Eastman Kodak Co (KODK) 2002 Q4 法說會逐字稿

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Good morning.

I'm Don Flick, the Director of Investor Relations at Kodak.

I would like to welcome you this morning to our discussion of the fourth quarter results and our outlook for 2003.

Also I like to welcome those of who you are joining us via the webcast and the teleconference this morning.

So, we can get started, I ask that everyone come in and take their seat and I would like to call your attention to the Safe Harbor Statement that's currently being shown on the screen.

Now, I would like to turn the meeting over to Dan Carp, Kodak's Chairman and CEO.

Thanks, Don and welcome, everyone.

We appreciate your coming on this nice, warm day in New York.

What we'll do today is we'll divide it into two parts, really.

The first section, I'll make some comments about my view on how 2002 ended up and in a short statement, we're really pleased with how 2002 came out.

Bob will take you through the numbers.

Around 2002 and put his view on that.

Then I'll come back and talk about how we see the business environment in 2003 and Bob will then take you through the numbers and we'll try our best after that to answer your questions.

So, with that as a background, let's get started on 2002.

It was no question a challenging environment.

Remember, kind of where we were in January when I came down and met with you last year.

Remember now, we have gotten into a pattern of coming and visiting with you in January to talk about the upcoming year and in September to talk about our strategy and when I came down here right after the events of September 11th and the fourth quarter, we knew we would be going into a challenging environment and we really focused on execution in 2002 and controlling those factors which we could control.

The net result is we came out of the year in pretty good shape.

We have now maintained for the fifth consecutive year -- excuse me -- fifth consecutive year, go back one.

There we go.

Nope.

Yep, that's it.

There.

Fifth consecutive year, our film share in the U.S.

I take you back in time, that goes back to 1997.

Those of who you have been following Kodak since then, know that that was a moment where I drew a line in the sand on U.S. film share and we have, in fact, held that very high share for the fifth consecutive year.

Our merging markets continue to shine, particularly China, India and Russia and you've been reading about us in China.

Our fourth quarter results in China were up over 30%.

Latin America continues to be a problem.

But that's more economically driven than anything else.

Our growth in the growing parts of the world and our share in the growing parts of the world remains very strong.

We focused a lot in bringing out new products and we had some really winners in the marketplace in terms of new products.

The easy share system in particular, continues to win rave reviews.

Old Photo is our online print system.

It is continuing to grow.

We've got about six million members now with Old Photo.

Not all of them are customers.

All of them are signed up and are customers and are members and continues to grow and we continue to use all of the tools of online to bring those people closer to Kodak.

We launch Kodak Perfect Touch in the Midwest.

Actually it gives consumers better pictures with their traditional products but perhaps more importantly, it brands out.

One of our key strategies is to drive output in all forms and up until Perfect Touch, frankly, output wasn't too branded for the consumer.

Kodak Perfect Touch is branding it and it is exceeding our expectations.

And I think our retailer's expectations.

It will roll out in 2003 as we'll talk in a minute.

And we brought out a new digital print station to try to make it easier for consumers to get their digital printed at retail.

We'll talk more about that later.

New vision film in the motion picture, our high market shares in that critical industry requires constant innovation and we're innovating with a new vision motion picture film receiving rave reviews by cinemaing to [INAUDIBLE].

Of you're you're familiar with the new camera.

A whole number of initiatives with the health initiative business as that business recovered from new laser printers to a CR system plus we're continuing to innovate in the analog area because that product category has a long tail to it.

Couple of other products you're familiar with OLED display.

NexPress product is in the marketplace in customer's hands.

We innovated also in a new scanner space that is beating its forecast as we came through 2002 and is finding its way into emerging markets.

If I think about our -- in terms of operational, financial and strategic, certainly our operational accomplishments start with our manufacturing productivity in 2002.

Kodak Operating System was introduced I think in 2000 and really picked up speed in 2002.

Generated enormous amount of productivity in our factories.

Still more to do with Kodak Operating System and Bob will talk about the productivity we think we can get in 2003.

Health imaging started off the year having had a tough go in 2001.

They had a great operational recovery and we're really proud of that business and have confidence in it now way into the future.

We have proven we can hold capital and not have a big problem with that.

Remember, in '99 or 2000, we were in the billion dollar per year and I have for some time and Bob, when he came in 2000, agreed that we were -- we had sort of an appetite for too much capital and we have pulled that down into the $600 million range last year and probably could hold that level over the next year or this year for sure.

Good working capital management.

And our thrust across the globe particularly in emerging markets that are growing continues.

That's not just the marketing statement.

We're also increasing our manufacturing capabilities in some of the emerging markets, particularly China because it's so cost competitive to produce there certain products, not all products.

Certain products.

Financial, I'm not going to spend a lot of time here because bob's going to go through them but we hit our marks on all of these areas and exceeded in some.

Particular cash generation this year.

From a strategic standpoint, while we knew this was a year of focusing on operations, we didn't want to lose our vision on our strategies.

And we have got the whole company focused on these four strategies.

Expanding the benefits of film, we talked a moment about that.

We'll talk more in a minute.

Driving output in all forums.

This is a big output opportunity for the Eastman Kodak company.

It is ours to help customer's achieve but then it's ours to take advantage of.

Make digital easier both in for consumers, Old Photo and of some our easy share software but also for commercial customers.

Remember, the digital work is a productivity tool for business customers but it has to be easy for their people to implement and then new markets, new businesses probably the best example of that is our OLED technology.

We've had some other strategic successes in 2002 that I'm really pleased with.

One, is consumer digital.

It really moved into a leadership position not only with the easy share system, not only with Old Photo but in our brand connection now with consumers as I predicted, as it moves closer to a mass market product, the Kodak brand is connecting with consumers.

And I think also is important is the focus of our consumer digital now strategies which really fit under those four growth strategies above.

Our balance is strong.

I have to tell you know, right after 9/11, I was worried about the debt level we were carrying and what the world was coming to and I really no longer worry about that.

And I am pleased with our balance sheet.

And have confidence now this company has the financial strength to take advantage of the opportunities.

Management team strengthen.

We started the year -- Pat Russo decided to go run Lucent.

Wonder what she thinks today.

But that wasn't a problem for us.

We kept going on our strategies and we brought two really experienced senior people in.

Dan Kerpelman from G.E. who's had multiple years, I can't remember exactly in the health business at G.E.

And has brought some people with him from around the industry.

Not just from G.E., into the health imaging team.

And Bernard Masson, who will be with us in September to talk about the display business, came to us after having retired from Lexmark to grow our display business.

For those of who you know Bernard, he basically built from almost scratch, the InkJet printer business at Lexmark.

Two really strong strategic and operational managers coming into our team.

Of course, China continues to be a great opportunity for Kodak.

Almost all of our digital cameras, virtually all of our digital cameras are now built in China.

You read we're moving our one-time use production to China.

You know, these are areas where low cost is heavily dependent on labor and that is an opportunity for Kodak because we do produce world-class products there.

Obviously a lot of our materials are made on big machines with less labor and that will be around our current asset base but by moving our one-time use cameras into China over the next year or so and our digital cameras, we're now taking advantage of our unique position and capabilities in China.

In addition, to having top market shares on all of our business and probably the fastest-growing economy in the world for the next year or two.

But I do have some concerns.

We'll talk about it in detail as we go through looking at 2003.

The consumer film industry surprised me a little bit in the fourth quarter.

It was weaker than I had expected.

I think I understand it.

It is heavily tied to consumer confidence.

And the slowdown in the economy.

It is not like the consumer film industry is dropping into the core.

It is at the margin.

There's still in the U.S. -- for example, last year, 719, 720 million rolls of pictures taken but it was down 5% in Q 4.

And that surprised me a little bit.

