Eastman Kodak Co (KODK) 2003 Q1 法說會逐字稿

Please stand by for real time transcript. Please stand by for real time transcript. Is . Eastman Kodak company call will begin soon. Please stand by. We're about to begin. Good day everyone and welcome to the Eastman Kodak first quarter earnings results conference call. Today's conference is being recorded. At this time for opening remarks I'd like to turn the conference over to the Director and Vice President of Investor Relations Mr. Don Flick. Please go ahead sir.

Good morning. And I'd like to welcome you to our discussion of our first quarter results. Hopefully you will all have received our press release and financial discussion documents this morning which will provide details of our performance which we'll be covering today. Before we start, there are a few housekeeping issues I'd like to deal with.

First concerning the adoption of the SEC final rules concerning conditions for use of nongap financial measures which was adopted as of March 28. In our discussion this morning we will be reviewing our performance using both gap and nongap performance measures which we will refer to as operational. Where this is done the reconciliation between the two measures is provided in detail in our financial discussion document available via our web service, wire service releases as well as as our website www.Kodak.Com. Kodak believes that presenting income from continuing operations and other financial measures excluding nonoperational items provides an important additional measure of company performance. Where operational measures are provided it is done so that investors have the same financial data that management uses in the belief that it will assist the investment community more properly assess the underlying performance of the company on both a year over year and sequential basis.

Lastly let me call your attention to the safe harbor provisions that cover any forward-looking statements that will be made in the course of this mornings discussions. Specifically, certain statements in this conference call may be forward- looking in nature or forward-looking statements as defined in the United States Private Security Litigations Reform Act of 1995. For example, references to the company's 2003 revenue, earnings and cash flow expectations are such forward-looking statements. Actual results may differ from those expressed or implied in these forward-looking statements. These forward looking statemants are subject to a number of important risk factors including but not limited to currency fluctuations in raw material costs, competitive actions, technology substitution, general economic and business conditions to name a few. A complete discussion of the risk factors relevant to this morning's discussion can be found in our press releases and other filings, and I would encourage you to review this important information carefully. Now I'd like to turn the call over to Dan Carp, Kodak's Chairman and Chief Executive Officer.

Thanks, Don. And good morning to all of you on our call this morning. Before we get into our discussion of the first quarter, I'd like to introduce an important new addition to our team. As you know Antonio Perez recently joined Kodak as President and Chief Operating Officer after a distinguished career as a top executive at Hewlett-Packard. Those of you who follow the company know the great importance I have attached to getting the right person for this key job. In Antonio I know I've got not only the right person but unquestionably the best person for the job. In the months ahead I'll be looking for Antonio to drive continuous improvement on the operating side. We also intend to use his world-class expertise in the output market and his demonstrated business building skills to help drive our growth strategies. I'd like to ask Antonio to say a few words.

Thank you Don and good morning to everybody. I have now been with Kodak for exactly 21 days, so I won't be saying much about the first quarter results, however, I do want to take this opportunity to introduce myself. For many of you in the investment community, reintroduce myself. And I look forward to getting to know you in the context of Kodak. I wanted to tell you as well how pleased I am working with Kodak, working with Don and the rest of the team. You know, continuing to reshape this great company and create value for investors in the process.

I came to Kodak because I saw a great opportunity. Not only to build upon the attractive traditional business in the portfolio, but also to further accelerate the progress already made by the company in making a new portfolio of digital imaging businesses. I'm always been impressed with Kodak's technology,. The IT portfolio position, it's market presence worldwide and this very strong brand. I became aquainted with Kodak in many of the senior management team during the evolution of the photogenic joint venture. So I had a pretty good idea of the company and the strengths of the company even before Don called me about joining the firm.

So while in Kodak I'll intend to focus in three areas in the near future. The first one is to drive improving operation performance across all of our businesses. Second, is to accelerate digital imaging strategy with a strong emphasis on output, and last but not least I will be seeking revenue growth opportunities from new businesses and product categories.

I already moved from San Diego to Rochester and I'm very happy here, even if it did snow here last night in the middle of spring, which I was never told that was going to happen. Anyway, let me turn the call now to Bob Brust to discuss the first quarter result.

