Eastman Kodak Co (KODK) 2004 Q4 法說會逐字稿

[Caller instructions] Also, a few opening formalities we always get through: Of course, we are making forward looking statements this morning, and they do contain a number of risk factors that can affect the outcomes of those projections.

So, I would urge you to take a look at our safety statement.

It is included in the hand-out materials this morning.

Plus available on our website as well.

I'll speak louder.

We do make reference to non-GAAP measures in the discussion this morning.

We do that because these operational measures are a key way that the management looks at the operation of the business.

However, in each and every case we do reconcile those to the equivalent GAAP measure and that can be found at our website: www.kodak.com.

Now I would like to introduce Dan Carp, Kodak's Chairman and CEO.

Thanks, Don.

Good morning, everyone.

Thanks for coming, and also thanks to those of you who are on the Webcast.

I know that's turning into a very efficient way for us to share our thoughts with you.

This is our regular scheduled January meeting that we do every year where we talk about, not only the '04 results, but probably more importantly lay out what we think we will achieve, our plans and our commitments for 2005.

I can tell you we are very, very pleased with both our status to date and the results to date and we are very pleased with the plan for 2005.

It is an aggressive plan, but certainly a plan we believe has -- can be achieved -- has a good chance of being achieved and will be achieved.

But let's get into it.

The speakers today are, of course, Antonio, Jim Langley is here who runs the graphic communications, those of you who came to the September strategy review know that we did DFIS and Health.

We just didn't have time to do all the businesses.

So Jim is here to update you on how graphic communications is doing.

All of you know we've made a number of acquisitions in that space and we've put together a powerhouse organization with good product flow to go after this market as it moves from kind of analog products to a digital work flow.

Bob will come on and talk about the financial results and then we'll move into Q&A.

When Antonio and I put this strategy together in September of 2003 we knew a number of things.

One, we knew that this was going to be a challenge to do.

We had requirements that you're familiar with in both taking costs out and building momentum and revenue and earnings in the digital products.

We knew it could be done.

We really did.

We saw the technology, Antonio and I believed in the technology the company had and that it would give us the platform to go after these major segments of the market that Kodak had led for years or had technology to add benefit to.

And we knew it would drive the best shareholder value compared to any of the other options that were available to Kodak.

Since September 2003, these are kind of the accomplishments we've had.

We have a digital strategy in our businesses.

And it's implemented, and it's making excellent progress.

We'll talk about that today.

We've pretty much acquired a large portion of the digital assets we wanted to get.

We spent about $2 billion.

As you know our plan does lay out a possibility that spending three billion.

We do see some more acquisitions ahead of us, but we really have acquired a big part of what we thought we needed to acquire.

Got a good cash model for the traditional business which was key to this transformation.

And the company is properly funded as we go forward in this transition.

If I can reiterate and recommit, we're confident that the revenues will be about 16 billion by 2006.

We will achieve this $3 per share earnings.

We can do this and still maintain a strong balance sheet and we will continue, as we have this year, grow our earnings per share from the low point of 2003.

Okay, for those of you who have been following us know that we are focused on these imperatives for the company: drive digital growth, drive digital profitability, manage the traditional business, and have an effective acquisition strategy.

Let me give you just a quick highlight by each one of these of 2004 and kind of where we are.

First in the top in the black, we now see that growing.

As we said in September of a compounded rate of 36 percent.

That looks very likely in this business and wouldn't change that now.

Obviously we'll talk again in September and update all the numbers.

But that still looks good.

Our consumer digital business really has had great growth.

If I look at the kiosk and the media in the fourth quarter, revenue's up over 40 percent.

If I look at digital capture, of course the corner stone being digital cameras, revenue up over 40 percent.

If I look at home printing which is a combination of our printer dock family as well as HF paper in the fourth quarter, up over 40 percent.

In the health business which is very far along in a digital transformation, in their digital portfolio it grew about 11 percent in the fourth quarter.

That's very strong for a big business like that and one in an industry that, of course, requires regulatory approval before you change things and capital budgets are under the pressure of health industry everywhere.

But to have our digital portfolio growing 11 percent in the fourth quarter again was very positive.