I think as we uncover and look at it, a big part is those marginal pictures that people take when they go to bigger places.

If you go -- if you take a trip to theme parks or to the beach or to Europe, you take eight rolls of film.

If you go to a park in your hometown or to grandma's house, you tend to take fewer rolls of film.

You pick the number.

Two, three rolls of film.

It is those big trips that are pulled back both due to the weak economies, to the lack of employment, and our jobless recovery environment and frankly, to the threat of additional terrorism that has got the film industry under pressure unlike never before.

We'll talk about it I'm sure in the Q-and-A section.

And I continue to see weakness in worldwide economies.

Latin America is weak.

The U.S. looks weak to me.

Europe, for sure looks weak.

Even discussion about whether Germany is going into a double dip.

The only bright spot on the world economy for -- that I can see is Asia and it is heavily driven by China.

We're lucky we're leaders in China but that can't be enough to pull the whole demand through the system in 2003 and that is our concern as we look at our forecast for 2003 and we'll get into it.

So, let me stop there and ask Bob if he would, please, to go through the numbers for 2003 and then we'll talk -- for 2002 and then we'll come back on 2003.

I'm just going to spend a few minutes on 2002, you saw a lot of that in the announcement this morning.

When we were standing here last year, we were 16 months into the downturn and we're still trying to figure out what the impact of 9/11 was going to be as we entered 2002.

So we talked about revenue being off in those single digits in the first half and then growing by mid single digits in the second half of the year.

What happened was revenue was softer in the first half and we thought and the second half it, flattened right out and all of the growth was essentially exchanged so revenue last year declined $400 million from $13.2 billion to $12.8 billion.

We also talked about earnings in the two to 260 range.

Mostly around $230 or so.

And it turned out for the year, both on a reported basis gap and on operational basis, we ended up a little bit above $260.

Between $260 and $270 which ever measure you take.

Most of was driven by the big restructuring we took in 2001 where we thought we were going to save around $450 million and that kind of verified and then the real success, our manufacturing folks had on the Kodak Operating System.

We also said we thought we generate around $4 million of cash at the meeting last year and as you know, we more than doubled that so that worked out very well.

As we go to the fourth quarter, the revenue was about $3.4 billion.

That was up 2% but that was exchanged -- if you take exchange out of it, it was flat.

It was flat the whole second half.

Gross profit was up sharply but that was an easy compare with the fourth quarter of last year after 9/11.

It also shows the good productivity we got from both the Kodak Operating System and from the restructuring we took in 2001.

Our earnings came in at 65 cents which is right in the middle of the range.

We had guided 60 to 70 so that was right in the middle of the range.

That was up from a badly depressed fourth quarter last year by 170%.

During the fourth quarter as we said in September, we took some direct charges.

We didn't do a restructuring across the business.

We just went after some direct things that would give us good cost reductions.

Those charges totaled $167 million during the fourth quarter.

They have very good paybacks.

We think that on an annual basis, that will pay back around $190 million.

About $80 this year and it is in line with what we told you in September, we expect the cash flow from this to be relatively neutral because most of these actions were taken during the fourth quarter and early in this year.

The highlight for me at any rate for last year was our cash performance and there are several things working here.

We always have this problem of deep use of cash early in the year then we have to generate later and the treasure people are trying to swing that through with commercial paper and borrowings and stuff.

We went out to get rid of that problem and our goal in the first quarter was not to use any cash.

We did use 48 but it is still a hell of an improvement of where we had been by almost 90%.

The total cash for the year came out much better than we had indicated last January.

We surrendered our COLI, company on life insurance during the fourth quarter.

That was a practice started ten or 12 years ago.

So we cashed that out.

That was about $187 million so if you take that out, we generated about $760 million of operating cash last year.

Our inventories continuing to go down.

One of the things that's coming out of this inventory reduction is LIFO.

We're entering productive LIFO layers.

Everybody who's on LIFO will probably experience this as we all pull our inventory down.

We booked $31 million of LIFO in 2002.

That should be a little better in 2003.

Because we are redoing our efforts and reducing inventories.

That's a noncash benefit that helps offset the drop in our pension income, which we'll talk about in a few minutes, but it looks like LIFO will be a couple of times better than that if we can get our inventories down this year.

Our turns moved up to 5.2 so we're making good progress on our inventories.

As Dan mentioned, our capital spending went well, we got it down to $577 million last year.

It was $1.2 billion in 1998.

It is about cut in half.

We think we can operate in that range for the next few years.

Somewhere around $600 million.

Our trade receivables declined again during the year in a tough environment.

Our days went from 61 to 55.

We're trying to get a couple of days a year out so it was a pretty good year on the days reduction.

A lot came out of past dues.

So, we generated the cash flow.

Last year, we used about $600 million to reduce debt.

Our debt at the end of the year was $2.6 billion.

We'll show you the profile in a few minutes.

We increased our cash on hand by about $120 million.

Probably a prudent thing to do with the unstable environment we have in the first quarter, with the Iraq situation, we did buy as we told you, about $7.4 million shares of stock back out of our U.S. pension fund at the advice of our pension fund advisors.

They wanted us to get that out so we bought a pack in December and that cost us $260 million.

And during the year, a debt to cap went down by just over four points.

Even though we did take a charge equity for our pensions.

Which we'll talk about in a few minutes.

When we were here in September, we talked about the U.S. pension plan and we had gone through that with [WELLSHARE], who's our advisors, and it was fully funded.

The only thing that was a problem with that is the income throwoff would be lower and we said it would be down about $100 million from last year into this year.

At that time, we said we are going to go look at all of our pension plans worldwide.

And that's an additional 121 of them.

There is a lot of pension plans in a global company.

It was a very complex and difficult task because they're all different in all jurisdictions.

The funding requirements are different.

And we have to end up putting them back in the U.S. gap for our accounting so it was a complex task.

When that was done, the conclusion was we had no funding problems with the exception of Canada which we put some cash in but we did have to take a charge of equity of $394 million which we did in December.

To true up all of these foreign pensions.

It at the advice of our advisors with the low equity evaluations around the world, it would appear that that will reverse itself back out over time as the equity markets recover.

So, here's an attempt to try to explain this whole pension thing: During the year 2002, we used $38 million of cash, that was our Canadian pension fund to top it up to make it fully funded.

We had a charge of equity of $394 million. 18 in the U.S. [INAUDIBLE] None for the U.S. pension plan. [INAUDIBLE] U.S. pension plan is 78% of our assets.

We also recorded income in the U.S. of $197.

Our U.S. pension fund in September was down a half a point for the year.

It was actually up half a point so our pension fund had more income than we thought.

Our other pensions had a negative $100 million so we had about $90 million of pension income for the year 2002.

As far as it looks now, that's all behind us.

We've reconciled all of these things.

We've gone through every plan in the world.

So I would say for 2003, right now we're looking at cash no usage, don't expect any equity charges and it looks like we'll generate around $14 million of income from our global pension situation.

So, we'll have a decline in earnings of about $75 million from our pensions.

That's a little bit less than we had talked about when we were here in September.

And we'll try to look work that LIFO situation off to offset a good bit of this.

So, as you go out of the fourth quarter and go out of last year, we were right in the middle of expectations.

It kind of went the way we thought it would.

We've got our pension plans all squared up and pretty well understood.

And I think we saw them enhance their balance sheet.

Turn it back over to Dan.

Okay, thanks.

I want to again thank Bob.

I mean, the work done on leading the company from our financial leadership and operations was a lot of credit goes to Bob.

And now that we've got this pension thing really analyzed, we feel very comfortable about where that stands.

That's like other mature companies around the world.

I think we have 120 pension plans and there can be surprises in there and we don't have any surprises.

In our pensions going forward.

Okay.