Thanks Antonio. We should tell you that snow in April is not unusual in Rochester.

A little late.

Back to basics, in some respects it wasn't difficult to summarize the first quarter. The economic weakness we have seen for an extended period of time nearly three years continues. With some new twists such as the Iraq situation, SARS and several orange alerts. You can argue that these represent perhaps the ultimate collection of one time events. Whose impact will disappear over time but in the near term they represent very real forces this management team must deal with.

Let me walk you through some of the important aspects of the quarter. Our gap earnings representing the sum of continuing and discontinued operations were 4 cents a share. On a continuing operations basis, our gap loss was a negative 1 cents a share. The gap loss from continuing operations included the following items: The settlement of an intellectual property claim for $12 million pretax. Write off of $21 million pretax of in process R&D resulting from printing technology acquired during the quarter. A restructuring charge for previously announced cost reduction activities, excuse me, and accelerated depreciation totalling 20, $46 million pretax and a tax benefit valued at approximately $8 million resulting from the donation of intellectual property to a tax qualified institution. None of these items operational earnings were 14 cents per share essentially on expectations and equal to last year on a continuing operations basis.

As we indicated in our release this morning, the top line is up 1%. Driven by positive foreign exchange, our health imaging and commercial imaging segments as well as products and services from entertainment and digital and applied imaging. Excluding the benefit of exchange, sales declined 4%. Exchange adjusted revenue was negative in all geographies except emerging markets which saw a growth of 4%. The photography group reported sales down 1% while health was up 5% and commercial imaging was up 7%.

So while revenues were soft for the company, the weakness was really concentrated in the photography segment. Within photography, products and services within digital and applied imaging and entertainment posted strong growth while sales of Kodak professional products and services were down slightly. The negative [top] line story is in the traditional consumer product areas where sales were down 7% as reported and declined 13% adjusting for exchange, while the rest of the company, except KPRO grew.

Dan Carp will provide more detail about consumer and our other markets but it's important to understand that about half the company's revenues are in businesses that produce good top line growth, even in this challenging economic environment. Operational gross profit as a percent of sales declined 1.2 percentage points year over year to 30.6%. As we predicted back in January, manufacturing productivity, although positive, was insufficient to offset the effect of lower volumes, prices as well as adverse mix. Expense control during the quarter was generally good, but R&D spending reduced year over year and SG&A up slightly as a result of foreign exchange impacts on nine U.S. costs. And higher levels of advertising spent. Operational earnings were down $22 million on a year over year basis, principally as a result of reduced gross profit.

Moving further down the P&L interest expense declined $7 million year over year reflecting both lower debt levels and lower interest rates. Other income and charges benefitted from positive transactional foreign exchange which more than offset increased investment levels in some of our joint ventures. Some of our major joint ventures, Phogenics and NexPress continue to incur losses due to mostly to tough economic conditions. For the year, we are reducing our estimated effective tax rate to 26%, down from our previous estimate of 27%. This is fine tuning, not a structural change. Operating cash flow from continuing operations was a $98 million use of cash, including the impact of $54 million of acquisition activity and $21 million for the purchase of in process R&D in the quarter.

We had excellent receivable performance and held capital expenditures below depreciation. Inventories increased and will receive a great deal of attention in the coming months. So while I am genuinely pleased with our cash and cost performance, and the state of our balance sheet, the current environment demands caution. Therefore, we will continue to increase our emphasis on cash generation, especially inventory reductions, to ensure that the liquidity needs of the firm are met.

We're also beginning to explore opportunities for further meaningful cost reductions. The company remains in excellent financial health with a strong balance sheet and cash flows. We will continue to manage the fundamentals aggressively to remain that way during these challenging economic times. I'll now turn the call back to Dan Carp for his assessment of the first quarter markets.

Thanks, Bob. As Bob mentioned in his comments the area that has been most affected by the current events is the consumer area. While our other businesses have faired well. This diversity of the Kodak portfolio coupled with the ongoing cost reduction activities will permit us to manage our way through these difficult times. That said in my 33 years of business I cannot think of a time with a greater level of business uncertainty, with more unusual events at work. At our January meeting in New York, you will recall that I spoke about the lack of clarity in the direction of the economy, the threat of war and terrorism and the continuing evolution of digital technology, all impacting our ability to foresee this year's performance. It now turns out in hindsight that I missed one, the still evolving SARS out break.