And as you saw at RSNA, for those of you who were there, that's the big radiology show in Chicago, we had a number of innovative new products laid out for the future in the health business.

Digital profit ability: our digital product portfolio continues to get more profitable.

Bob will show you the numbers.

He will show you the numbers of how our digital earnings grew in '04 and what we see in '05.

One of the key things is the continued acceleration of our digital product portfolio profit ability.

And we'll show you that.

Obviously a big part of the strategy and the one that is also working very well is staying ahead of the decline that we saw in our traditional portfolio, primarily around the consumer business which is dropping most rapidly and staying ahead of that decline and managing that business for cash.

It came in very well last year and we expect to stay on that trend going forward to manage that business effectively.

Kind of a gee-wiz number you saw this morning is DFIS which is where the consumer business is and, you know, it's earning -- its business dropped -- sales dropped about six percent and the earnings grew about three percent and of course they are heavily affected by this rapid decline, and yet they and the manufacturing team really took cost out ahead of the decline to be able to generate that kind of result in the fourth quarter.

I am not going to spend much time on acquisitions because we've got Jim here and he's the Big Kahuna of the first three of those.

He put together a great business and one that bodes well for the long-term.

Health Imaging bought Practice Works I think in the fourth quarter of 2003 and they are ahead of their plan on that acquisition.

So 2005: that's really what we're here to talk about as we look forward.

It's going to be a -- another year of significant progress on becoming a digital company, a significant progress on maturing.

We hit those form priorities and deliver on these results.

If you think about some of the highlights, revenues from the digital portfolio in 2005 will exceed Kodak revenues on the traditional portfolio.

Revenues in 2005 will be more than the traditional revenues in 2005.

Just as exciting and important is the digital earnings growth in terms of dollars will exceed the traditional earnings decline in terms of dollars at the EFO level.

So, we're seeing excellent increase in the digital earnings in 2005 and that allows us to have a year in 2005 where our digital earnings dollar growth will actually exceed any earnings decline in our dollar drop in the traditional business.

And of course the key is to keep the strategy on tack -- on track with those imperatives and you will see today that it is throughout 2005.

Okay, with that let me turn it over to Antonio and he'll -- he'll -- he'll give you his thoughts and lay out what the operations are for this year.

Thank you.

Thank you, Dan.

Good morning.

Thank you very much for attending with this weather.

It is lousy outside there.

I do believe like Dan -- Dan Carp that we had an excellent year.

We, -- as he said we have implemented our new digital strategy.

We bought -- we acquired the necessary assets we thought were an integral part of the vision that we had.

You know, complimented the technology and the products that we had already.

And we optimize our traditional business.

But while we were doing that, we actually delivered results of the year.

My best summary of the results of this year is the following: First, our cash is strong, $1.2 billion.

Second, our debt is down -- more than $900 million.

Third, our digital products grew more than 40 percent for the company which is an amazing achievement.

Fourth, in every one of the categories that we are participating in digital we have gained -- at least virtually all.

Then -- this is five, I guess.

Five will be that we have optimize our traditional businesses while we were able to maintain the market share that we had in each one of the categories.

That was an important objective we had while the market was declined in the category.

Number six is that we attacked the cost structure of the traditional business such that we were able, not only to maintain the market share, but as well to get a return of sales that is at least ten percent of each one of our film products.

Then last but not least, when you look at Kodak today versus the way we were about a year ago or two years ago, we're not -- you cannot say anymore that we are a one-product company.

We have a broad spectrum of digital product lines.

I can count up to 15 very significant product lines.

They all have products, they -- most of them have services and most of them have an after market with the news in the after market.

Now granted we are building that install base, but when you look at the type of progress that we are building, they will have a very attractive annuity coming with the majority of them.

So this is going to give -- and this product line is not only 15 that I can count of significant volume, but they are in three different business segments and they are across commercial markets and consumer markets.

Remember that the plan we had at the time with our strategy was to leverage the technology.

We were going to focus on the core competences that we had which we are around the world of imaging.

The same technologies apply very well across those markets and across those product lines.