I think in 2003, I would sum it up as a difficult operating year will continue.

I mean, let's go back just a moment in history.

Now in September, 2000, we saw the downturn start.

As I've told all of you before, the way we saw it, frankly was that film tends to go into an economic slowdown a little early.

Turned out we weren't that early but the fourth quarter 2000 really slowed down.

We had a weak economy coming into 2001 but most everyone thought that we would see some recovery then of course September 11th happened.

And really changed the world perhaps forever.

But certainly shocked the world in the short term.

For Kodak, that was -- we had trouble with the health business.

And we were at beast angry with ourselves for getting in that position but committed to getting that business sound again.

Then, of course, in September of 2002, we still see a very weak economy.

So, as I look at 2003, you know, we have a weak holiday period that led into this.

I described it a moment before.

We're all sitting here looking at probable military action.

And world tension which is affecting consumer confidence.

Consumer confidence is at an all-time low.

And that affects travel and vacation plans.

And of course, I'll remind us all that while in the last slowdown, film was in early, it did come out a little late.

Frankly, that kind of makes sense because people need to see people going back to work and feel better about their personal financial positions before they get back into taking trips and getting back those marginal rolls of film so our prediction is a fairly long downturn.

Those are the long period of time.

Probably continues into -- in through 2003.

As we thought about 2003, we really said how do you make an estimate on 2003 and should you even give an estimate of what you think 2003 will be?

But the fact of the matter is we have a plan.

We have a plan that has a lot of assumptions in it.

And it doesn't assume the world comes to an end but we have a plan and we think we can manage to that plan so we decided to give guidance again in 2003.

As you've seen from our releases, we think the earnings per share will be somewhere between $235 and $295 a share.

The three major factors that will affect that is the world economy, and we've talked about it but if you believe -- if you believe the world economy will be stronger than we do, you would push us this way.

If you're like me, I still see weakness in the economy.

That would push us this way.

Clearly, a resolution of the general fear of terrorism and a war would -- if it happens quickly, would push us this way.

If, in fact, terrorism should rear its ugly head in a significant way, it would push us in that direction in 2003.

Technology and the digital substitution, frankly is working out about like we said.

I never thought I would stand here and say this but I'm having an easier time predicting this than I am predicting the effects of those two things on business.

Some of you probably would agree that it's easier to predict digital substitution but I tell you for me it's a whole lot easier.

So, that's where we are.

It is it a range probably wider than you would like, certainly wider than I would like.

Bob will show you in a minute kind of if we stress test the cash power of the company, we feel good at both ends of that.

We'll just have to see whether we're -- whether we're to the left of this or to the right of this depending on how things work out.

I, again, think that most of those top two boxes tend to push us toward the left.

But we'll just have to wait and see.

Our strategies remain the same.

I can't emphasize enough how much this has helped the company.

If we find anything going on here that doesn't fit under one of these, we stop it but it really has brought a clarity to what we're trying to do and where we're focusing our activities.

If I take us quickly through each one of the businesses and I'll remind you that we'll be back in September with some of the business Presidents to talk about each of our businesses, let me give you kind of the highlights for 2003.

The consumer business really is focused on extending the benefits of film, going after the emerging markets which will be a growth opportunity for years and years to come.

And drive these output opportunities both on traditional products and digital products particularly at retail.

Now, last year, we had some great success.

I mentioned the market shares, China, manufacturing of the one-time use camera to China.

But also we've got some nice niche opportunities and I show here, too, the black and white film which is having a resurgence and of course, it is a kind of product that you really don't need multiple brands in your store.

And we introduced high definition film in this space that really rolled out from the last couple of weeks of December.

Will roll into marketing for Easter in the second quarter of 2003.

Then of course, the retail digital printing opportunity continue to evolve.

For 2003, it really is focused on growing this retail printing of digital pictures.

I think when we get all of the numbers in the U.S. that maybe 15% to 17% of U.S. households will now have a digital camera.

We're getting close to the point where the retailer can put some emphasis in printing the pictures.

Up until now, the sort of the juice wasn't work the squeeze.

It wasn't big enough.

We've got tests going with all of our major retail partners on how they want to implement printing of retail -- printing at retail of digital images with Kodak and that will -- I think we'll see that start to be implemented in retail in 2003.

Great opportunity for the retailer and for us.

Of course, to do that, if we don't brand output, then it just a private label game.

That's not Kodak's game.

That's why we rolled out Kodak Perfect Touch.

As I mentioned in the Midwest, that's receiving great reviews and actually exceeding all of our expectations.

Eventually, that rolls to retail but it will take a while.

It doesn't make -- it does make people stop and ask for Kodak in their photo finishing.

Of course, we'll continue the share management programs.

I've got total confidence in the team to manage the share goals.

The U.S. industry did decline 5% in Q4.

And that was -- as I said, a bit of a surprise.

For the full year, it was down 3% so it was more of a drop in Q4.

As I said, as I've looked at consumer confidence and the pullback on retail in general, I'm not surprised now that that has happened but I think that's a warning sign particularly as we go through the first half of the year.

Of this decline, I had told you and debated with of some you that the digital substitution would be between -- take two and a half to three percentage points of growth out.

Everything we see from our research and we find something new, I'll tell you, says it took about three points of growth out.

So, what's happening is the top line growth of film that you would subtract the three points of growth out, you know, that had grown historically somewhere between 4%, 3%, to 11%.

Just not happening and it is pretty clear that it's economically driven.

Now, of course, for next year, for this year, 2003, that digital impact grows to 4% to 5%.

And given our concerns on the weak economy, we think the U.S. film industry will be down 4% to 6%.

When the economy recovers, there will be a pop.

You remember when I was here and talked about our long-term strategy.

After the economy recovers, I said the U.S. film industry between whenever it recovers and 2005 and 2006 would grow between minus one to plus one percent..

I still feel that way because as I said, the digital impact is tracking like we thought.

What we need is for the economy and these other factors to recover and get the potential out and the opportunity up and then it will settle down after it recovers and that minus one to plus one percent.

So, this is really important that we communicate on this.

Film has come down.

Digital piece is about what we thought.

When the economies recover it, will pop back up but over time, digital increase and some in here are seeing it settle out -- at a minus one to plus one growth.

We'll get a pop, I'm convinced when the economy recovers but I don't think that's going to happen in 2003.

Last year was a banner year for our digital strategies.

We've been driving adoption.

As I mention, I think the U.S. is up to 15% to 17% of households.

We've got great linkage in DNAI, our digital team to future consumer plays building off of Old Photo and we are in the lead as this thing transfers to the mass market.

Our easy share system including the software is performing exactly like we wanted.

The initiative we drove was CPXE, the standards committee to make this an open place so that consumers can get their pictures printed anywhere, not charged through a gate and accepted retailers and other manufacturers are on board.

Our Old Photo is continuing to grow.

And this business which you know, three or four years ago was zero is up to a $700 million business for us.

As I look at 2003, we'll continue to strengthen the camera port portfolio.

Particularly the connections with docks.

I think we're running above 50% on connectivity with cameras with docks.

We'll see Old Photo move overseas in selected markets.

We're exploring the cell phone camera opportunity.

There could be a play there.

If those devices turn into cameras.

Right now, people are using them just to communicate and I'm a little cautious it is a fad but we're exploring whether that's a source of pictures to print and store for consumers and I am very confident, very confident we're on track for year-end run rate on camera profitability.

Kodak Professional has had a tough go as I told you before, the transfer of the professional photographer to digital has been a tough ride.

We've had some management instability.

They're really focused on driving output.

And using their software and their printers to do that.

We've stabilized the leadership team getting good reviews from our customers on customer satisfaction and really the focus for 2003 will help now drive output through these customers as it continues to transition out of a film business and it is getting pretty much to where it will settle down and be more pressure on them in 2003 but they can start now growing the output driven by the digital opportunity.