While SARS had limited impact in the first quarter its impact could potentially be more significant in the second quarter. As a result, the reasons for the downturn in consumer picture taking activity are really not hard to discern. The war in Iraq kept the public in front of TV sets instead of taking pictures, while heightened concerns about terrorist attacks continued to cut in leisure travel. The ongoing weakness in our economy kept consumers cautious about vacation spending and other behaviors that drive [inaudable] picture taking.

Nor has Kodak been uniquely affected by all of this. You can see the effects in many other industries including airline performance particularly international travel, theme park attendance, hotel occupancy rates et cetera. As a result, Kodak experienced declining volumes across a broad range of consumer products film, paper and photo finishing and its principal developed markets U.S. and Europe.

U.S. film industry was down 10% in the first quarter, with each successive month in the quarter posting a higher decline than the month that preceded it. Some of this industry decline was clearly due to Easter moving from March of last year to back, well back into April this year. Still even accounting for this impact the industry is down substantially more than the 4 to 6% I predicted for the full year in January. These softer than expected industry sales left a retail channels with a significant Inventory position. This combination of slow retail sales coupled with retail inventory reductions resulted in Kodak U.S. sales to dealers being down 24% year over year with volumes down 16%.

I'm pleased with our ongoing share management programs as we gained a slight amount of share in the quarter. Our data suggest the retailers still had a high inventory position as the first quarter ended, so we expect a destocking trend if you can call it that, to continue into the second quarter.

Pricing dynamics in the U.S. market remain essentially unchanged from previous quarters, although it's a bit hard to see that from our reported price mix performance of minus 9%. As we disect the price performance we estimate that the underlying price mix trend is down about 4 to 5%, consistent with the last several quarters, however the impact of certain contractual payments we make to retailers spread across the relatively small role volumes this quarter produced a disproportionate impact on a percentage basis on price. As a result we are confident there hasn't been any real significant change in the pricing dynamic in the U.S. marketplace.

We continue to have some real bright spots in certain emerging markets with China film sales up24%, India film sales up 16%, Russia film sales up 33%. And Latin America, particularly Brazil, however remains very soft. There's no real mystery to what happened to the consumer markets in the first quarter. Over time the factors that created these pressures will abate and allow these products to rebound.

Now let's talk about the other areas of business that helped offset some of the pressures the consumer business experienced. Digital slide imaging products and services saw excellent top line growth across all major elements of its portfolio. Sales of digital cameras increased 36%, photo-grade ink jet papers increased 51% and sales grew 86% at our Ofoto online picture operation. Equally important the economic performance of the operating unit continues to improve consistent with our objective of reaching a run rate break even performance by the end of this year.

Lastly the recently announced addition of [inaudible] from Olympus to the digital camera team represents a very significant injection of industry experience and vision to our digital still camera program. [inaudable] stature in the consumer digital camera industry may not be fully appreciated here in the United States however it is important to note that he's been widely regarded in Asia as one of the real pioneers in this business with an excellent track record of success. Getting him on our team a really a coup and goes a great deal towards the success of Willy and the team he's built.

Entertainment products and services also saw good growth, particularly in the print film business reflecting a strong flow of movies into theaters, as the continuing trend for world-wide same day releases. As we have mentioned previously our new Vision 2 origination film continues to garner both awards and customer acceptance. Looking outside the photography segment, health imaging posted a 5% revenue gain or negative 1% with foreign exchange excluded. Sales growth was led by digital products and services which grew 11% year over year. Health segment margins once again came at a strong level of 19.9%. As I've said many times our health imaging business is a real jewel in our portfolio and we intend to assure that it has the resources necessary for profitable growth. The commercial imaging group also grew revenues in the quarter led by growth in it's services business. Commercial imaging is also where responsibility resides for our Kodak polychrome graphics joint venture as well as our NexPress joint venture. In a difficult market KPG continues to generate positive earnings and cash with good success in it's computer display business and it's color proofing portfolio. NexPress our joint venture with Heidelburg, in the on demand color printing area continues to place machines in a tough economic environment. NexPress customer print volumes continue to run ahead of plan, with one customer running over 1 million impressions per month per machine. So Kodak continues to do well in the nonconsumer portion of our business.