That's how we get the return on the best ones.

And I think this is a great base for the future this is a very broad platform that allowed to us achieve the goals for this year and for the years to come.

Why is this strategy working, and why we think it is going to continue to work?

You know, I'll give you four reasons.

The first one, we are very focused.

We said that in September last year, you know, 2003.

We are very focused in the areas where we have very strong core competences.

And it is all about the realm of imaging.

We were very faithful to the idea that we will not participate in any market where we don't have a strong IP, strong know-how where we can make a very significant contribution.

When you look through the product lines we have, you will find that.

And we have leading technologies that support those products.

Whether it is in [inaudible] market technologies, ink media, et cetera.

Second, we are -- we have an obsessive customer focus.

We are constantly -- we are constantly surveying the market to see what -- you know, what customers want.

And we are executing on it.

And I'll give you a few examples.

Innovation: We've been the first company to come with a WiFi digital camera that surprised very happily our customers and surprised our -- you know, our competitors and also happily as well.

But we're the first company [so far as this has used] that came with a printer dock idea which is, with no doubt, the easiest way to make your photographs in the home.

No doubt.

You know, as far as customer satisfaction -- we're the only -- the first company to got two awards in two of the four categories of digital cameras.

Hugely important for us.

It gave us a lot of push and that shows as well, you don't get those awards -- these are awards that are not given by an association.

This is an award given by your customers.

It is a very important award.

We got two of the four.

We understand, you know, how important it is for customers to have access to our products.

And our products are easy to find.

We have very large distribution worldwide.

They are very easy to use and they have very good volume compared to our competitors.

You know, number three, I want to claim publicly that we are a very disciplined company.

Maybe we were or were not in the past, but I can assure you that we are today.

We make fast decisions about portfolio management, and you've seen the things we have done in the last two years.

We have proven to you that we can manage for cash one part of the company and we can manage for growth the other part of the company.

We have been able to timely make the tough decisions in cost structure for our traditional business; you have seen the string of news that came since we announced this strategy in September with the objective of staying ahead of the decline.

We've done that.

We're going after the -- the a AG&A you can see some of the numbers I will show today -- we're going to take $80 million out of the a AG&A -- out of the corporate AG&A of the company this year.

We have all of the traditional initiatives for businesses as well.

We're surprising people with our ability to introduce new products rapidly.

And I can tell you that it is a lot more with this one came from.

We have a lot of technology in the lab.

Maybe one of the challenges we have in being able to go even faster moving that technology to the market which we will be working on is one of the plans for 2005.

And we understand the digital business.

We understand how to make money in digital.

When you look through the product lines that we have you will see we have products, we have services, we have consumables, in the majority of them.

Some product lines like digital cameras where we do make money and we are planning to continue to make money as well becomes a very strong enabler for the services that we have with the Kodak gallery which was previously Digital Photo and as well to sell printers.

One of the biggest successes of last year, and we hope this year too, is our sales of Bundles of our camera with our printer dock.

So we understand how to get money with digital.

You look at Kiosk.

I know we don't disclose the burn rate of the Kiosk, but I will give you this, we tracked the six most important retailers in the country with our Kiosk to see how the burn rate is moving.

The burn rate in December was five times what it was in January last year.

Very significant growth.

We're very happy with that.

That was one of the reasons why we have some issues with the amount of media that we could build.

We solved the issue and we told you about this before we solved the issue and we told about you this before, but the growth of the burn rate is excellent.

We're going to make money with these products.

We know how to deal with that.

And we understand it well.

And then let's never forget the power of our brand.

The power of our brand in the mass market is enormous.

And I'm saying this again and again I guess every minute that I came I kept saying that because for me it was a very happy surprise; how well the brand power moved from the analog world to the digital world.

It is especially for mass markets which is what we're after.

And our brand invokes into mass market buyers the the notion of image leader, the notion of trust and quality and good volume, easy to use.

And this is a strength that we can apply worldwide.

Some of the good things that happen in 2004 I will go very briefly to that, we expected to be number one in the U.S. at the end of the year with these two cameras.

I cannot assure you that.

We need another month to see the figures.