Entertainment imaging is a jewel.

Great business for us.

Leadership position in both technology market share.

We were pleased to see the motion picture industry recover.

This year, we'll it continue to bring new products and digital work flows there.

As all of you know, we've got some activity going on the digital cinema operating system.

It is in test.

Of course, we need the industry to come along and make a decision that they want to go in that direction.

Might be some opportunities for -- as I said in September, for some acquisitions, not big numbers but acquisitions in the post-production space that clearly will be a work flow place.

We have a good start in that with our sunny side operation but we're looking to see if that will be an area that we might want to do some acquisitions in.

Health imaging, great job this year.

Can't be more proud of any organization in Kodak with the exception of the manufacturing people for the recovery they exhibited in 2002.

They brought some new products now.

To the marketplace and next year, the whole goal will be to drive those new products into the marketplace.

We were looking as this is one of our strong growths into the future.

Shook our confidence a little bit in 2001 but we're back on track with the products they have.

They're going to really go more aggressively overseas.

And they're going to look at some acquisitions again, not big numbers but acquisitions in this space to strengthen the portfolio and bring other things through the strong distribution and customer relationships they have.

Commercial imaging group got formed last year and basically they were focusing on making sure the two acquisitions that had been assigned to them, the [INAUDIBLE] acquisition and the Bellon House service acquisition was brought in and operationalized and they both are and they both have been done very well.

They also are our team that manages our movement in scanners and as you've read, the scanners that we've introduced have won awards and continues to be exceeding our expectations and exceeding their estimate and then they manage this group called [INAUDIBLE] NexPress.

NexPress is doing fine.

The product is performing like we wanted.

It is receiving great reviews from customers.

Our only problem there is the printing industry is in the worst slump it's ever been.

That I can see and certainly in recent history.

In fact, you may have seen some of the results by some of the companies that are really focused in that space.

Our partner Heidelberg has had a hard time because of the slowdown in the printing industry.

What that has meant is a customers just don't have the funds to make the investment in the ramp of the NexPress machine.

It will come but as they pull back on their capital expenditures, it is not ramping quite as fast.

I would be concerned about it if I saw product problems, if I saw cost problems, if I saw reliability problems, we don't see any of that.

What we see is capital budgets nonexistent to buy this machine in any kind of numbers right now.

The main other product category is SK Display, our joint venture with Sanyo.

Struggled a bit to get the product off the R&D bench into manufacturing.

It is off the R&D bench now into manufacturing.

It has to come down the experience curve, get the yield up.

And it's doing fine.

Our IP position is strong and our confidence in this product continues to grow every day.

We have moved it under a -- I mentioned Bernard Masson, an experienced leader.

It was being managed out of our R&D group.

Les [POVAR] now works for Bernard.

They're looking at now operationalizing the business as it relates to -- as it relates to our future.

Bernard will be down here in September.

My expectation of Bernard will be with us in September to talk about the display business and much more detail.

So, strategy remains on track.

I think 2003, we still have to pay really close attention to operational excellence.

Not a lot of room for dropping a ball in 2003.

Given this economy.

I am pleased at health imaging which I had counted on has re-energized and our digital initiatives continue to move to profitability and probably the banner of that is our digital cameras in DNAI.

But I do think not a disaster year.

But I do think it will be another difficult year in 2003 for our film business given those comments I made on the general mood of the consumer and the environment that we're in.

As we have watched 2003.

Put in numbers around that.

Turn it over to Bob.

Okay.

So, now, kind of the same story that we saw last January when we were down here.

This year, you know, we're now in the 28th month of where -- of this economic uncertainty.

We're looking it at the Iraq situation.

Not only -- now that we understand a little better what came out of 9/11.

So, this is a 12-month view of the revenues and this started down.

That's September of 2000.

We started down then.

And on a pretty sharp decline.

In June of 2002, it started to show some signs of flattening out.

Maybe take a six-month projection of that.

It shows a flattening and the last three actually shows that revenue might be tending upwards a little bit but that's, again, against an easy compare after 9/11.

So, we're looking at revenue after dropping $400 million to 12.8 in 2002 to be in the 13.1 to $13.2 billion range in 2003.

So, modest growth.

Of some that exchange.

Some of that in health and digital and things like that.

Our gross profit which last year went up, primarily due to a wonderful year in productivity as Dan mentioned, we look at that coming back down into the 34.5 range this year because we think with the soft film business, that Dan talked about, the productivity is going to be much harder to get.

This is our productivity chart.

In 2001, productivity, this is cumulative.

In 2001, it was kind of low because of 9/11 and the downturn we're in and in 2002, we had a real banner year in productivity.

It was helped by good material pricing.

And the Kodak Operating System.

In 2003, we think that's going to slow down quite a bit by more than $150 million from what we saw in 2002.

So, that's built into our thinking and that also reflects the soft film business as I said before.

As we look at R&D, about the same.

About 5.8, 5.9 percent of sales.

We will look at SG&A.

The work in SG&A didn't show up to much in the percent of sales because the percent of sales in this is like $400 million. of to the -- the is.

But at 13.1, 13.2, we think it will settle in at 19% of revenue including advertising.

This is below EFO.

We've talked about this before.

Not too much new here.

We're still continuing to see interest expenses decline as we pull down our debt.

As Dan talked about NexPress and [FLOGENICS], and of some our joint ventures would show up in this line.

Because of the economy, they're not improving as quickly as we thought they were.

We're not getting as many units out in the field.

So we think below the line, below the EFO around $230 million loss.

We've -- would seem to be a good number.

Little bit less than this year.

This is our tax rate, operational tax rate continue to have downward pressure as we talked about.

We think it will settle in about 27% in 2003.

This reflects the use of foreign tax credits and the geographic mix of our earnings as places like China get stronger and generate more income.

They're at more favorable tax rates.

We will have some more direct charges.

There is about $15 or $20 million of the charges which we talked about in September which we didn't get booked in the fourth quarter which will be booked in the first quarter.

That's this column.

That's already preannounced.

As we look at 2003 in the type projects that we can envision, it looks like about $75 to $100 million of these projects with savings of about $65 to $85 a million.

This is heavily in our photo finishing operations both in the U.S. and in Europe getting those matched to the current demands.

It has a high level of employment reduction around 2,000 people in those businesses.

We think the cash flow impacts around $30 million use.

This will be a difference between gap income and operational income again.

But like last year, we have some things we're working on.

Some one-time credits that we think will come through the year.

Which will largely -- we think largely offset this charge so it would look like gap and operational income will be very close again this year.

There won't be a big divergence.

I'll talk a little bit about -- Dan started on the guidance.

Give you more thoughts on how this thing would look by quarter.

We have our lowest quarters in our first quarter, we get about 17% of our revenue for the year historically in the first quarter.

That has been a number that hasn't changed much over time.

About half in the first half but that gets picked up by a strong second quarter.

Our film and paper leverage is very high on manufacturing costs particularly here in the U.S.

And with the weakening of the film industry which surprised us during the fourth quarter, that's a little worrisome for the first quarter as we look at the productivity.

Retail inventories was a light Christmas.

We don't expect the retailers to do any inventory building during the first quarter.

In fact, they may be going the other way.

One of the things that happens in this business, the first big holiday, in the film business is Easter.

Last year, Easter was in the last weekend in March.

This year, Easter I think is in the second half of April, around April 20th or 18th or something.

That will further depress retailers' urge to raise inventories during the first quarter because they don't need the inventory for Easter until April.

It is hard to see how well improve much from last year in the first quarter with these downward pressures.

And the real possibility that we'll have some kind of a disruption with Iraq which would move people to CNN for as long as that goes on.