The softness in the consumer behavior that drives film usage is an issue that ultimately will turnaround and correct itself. We've made great strides in improving our cost structure during this extended economic downturn. As Bob indicated we're beginning to study additional actions to address the challenges presented by the current business climate. With this ever improving cost structure there is a significant upside in the face of improving consumer demand when it appears. However it's virtually impossible to predict when the combination of improving economics, lessening world tensions and other factors will drive that increased consumer demand. As a result there's significant volatility in our business and our estimates going forward. If current trends in the consumer business continue into the second quarter, it is possible that the second quarter operating earnings could fall in a range of 60 to 80 cents per share. However, we saw a pick up in consumer film consumption, we would see an upside to this.

Consistent with this view, our full year outlook is now falling at the low end of our $2.95 to $2.35 per share operational earnings range that we provided you in January. It is interesting and also encouraging to note that our second quarter out look, if one excludes the traditional consumer business from the analysis, is actually forecasted to grow revenues in the 5 to 9% range. While our traditional consumer markets are experiencing challenging times, I am pleased with our share performance. Our focus on cost and cash and the results of our nontraditional consumer business. Our digital portfolio continues to gain traction in the market with consumer digital cameras continuing their journey toward profitability.

And, lastly I'd like to repeat what Bob Brust said at the beginning of his remarks. We may be seeing the ultimate manifestation of near term disruptions to the consumer markets we serve. War, terrorism concerns, worry about SARS, and the continuing economic weakness which can strain those behaviors most closely tied to picture taking. However, these negative factors will ultimately pass. And on the back of an improving economic environment, our strengthening of our management team we will be positioned for profitable growth. The question is not the if of improving performance, but rather when. Now we'll be happy to take your questions and I'll turn it back to the conference coordinator.

Thank you, Today's question and answer session will be conducted electronically. And if you'd like to ask a question, please do so by pressing the star key followed by the digit one on your touch tone telephone. Again that will be star one for questions today. If you are on a speaker phone please turn off the mute function so the signal can reach our equipment. We'll be taking our first question today from Ben Reitzes at UBS Warburg.

Yeah, thank you very much and good morning. Wanted to ask a few things first on SARS when we look at your emerging markets portfolio, obviously China has if I'm correct become your second most important film market in the world behind the U.S. I'd like to know if you can confirm that and talk a little bit about the exposure to that particular market and what you're seeing going on there, not only with your sell in, which has been quite strong, even was strong in the first quarter, but also your own manufacturing facilities there in that region, which are only growing, you've recently taken your single-use camera production from North America, I believe and moved over there. So if you could talk about those issues. And I have a follow up.

Thanks, Ben. The first quarter there really was no affect of SARS on the business. It was an emerging issue and so the impact I think will be in the second quarter. Your question about what is the size of the impact, it's hard to predict. We think it will be tough on film consumption in China in the second quarter, in that they've basically cancelled or pulled back on their May holiday week, which traditionally, after the -- since the new opening of China is time where Chinese consumers explore their own country and that is a pretty big picture taking time. So I think that will be the issue that we'll face in China. Now China is to your point our second largest film market, but we've got to be careful. There's the U.S., then there's a whole lot of space, then there's the second largest. It's more like what a Germany or Brazil would be in a normal time, than really implying it's as big as the U.S. But don't forget China was a big tourist destination for both Europeans and Americans. Of course no one is going to go to China in this current environment. Our plants are running fine. People are coming to work. The number of absolute numbers of diseases is a relatively small percentage so people are coming to work in our company and other companies. But what they're doing is avoiding large public places, movie theaters and things like that, museums, so I think what you'll see in the country is you'll see continued production. If an outbreak occurs the government officials are jumping on it. People will have quote unquote a normal daily life. They just won't do the things that are part of entertainment and tourism.

So as far as Chinese units go, you are at 28% I believe in the quarter, and we should just assume that that maybe a lot of the other emerging markets flatten out or even go negative.