We were number one in November, you know, with firm data.

Everything that I saw here in the month of December shows that we are going to be number one.

I might be wrong, but that's my best guess.

And we are top three in some of the key markets in the world.

We make money for the whole year and we will continue to make money this year and we got this very important award that I mentioned before.

You know, the web-based repository for consumer photographs, used to be called Ofoto is going to be --- has been renamed.

It is now the Kodak Easy Share Gallery.

It is going to play an even more important role than it played in the past with Kodak you can see the actions we have along the year.

It is too early to announce them.

But you will see that we will put more emphasis into this which is a key enabler for the good use of cameras and the enjoyment of digital photography for the masses as well as a great enabler to printing.

And Kiosk and retail as well as in the home.

And we think that will play very well for us.

It is going very nicely, more than 19 million subscribers -- members. [Sixty-six] percent increase in revenue.

More than 124 percent increase in uploading on images which is at the end which is going to make this, you know, this business successful.

Consumer digital output, I already mentioned that.

We are number one virtually in every country where we are participating with this.

A hundred percent -- as far as the printers [along], 100 percent growth in volume and in revenue which is very important to build the install base the later will deliver the annuity.

And we have the launch already of the wireless product.

Important as well, although we don't have any products yet on the market, is that we announced the Image Link Consortium in which six of the manufacturers of digital cameras will use these dock printers to print.

Some of the products will start to come in Q1 -- in Q1, you know, this year.

And Kiosks, I already mentioned a few things, more than 60,000 units in the install base.

Fifty percent of them are approximately G3 which is the latest platform we have.

The one that is more valuable and with no doubt number one, you know, way ahead of any other company, and with the burn rate as I shared with you before growing fast.

Health Imaging: huge improvement this year.

We told you that we're going to invest in health imaging.

We said that last year.

We invested about $100 million more last year in R&D and SG&A to create new products, revamp the whole set of digital products we have as well as strengthening our go-to market.

And the good news about this is that we grew -- we grew the whole portfolio more than 20 percent.

Again, a lot of seating of CR's DR's and [impact] systems, and [inaudible] systems.

As a consequence of the seeding we have been doing in the last few years, our service has been growing 15 percent year to year.

This is very important, very significant.

This is very profitable, very important for our customers.

Those systems have to work and they have to work well constantly.

And we have -- we have integrated practice work successfully within the company.

It is growing very nicely, very well, better than we thought when we bought it and we got a lot of awards worldwide.

You can read through those.

We'll mention much about graphic communications.

Jim is here and let me tell you one thing, what I see that is fairly important for us is we have moved in two years from being a passive and marginal contributor, you know as far as participating in this market, to what I would call a clear leader in this market with the largest product portfolio that will help those customers that are moving from analog to digital to make this transformation.

And I will leave it up to Jim to give you the details.

We're very -- you know, we're very -- you know, we're very satisfied with this business and it is going to be a great business for the company.

Now, moving into 2005, three key operational priorities--very obvious.

Number one, drive the digital growth and the earnings growth.

We are getting right now to that point that we have -- we are having sufficient critical mass in the majority of our digital business.

Whether it's a printing business where we already have a bigger install base or where we have a large -- you know, a large digital camera business where we understand the market and where we can design platforms that we move across the world and send them to the postponement centers and right there close to the customer make your ultimate product in accordance to what sells the best in that region for that time of the year.

We have been working all the settlements over a good supply model for digital business and it is critical to have sufficient volume to do this.

We are getting into that volume.

That's why and I'll tell you in a minute we feel very comfortable with the growth on earnings in digital.

Number two we have to continue, this is a repeat of last year, we have to continue to optimize the cash integration of our traditional business.

It's declining, and it's declining fast, there is no doubt about that.

We know how to deal with that, but we will continue to deal with that.

Very, very important with this volumes now in digital, we want to be the leading company as far as business model is concerned and we'll talk about it in a little bit.

The digital revenue and earnings growth; our plan is to grow at least 36 percent.

Our top line, we said that before.