So, I think the first quarter probably going to be something like last year.

Low, 13 cents was what we made last year.

I think we're in that kind of a range for all of those reasons.

We'll have profile of good improvement in the second quarter much like last year.

And then the swing will be in the second half that the economy is better.

There's no big deal with Iraq that was resolved, that we don't have a problem with them.

We'd be on the higher end.

If there is, the economy does get thrown, does not recover or do we have a protracted problem with terrorism, probably in the bottom edge.

If you look at everything, there would be a downward bias to this thing because you don't see all of these things resolving themselves but kind of a profile of starting the year very much like 2002.

On our cash manager, we took a look at this at the lower end of the range, 235 and the upper end of the range, 295.

The earnings and net income after taxes would be about between $740 million and $920 million.

I did put in around $50 million in these one-time items assuming we get half of them so this will not reconcile operating income.

It will be a little higher but it's $50 million.

Depreciation, $780 million.

We're going to hold capital to around $600 million again this year.

This will get a spread between depreciation.

Inventories, we're going a inventories hard again.

I would expect at least a $100 million reduction in the inventories.

Receivables, we'll continue to work that, dividends are $500 million.

That's fixed.

So, I think our operating cash flow is going to be somewhere between $450 and $650 million in 2003 and of course, we'll work hard all year to try to improve on that.

Uses of cash.

This is the same chart we showed in September.

Our philosophy remains the same.

We're going to continue to pick away at that.

My goal is over the next few years, get that down around $2 billion.

We got it down to $2.6 last year.

We'll show you the composition of that.

Dan talked a little bit about acquisitions.

While we're looking, we realized that about 80% of acquisitions don't make their stated goals so we're being very, very careful about acquisitions.

So, there may be some but probably not a lot.

We don't anticipate changing our dividend policy unless there's something highly -- high value gets in the way of that.

This sour debt maturity schedule.

We do have $549 million due this year.

In the U.S., it is about $270 million in the first half.

Depending on what we do with acquisitions, we'll probably pay of some that down and maybe we'll have some -- move of some that over.

In China, we're starting to accumulate cash and we'll probably pay some of that.

Depending on how we do on acquisitions, much of that may be paid down this year.

At the also at the end of the year had $837 million in commercial paper and we had $74 million in high grade receivable secured.

That shows up as we said before on the balance sheet.

It is down from where it was early in the year.

We only do that when the interest rate of that is lower than we can either get commercial paper or other borrowings.

In the year 2004, we have virtually no debt in the U.S. $20 million.

We still have some more in China.

So, we're in reasonably good shape on our debt repayments in the next couple of years.

Our total is $1.7 billion.

When you add in the commercial paper, you get to the $2.6 billion.

These are just how we've been dealing with it.

We start out at about $4 billion.

A couple of years ago.

We've been dragging that down.

We're down to about $2.6 billion now.

We've taken cash from $250 million at the end of the year.

We were at $278 million so we're keeping a higher cash balance to deal with the swings that are going on with these major political events.

So, as we look at the year, as we look at it now, revenue up slightly.

Some exchange, some growth in health in our digital businesses.

We're going to continue the downward pressure on costs if we see other good ideas to get costs out, on a specific thing, we certainly will step up to the bar and do those during the year.

Earnings, I think, the middle of the range we just gave you is kind of flat with this year but I think there is a real downward bias to it until we get through what will happen with Iraq and all of this and get the U.S. economy to get a little bit better.

And I feel pretty confident that we can do cash after dividends of at least $450 to $650 million.

Based on what we've done on the last couple of years.

So, Dan, we'll be happy to take your questions.

Yes, thank you.

Don, you want to come up and lead us through the Q-and-A session.

I think there are people with microphones so if you raise your hand, I think.

Right?

Someone will bring you a microphone.

That way we can be sure that the people listening on the teleconferencing and the webcast will be able to hear the questions.

I would also like to ask if you can identify yourself and your firm.

We'll start with Ben Wright there by Marie.

Hi, good morning.

Ben Wright, UBS Warburg.

I want to address some issues in your guidance for next year and kind of talk about how you came to your assumptions.

What I'm puzzled about is some of your comments about the economy but revenues are supposed to be up so I calculate at least a dollar in cost savings based on all of your actions.

I have a tough time getting to flattish type earnings.

With that kind of cost savings then particularly on the film commentary, last year, your film sales into dealers were down 20% in the first half due to inventory reductions.

So, if we don't have those magnitudes of reductions this year, we should see actually higher productivity savings than you guys are saying.

I'm having trouble reconciling my numbers especially for the first quarter with 20 cents in cost savings, film sales comps down 19% year over year and all of those issues.

If you can tackle it and I'll shoot out more points as we go.

You want me?

Go ahead and start.

I don't think we can work your model sitting here right now today.

But we can give you our insight on some of the points you made there.

The first quarter has a bunch of stuff in it, Ben.

One is we were -- I mean Dan and I would have to admit we were surprised at the weakness in the film industry in the fourth quarter.

We really felt we were going to have an easy compare after 9/11.

That we would have strong growth and so that was a surprise.

The weak Christmas season, I think, all retailers got surprised by that.

And inventory work down mode so I would think in the first quarter, with -- and with the overhang of this possible problem in Iraq, unresolved economic stimulus program, there's just not much that would seem to me that would get this thing going in the next eight weeks, ten weeks.

Let me finish that.

I know you're dying to say something but it doesn't look like there's anything there.

Now, we just came off a great year of productivity.

And a lot of that came from the movement of pulling a large amount of inventories down near the end of 2001.

And in the first quarter of last year, we actually had some inventory.

We actually raised production because we had gone down too far.

At the end of 2001 but we're not in that position now so it looks like production is going to be sluggish.

Easter is gone out of the quarter.

Now in the middle of April so there probably won't be an inventory accumulation with Easter.

That's a big deal.

That's the first big holiday of the year.

It would look like Europe is not going anywhere.

We keep talking about the U.S. economy but we're a global -- we actually have revenues are higher offshore than onshore.

The European economies don't look very good to us.

As we go into the year.

So, other than China, there's no real spark out there, Ben.

So, you put all of that together and it doesn't look like it's going to be way off from what it was like last year.

Not to put words in your mouth but with film volumes in the first half, your comps, not the industry, Kodak's comp down almost 20%, it is looking like there's no growth off of that.

In fact, could be flat to down based on that.

I was talking mostly the first quarter.

You were asking about the first quarter.

Second half, as you go into the second quarter, it is a bigger quarter for us.

Third of the year's revenues usually half is in the second quarter.

And you know, with Easter now in the second quarter, we do have a compare with the Easter shifting.

So, you know, I had the second quarter jumping back up quite a bit but the first quarter does look very light.

Good answer.

Just one last thing then I'll pass the mike.

With the magnitude of the cost savings which you can do on the calculator with a little less pension, couple pennies a quarter, is there anything also in digital?

Is the margin hit perhaps in the quarter, your digital cameras and your digital health in particular were better than I anticipated in models.

Is there anything in digital margin wise that's keeping you conservative as well?

First of all, I don't think we're being overly conservative but we're giving our best estimate so excuse me for just pushing back on that for a second because I'm not trying to be conservative.

I'm trying to give you my best view.

There is no question that the digital business particularly cameras is a fourth quarter play.

Okay?

So, I mean, it is almost like in the retail business.

So, you have your infrastructure built, you know, in your digital particularly digital cameras to deliver the full year of business which is heavily fourth quarter.

First quarter is not that big a quarter so there is downward pressure, Ben, in that model.

Not unlike's retailer.

That's why we call it black Friday, right?

So, it is that kind of model underneath there.

The other thing to keep in mind is that I think Don, you probably know this.