Tough to say. Tough to say. Because I don't know how, I can't really say how long the SARS will it get worse or better. I think we can see the next couple months in China particular to be really tough on picture taking, maybe even some contraction. Then we'll have to see what happens after that!

Thanks. Then just reconciling the film performance in more developed markets, the memory card guys had great quarters. You had yourself a very good quarter in digital cameras it seemed, up 36% as you said. So is digital cannibalization of film in developed markets? I know we have tons of head winds with travel and digital might be better suited for the current environment because no one is going maybe on the long vacations where it makes more sense to take film. Is digital cannibalization in line with your expectations or could it be a little worse?

I said I thought it would take 4 to 5% growth out of this year, and you know, it's still in that range, maybe closer to the 5. I don't know it's too early to call based on one quarter. It's certainly not the big issue right now. Sure the digital is growing and we're thrilled. Willy will probably kill me, but with a little luck he could do a billion dollars this year. That's small compared to the $7 and a half billion roughly consumer business. So what we have is people are buying digital and we've built that into our plans and talked to you about that. But it's the pull back and we do panel surveys in consumer houses, it's the pull back on the traditional business that in these surveys we do is not related to a digital camera introduction to the household that's causing the big head wind we've got. So yes the digital transition is alive and well. We're making it fine and that's continuing. We're excited about finally the industry getting behind getting these images printed heavily with [inaudible] and at retail. But getting them printed our printer dot will help that. That's on ongoing transition. The big head wind is people are not picking up their traditional cameras or one time use cameras and taking pictures while they're sitting in front of TV or staying out of large group locations or while they're not taking vacations during school break, but rather staying at home because they're worried about their economic fitness. So it's more that. We don't see any change in the digital transition at all.

Last thing before I let other people here, which would be nice, I guess.

Sure they would be thrilled.

The DLS system, is everything on track, is that shipping along with expectations?

Yeah, it's gone fine. It's gone fine. It will be rolling through the U.S. May of this year.

Any idea on installs or anything we can expect?

I don't have those numbers in the top of my head, but the customer reception has been good.

And it's shipping right now?

I think we start shipping the software in May.

Thanks, Dan.

Yup.

We'll take our next question from Carol Sabbagha at Lehman Brothers.

Thanks very much. Just a couple quick questions. On the guidance for the second quarter of the 60 to 80 cents, can you give us a little bit more detail about what the assumptions are behind the low end versus the high end and I presume the major difference is going to be to consumer business.

Yeah, you're right, it is the consumer business. The major difference is really around fundamentally the volume, the volume of pictures taken and then run through photo finishing in the U.S. and western Europe. Obviously China is another piece of it, but it's U.S. and western Europe. It's heavily related to what the consumer will actually take away. It's too early to see what the results were for Easter.

I do see -- I do enjoy seeing some evidence maybe in consumer sentiments improve a little bit now that the war is over, but at the lower end of the range says the consumer sentiment continues to stay down there. People are worried about travel and getting sick. At the upper end of the range we see some recovery in the industry from the roughly best we can do Easter adjusted of 7 to 8% down in the first quarter. Some recover that. We'll just have to wait and see, Carol Sabbagha.

Did you see a deterioration into March? I know you said it's probably too early to talk about April. Did it get worse in March and maybe get a little bit better in April?

I don't have any information on April.

Nothing?

Nothing at all. It got a little worse in March. The drop -- the trick is-the drop is trying to determine the Easter effect. If I try to normalize out the Easter effect, February, March were weaker than January, but we're starting to split hairs here.

OK. And a follow to that, you said the retailers continue to have extra inventory. Was it more -- I think when we end the fourth quarter you suggested that they may have 8 weeks of Inventory at the retail level. Is that higher ore lower going into the second quarter?

I don't know the answer to that. I don't have that off the top of my head.

And last question on Inventories on your own Inventories. Bob had suggested they were a little bit higher and that was going to be a focus going forward. Can you talk about why they were higher, what the components were and what the plans are. Thanks.

Carol Sabbagha, it's Bob. Some part of it was planned and some unplanned. We did have a prebuild for the O tuck, you know we're moving O tuck production around the world. Some primarily into China from Rochester. That production will stop here shortly, but we did build some buffer. We normally have a seasonality build because our second quarter is normally our strongest quarter. Who knows this year with all these things going on.