And what is new and we have not disclosed up until this meeting, today, is the second line is that is our DFO for the company, for our digital products that will be described by Bob, you know, by Bob Brust later on will be between 275 and $325 million versus the $46 million that we made this year.

The $46 million might be a little misleading.

Remember that we had a minus 80 that was caused by the acquisition of NexPress.

But even with that is a very significant increase in earnings.

Very achievable because it is based in that list of products that I described before, and I know I am getting repetitive with this, but I want to you pay attention to the fact that we do sell products, we do sell services, we do sell consumables in most of those.

We are going after the system profit of the digital business.

And we are very -- we are very well positioned to get that.

I mentioned there that I think about twelve product lines there.

There wasn't enough room -- we have more.

We have 15 of very significant size that will add to this twelve.

You count three down in the last line.

You have you to have scanners, you have to have ink jet paper, you have to have sensors.

We have about 15 PNL's that have significant opportunity for growth both in the top line and in the bottom line.

I'm sure we're not going to get our plans with the 15 exactly the way we wanted.

But we are not a one product company anymore.

You know, our final goal for this, you know, for this priority we'll describe by -- as done before and I want to you see, the way we think about --- these are two key milestones for the company.

Very important milestones for us.

Number one, we will have our revenues in digital bigger than the revenues in traditional.

This is such an event for us as a company achieved every event we thought -- and this is going to -- it is going to create an enormous momentum with our people and with our customers as well.

I think that is important, or even more, if you want, if you wish, is that the growth in earnings of our digital business will be bigger than, larger than the decline in earnings in our traditional business.

We have been dreaming with this moment.

When we started this transition.

We have been dreaming with the moment where we could balance the decline in profits of our traditional with the growth of digital.

This year that will happen.

That means we are transforming the company effectively into a -- into a -- into a successful digital company.

Number two is a repeat of last year.

We have to continue to do what we have been doing this year very well.

Now, [inaudible] is the following: the decline in consumer film [in roll] ... is to continue the way it is, but is going to go down even faster.

We told you last year we were expecting between 18 and 20 in the U.S. ended up 18 and 21 in the U.S. with the data we have.

We think that for next year in the U.S. could be up to 30 percent.

And worldwide up to 20 percent.

It is in our numbers.

We knew that it was coming and we are ready for this.

X ray, which is the biggest part of films and HI has been going down at three, three to four percent last year.

We think there is going to be five, six, seven next year probably.

This is what is in our plans.

EI, Entertainment Imaging, it has been growing this year and we think it will be stable, you know, stable for next year.

How do we make money with a business that overall, you know, is going down?

When you get the whole portfolio this year, we went down about ten percent.

Next year the whole portfolio we believe is going to go down around 16 percent.

So how do you make money?

How do you get your cash out of a business like that?

By the way, this is a business that people will die for.

When people say, oh my God, you know, your traditional business is going down.

I said, yeah, well, you know, that's too bad.

It has been going up for 100 years.

Give it a break.

It is time to go down.

But this is a business to die for.

This is a business we can still make a lot of money for many years to come if we execute these things.

Now we are not happy that it is going down, but this is a great business to have for the company.

This is not rocket science -- as you all know, where the business is going down.

You work on your portfolio and you SKU your management.

When your portfolio is going down you don't need as many products, you don't need as many SKU's and you actively go after that.

You don't let it go too late.

You go ahead of those things.

You work with your market and mix, your prices, positioning, changes.

And you have to be intelligent about it.

We have the brand, we have the distribution.

We know what to do with that.

Inventory: We're going to work with less of a fixed inventory and we're not going to build a new product until we have one new order in the mark.

We're going to create a pull system for inventory.

We have been working this year.

It hasn't worked as well as we wanted.

We will make it work next year.

We're continuing to invest where it makes sense which is EI and some of the emerging markets.

Things are growing and we can make money and it is a good business.

And we will continue with a plan for the footprint -- of the footprint reductions and the cost reductions that we announced in September '03 -- no, last year.

Which is right -- I mean, we are ahead of the plan.

And the idea overall was to stay ahead of the decline.

This is what we continue to do, you know, for next year.

Overall those are the objectives---stay ahead of the decline on the business.