That the largest single runner through our plants is color paper.

And I think it consumes -- it is that and Eastman color print, I guess.

And with the slowdown in the film industry, Easter in the second quarter, we won't make as much colored paper in the first quarter of the year.

You just don't build ahead.

One of the things KOS has done is allowed us to move to a pull system on our demand.

We don't build inventories quite as much ahead which is smart business but that puts more pressure on a low sales quarter of the year and this year in 2003, the first quarter will be an unusually low sales quarter as Bob mentioned because the world will celebrate Easter in the month of April.

One other thing, Ben we're trying to keep you off the air here.

I was very pleased with the progress of our digital business last year and to how it grew and the relative cost.

I think it will continue to get big and become profitable.

So, and be a really good business for us.

But to the extent that digital is growing a lot faster than film is, and film is not growing, that digital margin is nowhere comparable to film so it is an inherent mix issue as digital really starts to outgrow, gets close to the size of film over the next several years.

So, there will be an ongoing mix issue with that.

But we expect digital to get as Dan said, profitable by the end of the year.

Thanks.

Another question?

We'll go with Peter Osnet of Deutsche Banc in the front row, please.

This gentleman right here.

Thank you.

Peter, of Deutsche Banc.

How's the weather in New York versus California?

I'm happy to be here.

When you talked about the world economy being the biggest driver of your next year's results, can you give us some sort of percentages in terms of what you're expecting for the economy on a world basis relative to what would skew out to top or bottom of your range?

It is not just a GNP figure.

That's what makes it hard to predict, Peter.

It is what is the impact on consumer sentiment and their willingness to travel whether it's travel within a country or travel between countries.

Particularly travel between Asia and the U.S. and between the U.S. and Europe and back and forth.

We see travel still restricted.

I can't put a number on it but we don't see a big recovery in travel.

We don't see a big recovery in employment.

Anywhere in the world.

With the exception of Asia continues to get stronger.

We don't see -- we just don't see those dynamics happening.

With that layer on that, what happened in the '90s which was film came out of the recession in a lag way, that's why we are very cautious and see the minus four to six percent on the U.S. film industry as our forecast for 2003.

As I said before, I'm convinced more than ever there will be a pop when we get out of this.

We're in the third year of a major slowdown that hit right at the heart of the consumers that drives a lot of the film and paper productivities, that drives consumer consumption and we'll get out of it but right now, it is right in our breadbasket, if you would and I don't see that changing in 2003.

I don't have -- I wish I could.

If I could, I would tie it to a number but I don't.

That's my belief that's where the film industry will be this year.

Okay.

It seemed as though we saw normalcy on the top line.

Admittedly it was currency that gave you the growth.

But it looked like SG&A was a little higher than I was certainly expecting.

You've done so much cost cutting so far.

It seems like the year over year compare didn't show the result of the cost cutting.

Can you talk about the SG&A and where it's going?

In the fourth quarter, as we do every year, you end up looking at things.

We did increase our allowance for bad debt.

As we looked across the economies of the world.

We did have an acquisition [INAUDIBLE] which added an SG&A, which probably what you had in your run rates.

And we did not get the revenue we thought so we probably should have taken it down a little bit more.

About $35 million was bad debt reserves, acquisitions, things like that which were not increased spendings, just add ons.

Exchange also.

It raised SG&A by $12 million.

In Europe, above just because the he can change went up.

So, you know, we'll watch it carefully.

But we think it's ok.

Lastly, on the first half expectations for next year, you talked about how Easter is moving into Q2 but you're still anticipating on your chart flat year over year in Q2.

Is that simply because of the uncertainty in the Geo political environment?

Right.

Easter moving since the first quarter is a small quarter for earnings, moving Easter out of the first quarter, you have a number on a small denominator, has enormous impact.

As Bob showed, Easter moving into the second quarter, we do get helped by it.

No question about it but it doesn't have quite the impact of the second quarter.

It is the first quarter.

It either makes it really good or puts a pullback on it and then the key to the year of course is the second quarter performance and how you come out -- how we come out of the second quarter.

We went back and looked at -- it looks like there is a reasonable correlation between in the U.S. film volume and consumer confidence and consumer confidence as you know continues to go down.

And you know, I can't see that getting much better until whatever we're going to -- we're going to do in Iraq gets better.

Until we get the economic stimulus package resolved and all that kind of stuff.

If that ramps back up, it would look like it would be better but we kept the second quarter kind of flattish because of those two.

Those events that are going on.

Okay.

We'll go with Carol Sabogga about halfway up on the left side.

Hi, I was hoping to get a bit more color on of some your consumer digital services.

You all do a lot of research into this.

And below that number, you think it is going to impact about four points of growth next year in film.

Last year, you said that consumer digital cameras, when they entered a household, caused film to decline, film usage in the household to decline by 50%.

Is that still the same number that's implied in those?

Is that what you're still seeing?

Second question on that is I know it is still early in the digital output story and how much the retailers are ready to do that but it's improved this year in terms of retail adoption of digital output solutions.

Have seen any changes in consumer willingness to output their digital files?

And lastly, just continuing on consumer digital.

Below the earnings projection, you mention that you're looking for consumer digital profitability to improve.

Are you still assuming that consumer digital cameras will come out profitable or break even to profitable at year end 2003 and could Old Photo end up in the same place or is it a year or whatever behind?

I might not remember all of the questions so you'll have to do it again.

Everything we see, the 50% reduction holds.

And I will add to that we said one time use cameras would continue to be a preference even in those digital households.

That continues and in fact, even with the weak film industry numbers, one time use cameras continue to grow.

That's why frankly we thought it so important to make the strategic move of where we build these one-time use cameras to ensure that we continue our low cost manufacturing position because one time use cameras even in developed markets like the U.S. and western Europe would be around forever as we see the dynamic playing out.

In terms of digital printing at retail, again, I come back to the point that at the end of this year, we're probably in the 15% to 17% of households in the U.S. owning a digital camera as compared to about 90% owning a traditional camera.

And so as retailers look at the dynamic it, has to get to some volume or they're not going to dedicate valuable retail counter space nor training of their salespeople to drawing in too small a market.

In 2002, it still wasn't big enough.

That 15% occurred pretty much at the end of the year right -- where the seasonal is.

But they're all testing how they're going to implement it.

We're testing it with all of our retail customers.

As well as some new outlets.

That you can -- I'm sure think about that are places one might take digital files to have them printed.

In those tests, consumers are thrilled to have this option.

Now, that's not a quantitative statement because we don't have quantitative data but as these consumers come into these outlets and see kiosks, see digital print stations to download to or digital mini labs, they're responding just exactly like we hoped they would in terms of excitement and trying it but it's too early to see whether the numbers will work out.

But my expectation is some retailers at the leading edge will start to implement more of it in 2003, have a cohesive program and will see that play out.

Old Photo continues to grow and I've told you that there's three ways you're going to print your digital pictures.

You're going to print them at home.

That's a legitimate way.

Frankly, I think printing it with a printer tied to the computer is clumsy.

There ought to be an easier way but that's one way.

I think we ended the year in the number two position in share in the U.S. in InkJet paper and it is a profitable business for us and it is growing nicely.

Also, puts a nice load on our plants.

Second way is you'll do it online.

Either with Old Photo or with retailers with their online where you send it to them and pick it up in the store.

Too early for that yet but right now, Old Photo as I mentioned is continuing to grow and we're so confident of it, we're going to take it overseas, I think, this year.

And then the third way which I personally believe will be the biggest way is you will do it in your normal shopping experience at retail as it moves through the mass market, as the person whose interest in photography is more average as opposed to enthusiast.

And that person wants to be able to go to a drugstore, download the images, pick the ones they want.