Inventories were also boosted by about 19 or 20 million by exchange, Inventories of foreign countries. We did get caught on the soft sales. So we were building to a schedule that didn't materialize, especially in February and March, as Dan alluded to the industry demand was down quite a bit February and March. So while Inventories quarter sequentially increased by about $130 million, we want to take a good bit of that back out as we're going forward. We're going to work on that very vigorously. We have adjusted our schedules to the realities of what's happening around the world. You should look to inventories to decline going forward.

To decline. OK Thank you.

And we'll go next to Craig Ellis at Smith Barney.

Hi, Craig.

Can you hear me now?

Yeah.

Sorry about that. Good morning, gentlemen. First clarifying the earlier comments on the potential for further cost reductionsthis quarter, can you give us some parameters around how significant that might be and how quickly you might be moving towards further staffing reduction?

It's too early to even answer those questions. Let me backup just for a minute. You know, we've got a fairly significant cost reduction program under way, so the first order is ensure we get that done. I don't see any hiccups in that. That's going just fine.

The second key point to remember is we've got a pretty good method for looking at cost reduction. We don't do it across the board, we don't do a scattered shot at it, we go at it very methodically. So what we've done is energized the people that do that to start looking at some ideas. Obviously after taking as much cost out as we have, it will be difficult to take anything like that in the future, but, at the same time, we're getting pretty good at taking costs out and our processes are fairly easy to start up. So all we've done thus far is start up saying, okay, the business conditions stay this tough, what can we do to get more costs out of here? We'll have to see what feeds back before I can give you any kind of concept of cost or scale or timing. But it would be irresponsible of the company I thinkto see the third year of a recession, increased fears of terrorism, global concern about health, and then sit here and say we'll keep the same cost structure. That doesn't make sense to me. We've got to look at it. We don't want to cut into our future because our strategies are working. That's what the management team, the senior guys Antonio and Bob and I will get together on once we see some of the ideas and so forth.

Thanks Dan. Then on health imaging, I know the longer term target is trend back into the 15% range. Given the performance in photography ,is there any pressure to maybe keep that margin a little bit higher and try and keep mix more towards the consumable side and push perhaps less aggressively on the equipment side?

No, because that's selling your future. Economy changing has a natural effect on some things, and one of them is even the medical profession pulls back on some budgets and things. That actually is pulling back on some equipment placement, which then supports the margins in the health imaging business. I think as we see the economy improve we will see our equipment sales will go up and those margins will start walking backwards a little bit. By that time hopefully we'll start to see recovery in our consumer traditional business. so there is natural [inaudible]on there. We are not mortgaging the future saying let's milk the health imaging business, which I know you didn't suggest, but we're telling them to keep going and grow their business.

Then a clarification on the SG&A. Bob, I know you said that advertising was up year over year and currency contributed to SG&A increase. Can you help us understand the relative contribution of those two and was it a planned advertising increase or was it somewhat tactical given the weak demand we saw in the quarter?

We had a planned advertising increase. You know, we had -- we had several new launches at PMA, including the dock and the printable dock and [inaudible] and Perfect Touch and stuff. We wanted to increase the advertising to cover that. Which we did.

Currency, I think kind of for about $28 million of increase in SG&A, primarily in Europe, where the dollar weakened against the Euro so much. So if you adjust for those factors, SG&A was down a little bit. Some of the direct cost efforts we took last year will have further favorable effect on SG&A as we go through the year. So I was comfortable with where we were. The exchange problem will be with us. You know, we enjoyed the favorable -- we enjoyed the favorable effects which the dollar was strong. Now we'll just have to get through these effects as the dollar weakens.