We put an aggressive forecast for decline so we don't get surprised and the ideas that we want, you know, the goal is we are going to get at least ten percent return ourselves.

This year we grew about -- we got about you know, twelve percent.

We think we can get at least ten percent and maybe a little more.

And number three is we're getting large in digital now.

It's very important to have the very effective leading business model.

You know, the first point is that we have invested in a lot of technologies, digital technologies for many years and we have to come with those technologies into the market.

Commercial license those things rapidly.

We have done well this year.

We are very proud of what we have done.

There's lot more to that.

There's a lot more to that.

Now, you know, Jim has a big job, but has a great opportunity, the integration of those pieces that we have acquired and what we had in the company we're going to deliver -- has, you know, great possibilities to deliver both efficiency and cost reduction.

And we expect that from him this year.

And you know, for the years to come.

We are going after $80 million on corporate overhead and we are going to work -- if it is one thing that we don't feel, I don't feel very happy, our management team [doesn't] feel very happy is how we dealt with supply team management last year.

Now, let me clarify.

We don't have an issue with inventory in digital cameras.

The number of cameras that we had at the end of the year is less than the sales that we have in one month which was about the plan.

So we don't have an issue with digital cameras.

But we could have done much better with our traditional products.

We still have -- we still have too many [depots] in the world with too many products and too many SKU's.

That's not the right thing to do when the market is going down.

We have done some and we are not happy what we've done.

We're going to go aggressively after that this year.

But then there is a lot to gain from having that, from having that done this year.

I show you the target goal in some of the meetings.

That was a combination of analog and digital.

We thought it would be better to show you what the digital company we're aiming at will be like.

And of course have you to realize that depending on the success and the growth, the relative growth of consumer versus commercial, this may, you know, it may change slowly.

You know slightly.

But not much.

These are the goals that we have.

We think in this business we won't get as an average more than 30 percent gross margin.

But we can get 10 percent EFO with a significant investment in R&D in a well managed company.

This will be about 13 percent -- 13, 14 percent SG&A which will be a combination of seven to nine AG&A without advertising and about five points in advertising.

So five to six points in advertising.

You are going to see that we are going to invest more in advertising this year.

We think that we have enough of a critical match in digital that it would be worth putting money into advertising.

We have very nice products, very well received products.

We think we can take advantage of that.

We see that in the numbers that Bob Brust will show you later.

And though you see that, you know, consumer versus digital, we have rational aspirations for a gross margin in the consumer business.

We know how tough that is.

It will get better.

The EFO will get better.

It has the possibility of getting better.

The more we build the install base of [financial] services.

But for the next period, but for the next few years or so, we know that we cannot aspire to more than this and we have to live with that so we will make the company that will work as well.

An SG&A of 14 percent which is about nine and five, and AG&A five points in advertising and promotions.

And an R&D of five percent.

It is not a small number.

Remember that this company invested for the last 15 years in a lot of digital technologies for the consumer market.

We have a lot to work with.

That's not the case in the commercial space where we come in a little from behind and we have to put put more in R&D and that's why you see the nine percent there.

So that's the summary of the company for the year; what we're trying to do next year.

One point that I wanted to make is that we are starting the year with very good -- very good momentum.

Not only the numbers, the market share, the growth is good, but as well we came the last two months with very significant introductions that I think is going to help us.

We're very proud of this one.

This is Kodak Share One.

This is only the second year we attended CES.

I don't know if you have been to that show.

I have been there before many times in my life.

This is the second time that Kodak goes formally into this thing.

We got the best two awards from innovation in what arguably is the most important category of that show.

And we got it with a great product that surprised a lot of people and this is -- and this is what this company can do.

We have -- I kept saying this as I joined the company, you know, tremendous technology in the company.

Our issue is to be able to bring that technology to market fast enough and with low costs.

And this is what we're working on.

In home printing, we think that the launch of this image link is a very important event.

And now you are going start to see products coming in the first quarter from the six companies.

I know there is six companies, I know the six manufacturers of digital cameras that will be using the dock to print.

We think we have a lot of possibilities with that.

In Health Imaging a lot, a lot is new.