Finish their shopping experience and pick them up on the way out just like they do with their film today and retailers see that and feel that that's a big opportunity.

I think that will eventually be the biggest printing of the digital files and the number of digital images captured is extraordinary.

There are tons of captured pictures.

Not tons of printed pictures but tons of captured pictures.

Has your test in Atlanta showed that -- I know you're rolling out a test on digital output.

I don't know if it's been a couple of months or a little bit more.

Has it showed the consumer increases their propensity to output the digital files at retailers?

We're testing a number of different places, not just in Atlanta.

We do have a lot going on in Atlanta.

Yeah, they come in and they print a lot of files.

What we need to see is the longitudinal behavior.

They got a lot of demand.

We're getting that.

It has to be in place a little bit longer and also remember, we got to get the newest buyers in.

The more mass market.

Of course, mass market is Kodak sweet spot with the brand and they then are more likely to use some help i.e., a retailer to get their digital prints.

Just on the profitability for digital cameras and O photo for this year.

On an operational basis, I think Old Photo's profitable now.

Close.

In the fourth quarter they were.

That is seasonably high.

Should drop off in the first quarter.

But hope not but it probably will.

But those statements with -- I'm pretty confident of that in the fourth quarter based on what we've just been through.

They should be operationally profitable at the second --

Digital cameras will definitely -- I mean I definite -- looks like it will be profitable.

I'm certainly committed to it.

Thank you.

Okay, Joe.

We'll go with Craig Ellis right there.

Thanks, John.

Craig Ellis at Salomon Smith Barney.

One clarification on the pension.

At the analyst meeting in September, we heard that it was going to be the noncash component would be negative 27, 28 cents to earnings in '03.

It sounds like it will be closer to a negative 20 cents versus what we expected not quite as aggressive.

It is a little less down.

The earnings drop is a little less than we had projected in September so it got a little better, yeah.

That's true.

By about 7 or 8 cents.

Two components in Europe, the offshore pensions aren't as bad as they were 2002.

It went from a dollar charge to 40 cent charge.

And the U.S. pension fund in the main fund performed better in 2002 than we had projected which is good news.

It actually -- it grew instead of declined which is good.

So, both of those -- we're going to lose about 75 cents.

I mean $7 million on the pension.

Okay.

Then a follow-up on the outlook for film.

Dan, I think you said that you would expect in a more normal economic environment for U.S. film roll and SUC to be flat to maybe down 1%.

As digital increases a percent of the total camera and [INAUDIBLE] base over time and fairly dramatically given the growth rate we seeing, why wouldn't that actually be down more aggressively on a year over year basis?

I've probably confused everybody and I apologize for that.

This is a complicated formula but let's go back.

If you go back over time, we've had film growth in the U.S. which is the model let's talk about.

Anywhere from 4% or 3% a year to 11% a year.

I don't think we'll get back 11%.

That was the hot days of you all remember as well as I do.

But film in general, you know, is somewhere in there.

It is a function of how well we promote.

It is a function of what the consumer feels like.

And that sort of I'll call it normal.

Now, eating into that is the digital substitution piece.

So, if you say it is 11%.

Let's just be optimistic.

And four to five points of digital substitution comes out.

It then turns into what, seven, eight points of growth a year or six or seven points of growth.

I don't think that's probably likely.

But I don't see any reason over the -- once we get out -- after we get a pop-up to make up for some of the drop we've had, that that industry couldn't grow four or five or six percent then you subtract out four, five or six percent due to digital substitution.

That's why I say, in the midterm, in the midterm, while we're growing the digital business.

While the cameras are moving into the mass market.

While we're teaching consumers how to print their pictures at retail, but the film industry, once we get out of the downturn, will probably be minus one to plus one in the U.S.

That's not Asia.

Because that model doesn't work in Asia because the film can he grow much faster when economies are growing and people are just reaching into photography because you get household penetration.

But that's a developed market model.

And I think that's what we'll see once we get out of this sort of hole we're in -- due to the economy.

Over time, it eventually slides down.

And I've said after 2006 or something, we'll start to see a slow decay in the U.S. market for film consumption just for the point you're making as digital goes up.

By then, our digital strategies should be well in place based on the success we're having now and we'll continue to innovate in film.

We'll continue to take cost out of the film product.

We'll continue to drive enormous amount of cash out of that for years and years to come but the growth will be in the digital space.

Thanks, guys.

JoAnne, we'll go with Sullen Cho.

Sullen Cho from Morgan Stanley.

First in the health imaging business, saw some nice acceleration in terms of top line growth.

Can you talk about what we should expect for '03?

Is that type of a growth rate sustainable or you know, were there some one-time items from the fourth quarter?

Well, we've said we think the health business, once we get out of whatever we're in now, I want to say that because that is affecting some purchases of equipment.

I think we said at our strategy time, it could grow in the five to seven percent -- three to five percent -- I'm sorry.

I can't remember what we said.

Three to a five percent range.

I think that's more the norm.

What we saw in the fourth quarter and I told you this.

I thought they had pulled back too much.

I wanted them to accelerate now that they this gotten operationally sound and go after a little more business.

I think you saw some of that in Q4.

I don't think it will run at that rate, I'm sure it won't run at that rate in 2003.

Then the growth margin in health imaging.

Was that -- it was 19% versus 22% in the third quarter.

Was that reflective mostly of seasonality and mix or actually ramp up spending?

Yeah, I mentioned -- I think I mentioned -- I thought I mentioned in the third quarter I didn't like the margin that they were running at.

I thought they were giving up opportunities at that margin and needed to come down.

In fact, Bob almost threw me off the top floor threatened to fire some guys if they didn't get the margin down and go for some business.

Bob didn't like that statement because he said he never met a CEO that said pull the margin down but I think they were missing opportunities so I'm glad they got it down and I'm glad they're getting some growth and I would like to see them -- I think the margin in that range is where they ought to be but we'll see as they look at the opportunities.

One of the things that happened during the fourth quarter, people didn't just arbitrarily pull the margin down.

The mix of -- there was a little more of equipment mix in the fourth quarter.

As you saw more equipment that ends up down, selling more media.

So, they did pursue equipment harder which tends to have a lower margin.

But bodes well for the future.

So, that is in it.

Dan has gone on record as saying we think this is a mid to upper teens business.

Not a 20% business over time as we get more of an equipment mix into this thing.

That's a good point.

You can first of all -- you can hold business out by pulling out of the equipment, right because is the annuity stream.

I was concerned about that.

I'm glad they stepped up the pressure on equipment.

Final set of questions on the photo finishing business.

Which is where the charge for this quarter or the announced charge relates.

I guess the volumes wee down 12% for Qualex in the U.S. and that compares to a up tick in the third quarter.

Can you talk about how much of that was related to store closings as opposed to the other factors that have been well discussed?

There's three things really going on there.

One is the film industry's down so that's pulling volumes down.

The second is that group is getting more productive.

And as they get more productive, they've got to take the cost out so they can get more through put per lab and we don't need as many lab locations to do that.

And the third thing is as you said, we had a couple of major customers swings there.

One is of course K-Mart and the problem they went through that pulled some volume out.

And so they've got to get the costs aligned with the new reality and you're not going as far as what the K-Mart pressure would say because we're getting that back through some other retailers, of some it back but it's productivity coming out of the labs.

As far as the European, we made a major consolidation move on photo finishing in Europe in acquiring of some those labs.

A number of labs in the wholesale space in Europe and we're consolidating those.

Bringing the same productivity tools now to the European operations.

One thing, that charge may not all happen in the first quarter.

That is our estimate for the charges we'll take during 2003 and there may be some timing which wouldn't make them all happen in the first quarter.

I'm not sure how that's going to fall yet.

We'll get more information on that as time goes on.

Final question on the charge in fact.