OK and lastly, Dan back to you, just on some of the recent management changes with the addition of Antonio, you hired Bernard a few months back. You've now got two executives from the ink jet printing business. Are we seeing any subtle initial changes in strategy for you? Can you talk a little bit about some of the management changes and what that --

Craig, you call that subtle coming in? No, you know, I didn't ask Bernard and Antonio or [inaudible] to come in because of tactical skill. I brought them in because they understand broad based elements of growing businesses and then, you know, in Antonio's case, broad based understanding of the out put business, which we feel is key and we feel we're making some good progress there. So it's not bringing a person in just for a tactical piece at this level, it's a broad, broad based approach. Both these guys that you mentioned, Bernard and Antonio have grown businesses from zero and have broad based knowledges of how to do that. They certainly have the DNA or the rhythm of high-tech business, which is as we transition, more and more, that being a bigger piece, so they're here to do those kinds of things.

Thanks, Dan.

Sure.

The next Michael Weisberg at ING!

Yeah, Good morning. Could you help me with a couple things I think you mentioned our overall digital consumer business was up 3 picture in the quarter. Did I get that right?

No, you didn't. The consumer digital business is up 32%. What's in there is consumer digital cameras, printer docks, docks, ink jet paper and Ofoto. That came out about 32%!

I got it. Thank you. And then your goal is still to break that even by the fourth quarter?

What we said is the camera business would break even in the fourth quarter. We're still investing a little bit in the Ofoto business. We're trying to grow that. We're taking that overseas the ink jet paper business is already profitable.

So does that mean the overall business may not be profitable fourth quarter?

I think it will be profitable. I just can't remember all the numbers. We look at them separately. On a run rate it will be profitable.

It should be profitable in the fourth quarter.

Great. Second. Looks like you had very good operating margins on the health imaging side, better than we expected. Could you give us a little guidance on what you think the margin trends will be going forward.

That gets a little bit to the question Craig asked. We had expected those margins to step down a little bit. Because we would sell more equipment. the reason they hung up is The equipment sales weren't quite where we thought, not because we're concerned about it, just people are pulling back in this economic time. I believe long term, these -- this business should not be running at this 19% plus range. It should be more in the, I don't know, the mid to high teens and where we can invest in growing the business. But we shouldn't force it there. It will go there naturally as business picks up and equipment and systems go in. Which by the way then leads to a long term annuity on materials, which is a great business [inaudible].

The other thing is the emerging markets which I think were up 6% in the quarter?

I don't remember the answer. I don't know. I can't remember.

I thought I saw that. I wonder you mentioned very strong trends in China, India and Russia, I guess mentioned Brazil was soft. I think precurrency, the overall emerging markets, which encompasses China, India, Russia, Korea, Taiwan, was up 6 precurrency I think. I'm wondering, were there any other offsets? Brazil it sounds like was down. Was there any other countries that were down?

Mexico.

To offset the very strong results of those three countries.

Mostly Latin America, Mexico.

This is Don Flicks. Just to add a bit of clarification. The Latin American portfolio for Kodak is material. All of Latin America is down so that certainly provides a strong counter weight to these ups we had seen.

What's the driver to the weak Latin America business?

The economy in Latin America.

Great. And if I can, one other thing, you said quickly your sales to dealers were down 24% first quarter?

Consumer field sales to dealers in the U.S. were down 24%.

Is that in dollars or units?

Dollars.

And you said volume was down a little less than that?

16.

Volume was down 16 and the rest was price mixed negative variance.

Right.

Thanks very much.

Michael, do you have a copy of the MDA?

The press release?

It's all together there.

I do. I just didn't look through all of that.

I just wanted to be sure you got it.

I did. Thank you very much.

Okay.

We'll take our next question from Ulyses with Buckman, Buckman, Reed.

Hi, I hope you don't mind if I compete with Ben in terms of questions asked.

It would disappoint me if you didn't.

Can you give us some idea in terms of the effect on gross margins the second quarter of the Inventory reduction, which means usually lower production limits?

In our January analysts conference we knew that we were going to have -- we stated that the fourth quarter we were surprised at the weakness in the film industry, so we knew we were going to have lower production schedules this year. We pointed out that our productivity while still positive this year would be quite a bit less than 2002. To pull that out specifically for the first quarter, the absolute number we haven't done that yet, but it certainly had a downward impact as we pulled the schedules down later in the quarter as we saw this weakening. So we had pointed out in January that I think manufacturing productivity was in excess of a quarter of a billion dollars last year. It will be much less than that this year.And that had a big impact on the first quarter. That's why the margin dropped 1 point, 2 points. I don't have a specific change from what we saw then to what we actually experienced. We are still working on that.