The savings expected for this -- the charge you just announced, if you do sort of a per head count reduction estimate, is lower than the savings that you expected for the charge that was announced in the third quarter.

The charge that we announced had a different content of payroll to it.

The charge in the third quarter had a higher paid, people were impacted.

Qualex tend it is to be a lower pay so you get less return on that and there's little more equipment type thing when you close a lab, you got to take some of the equipment out.

Thanks.

We have a question in the upper left there, please.

Michael Wexburg, ING.

You spoke at length about the U.S. photographic business.

Could you talk about the international business in two ways?

First of all, how much -- in your forecast going forward for '03, what is your forecast for international and how much impact will currency have on that and then second, when you talk about Europe, Japan and maybe the rest of the far east and what growth you saw in those markets and what your outlook is in those markets for '03.

I'll let you talk about the exchange impact, but basically, Europe is a couple of years behind the U.S. in that same model.

The impact of the general economic environment is about the same as the U.S.

I mean western Europe is having real problems and that seems to affect the industry although I will caution us that I don't have the final numbers for European industry in yet but it looks like the same economic impact in the digital substitution looks, I don't know, maybe a year and a half to two years behind the U.S.

Asia is a mixed bag.

China continues to grow very rapidly.

And our leadership position across not only our consumer businesses but our commercial businesses puts us in ta great position there.

The rest of Asia know though is not growing quite as well because of two things.

One, they're impacted by the slowdown in their major markets which is western Europe and the U.S. and they're losing, if you will, share of business to China.

So, we have great results in Asia as it relates to China and India and then weaker results in the other countries but that's okay because China is growing and the population is stepping up to getting more and more into photography as their income levels rise.

You want to comment on the exchange?

We hedge extension, all of the funds flow in and out of Europe to hedge the income.

As you know, that's an unprecise science and we tend to be deterred on that so if the Euro continues to strengthen, we'll a little bit of upside but we take most of it out.

Where you'll see it is in the revenue.

So, we're assuming that of the growth we talked about here, roughly half of it is exchange rate and the other half is growth in some of our businesses.

But the impact on earnings is really difficult to forecast because we do hedge the funds flows and the earnings because you can't hedge the earnings but there will be some modest subside if the dollar continues to weaken on earnings.

Not a big one.

I might have missed it.

Did you give a forecast for your international growth?

In the photography business?

You know, I don't have that number.

It is buried underneath that total revenue.

I don't see it being off the overall trend very much at all.

The international growth -- what growth reducing is in the emerging markets which is China and mostly Asia.

Europe not much growth in Europe.

Europe is in a difficult slide right now.

So, on balance, some international growth but not great.

When you look at South America and Europe is down.

And Asia is an upper and Russia and India but the rest of them are very soft.

Being global has its problems because there are hot spots and soft spots.

And the only place in the world we're seeing any fundamental growth is in China.

Roughly, could you tell us roughly how much your business in photography comes from China in 2002 or 2003?

I don't have that number in my head.

If you talk to one of the guys, if we can, we'll give you some idea but I can't remember.

Okay, JoAnne, we'll go with Ernie Levinstein about two-thirds of the way up.

Thank you, Ernie Levinstein of HG Wellington.

I'm curious about your definition of substitution -- digital substitution.

How do you define it because on the one hand, you're talking about one time use cameras in digital families as being strong so the -- so I'm curious how do you define digital?

Okay.

We know more about family picture taking than anybody.

We, for years, have been going into families with different demographics, and tracking their consumer picture behavior.

So, we know what the picture taking in a "normal, average family".

Average, there probably are no normal families.

Then, we track when a digital camera goes into that household, what is the picture taking behavior in that household.

What we find is it drops in half in terms of the number of exposures.

The the piece that remains is heavily aimed at one-time use cameras.

You add to that fundamental growth of the nondigital households which is still 80% of the household.

Then they also are moving to one-time use cameras rather than their reloadable camera.

So, my point was and I might have confused you.

I apologize is we see one-time use continuing to grow.

It is taking over from reloadable cameras and nondigital households and even in digital households, that picture taking will move to one-time use cameras.

So, obviously one-time use cameras will be the preferred, if you would, analog capture device well into the future.

Our conclusion for that was that we needed to get the manufacturing cost of the camera, not the film.

We're the lowest cost film manufacturer but get the lowest cost camera piece of it, the carcass, to a low-cost labor area where we load the cameras and make those products and that's why we made the decision to move it to Mexico and to China.

Not the film.

The film still made where it's been made, but the carcass.

So, the substitution is really just the 50%.

50% of the total number -- if a household took 100 pictures, we put a digital camera in there.

In the next 12 months it, looks like they would take 50 pictures.

We have a question on your right about halfway down.

This will be our last question for the day.

Hi.

David Swartzman, Westmoreland Capital.

Is your digital substitution number in the 4% to 5%, is that a linear number or do you expect that to increase?

The amount of growth taking out to digital?

It will increase slowly to time.

Like it was 3% this year.

Took three points of growth out of the film industry.

It will take four to five next year and it will take maybe 5% to 6% the next year.

It is a slow transition there.

That's why we -- that's why we've been so strong on having an organization driving for success in digital because we see that as in developed markets, not on merging markets, in developed markets as the long-term play for picture taking and it is heavily in output driven or service driven with our Old Photo site and a device driven business.

Okay.

And when you said the in households that get digital, that the number of pictures dropped by 50%, you're saying the number of analog pictures?

Yes.

The total number of pictures actually grows.

Because of the new toy.

Not a new toy.

I can't let you off the hook there.

It opens up new things.

Before I took a picture, I took it the drugstore.

I got a print.

I shared it with my wife and kids.

Digital, I can put it on the Internet and share it with everybody.

So, what it's doing is it's creating a new currency, a new social currency around pictures that's driving a lot of pictures where people are disappointed, they can't make prints.

They're not happy with the solution set today for prints.

We're all about solving that.

So, we'll tap into this large number of pictures.

Okay.

As I'm thinking about it coming out of the recession that we're in, however you want to call it, that there could be a large pop in digital cameras and if that's the case, then that decline rate goes down, let's say it starts going 8% to 10% a year.

I know there are trade-offs in your -- between paper and film.

But let's just say 10%.

What happens to earnings at that point?

I don't think that will happen.

People are buying from everything we can see, if they want a device, a gadget, whether it is a new TV, or whether it's a DVD player or digital camera, they're buying it.

And that's on a small base.

A relatively small base of household.

What's happening is that 750 million rolls of film which is an enormous number is being depressed by the look of travel in major vacations.

So, I expect a pop in film.

As the economy improves given where we are on digital cameras and the hot item it was at Christmas, I don't expect a big pop-up in digital cameras going forward.

I guess my question is in the event it happens and the substitution goes to 8% or 10%, then what happens to earnings?

Well, the gearing of that will come out based on how fast we can give people printing pictures.

If that happens, you're going to see retailers climbing over each other to get people to print pictures in their store.

Remember, they're making a lot of money as the industry does on -- and we have a nice business on output today.

They got to transfer it and they'll be screaming at everybody.

They'll be one of the hot items of how to get your prints at local drugstore as those cameras grow.

The reason they haven't today as I said, there's not enough of it to make the juice worth the squeeze but if that happens, that will grow much faster.

How well you manage the transition.

It is not easy but I think we're on our game right now.

Would you care to offer closing thoughts?

Thank you everyone for coming, I appreciate it.

We had a good year in 2002.

Tough looking going forward.

But I'm convinced that we've got this company on sound financial footing.

And we are able to stay with our strategies because we're not under any kind of financial pressure and in fact, our strategies are working pretty much like we thought.

Thank you very much and have a good day.

Once again, that does conclude today's conference.

You may disconnect at this time.