Mostly affecting the second quarter.

Oh, the second quarter?

Yeah.

We don't have -- in the range is two scenarios: We have -- while it's not clear what's going to happen to film in the second quarter, it looks like it's going to be down, so we have a range of 60 to 80 cent,two different productivity assumptions but I don't think we divulged that information, Ulysses. So it's -- in the 60 cent scenario, it's low because we would view that the SARS impact and the continuing problemsto have quite a bit of a downer on it. We don't divulge that specific information in our estimates.

Do you have some idea of the size of what you mentioned is contractual payments to retailers?

No, we can't. Because it's just too much competitive information.

Can we go to an easier number, advertising expenditure for the quarter?

Do you have that, Bob? We'll look it up. We don't have the exact number. We'll get that right now.

How is Perfect Touch doing?

It's doing well. It's rolling out now through the United States. Our best measure is in the Midwest where we launched it fourth quarter last year. It's driving the behavior that we predicted in that consumers are willing to pay more for Kodak Perfect Touch and they're relating to the brand, which is important long term. That the Kodak brand in output gets established. As you and I have talked a couple times the brand on out put hadn't been invested in by anybody and it's a great opportunity for Kodak, consumer accept that we should know more about output than anybody. But we needed to brand it. And the Kodak Perfect Touch is starting to connect with consumers. It's too early to see if it works everywhere else in the country like it is in the midwest. But it looks pretty good.

From personal experience, it seems to be adding significantly to the printable images out of digital, because it enhances light conditions and everything else. Is that true?

You get back a packet of prints of more good prints than you would have without it.

I was talking specifically on digital, where you print only the images that you like. Using Perfect Touch at least on the web, it seems to significantly increase the number of acceptable photographs you would print.

It has the same effect on digital prints delivered over the web. You'll get more better pleasing pictures using the technology and the Perfect Touch, absolutely.

Finally, may I ask a final question? Outsourcing, is outxourcing one way of cutting costs?

We're looking at further outsourcing. I'll let Bob answer because the purchasing group works for him. They've got a fairly disciplined approach in terms of making sure that it's good for the company to do.

We have in our purchasing group have established one individual as a BPO, Business Process Outsourcing expert. We have him going to different parts of world where business processing outsourcing is successfully done. It looks like it clearly is a path we're going to pursue. We're working it through now. It's a little more difficult with the world events to get a clear shot on it, but it's got to be an advantage to the company and we're pursuing it. The answer to your advertising question is we spent $104 million in the first quarter, which is up 8% from last year.

Single use cameras, are they still increasing or they are now in a decline? One-time use as you call them.

Yeah, they're increasing slightly, but they're not immune from what we're talking about here. People buy one-time use camera, I mean, that's why the Kodak brand is so successful, but people buy one-time use camera usually the night before they leave on vacation. So if they're not going on vacation, they're not buying any film or cameras. That's the fundamental problem. But they're ubiquitisly distributed, they're everywhere, so people, they don't stock them as much. They go ahead and buy them when they're ready to do go. They're not immune from what we're seeing in terms of general picture taking. You've got to remember you know there's I don't know. We'll see where the industry settles out this year, but there still will be 650-675 million rolls of film and onetime use cameras used in the year in the U.S. it's the fact that it's down from previous numbers, over 700 million,due to what we talked about but there's still a lot of product being sold.

Has your venture in the low end of the market, is it working?

Yeah. It is. It is. It gets to a price point for consumers who are very price conscious, but we continue to innovate with the better quality product to give people better pictures, but we want to keep them in the Kodak family.

Thanks very much. Sorry for the time it took.

No no. Thank you.

This concludes today's question and answer session. I'd like to turn the call back to Mr. Carp for any additional or closing remarks.

Thanks everyone for tying in. We are pleased on our results in the first quarter. We're very pleased at the broad portfolio of the company. We're concerned about the consumer traditional business in this environment but we know how to manage through it. We'll stay tight on our cash because we do have a good cash engine here at this company and all we have to do is pay attention and manage it just like we are. Thanks and have a good day.

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