As I said, we invested $100 million more than last year and we bought [Orex].

The the portable CR was a part of the portfolio we were missing and we really needed that part.

The team has a great acquisition is going to fit very well immediately with our portfolio and our sales force.

And we announce in our S&A as Dan said a new -- a new, you know, recent pack suites, we have now a pack system for our mammography images.

We have introduced a top of the line leading flexible VR system that holds enormous attention in the show.

If you happened to go to the show it was hard to get close to this piece of equipment.

Very successful.

And we started the year already with 60 percent of our revenues coming from digital.

Sixty percent of the revenues of H.I. come from digital.

And H.I. had an operating earnings last year of 16 percent which was in line with what we told you.

Mid, you know, mid teens.

That shows that we can go digital and make money in this business.

Now the same point I have been making all along and I might be getting heavier, but -- but we do have a broad, a very broad, portfolio of products.

We may or may not succeed exactly with the numbers that we want with each one of them, but this very broad portfolio of product services in [off] the market is going to give us a great plat -- platform that we can achieve sustainable and profitable new growth in digital. [How many of the year] the two points I made before: our digital revenues, bigger than analogue revenues and increased earnings bigger than the decrease in earnings and a traditional and we have a very balanced port folio and a very significant investment in new technology.

Don't forget that because coming in 2006 and 2007 those things will come to market.

Thank you very much.

Now I'm going to introduce Jim.

Thank you, Antonio.

Sixteen months ago we came to this venue and this audience and we described what the future of digital Kodak would look like.

It would be built on three pillars.

One of which was graphic communications.

But the reason for choosing graphic communications were three-fold.

First it was a large industry, the printing and publishing business.

It was undergoing a transformation to digital, creating opportunities.

Second, Kodak had the expertise in inks, pigments, toners, color science and image management where we could make a contribution through this industry.

And third we add starting position of two JV's and one consolidated business which gave us an initial foothold to expand on going forward.

What I'd like to do today is run through a reminder of what that market looks like.

We continue to see a very good opportunity there and show you how we are competitively differentiating ourselves and serving our customers and then look back briefly on '04 which I think was very good year for this business and also paint the picture for what '05 will look like going forward.

This is a large industry.

These are U.S. data.

This is one particular segmentation of the business.

It is -- you can see the value of retail shipments over $300 billion, U.S. only.

The primary industry is often called commercial printers or print for pay businesses are where we are targeting our efforts here at Kodak.

There is about 50,000 print for pay or commercial customers in the United States alone.

Roughly twice that around the world.

And this is the customer set we're focusing on.

There are 16,000 manufacturing locations that generate the printed output.

Which totals to the $112 billion of pages.

The top line of all printed output is not growing very impressively.

Only one or two percent, pretty much at the rate of gross national product increase.

However, the exciting part of the story is in the digital conversion and transformation that is taking place in this industry.

In '03, roughly nine percent of the pages produced in this industry were produced digitally on digital printing equipment.

But about 20 percent of the value.

And that is expected to grow at about a twelve percent compounded rate going forward.

So this is an exciting business to be participating in.

The equipment set which is used to produce those $112 billion pages, the piece of that equipment set that Kodak participates in with our current portfolio is shown on the bar chart at the left.

The overall growth rate for all of these segments is about six percent.

There is some fast growing and some slow growing components in there.

The most exciting piece is digital color production, the associated equipment, products and services that go with that.

And that's where we're focusing Kodak Graphic Communication's Group going forward.

Now, the customers in this industry are -- are currently producing the material in a traditional way, but the money and the opportunity for these businesses is generally by migrating to digital in some smart way.

If you look at the pieces that we have pulled together within Kodak, we have a very strong position in the traditional flow from the customer through free press with the leading KPG products out to plates from KPG.

We also have the digital products with the Versamark and Nexpress presses in the wide format output that allows those jobs to go digitally as the customer looks at their operation and starts to add digital capability to their shop.

Let me illustrate this with a real story of one of our customers.

Great Lakes Integrated in Cleveland.

They are an old time commercial print shop.

One of their customers is Caterpillar.

They are more than a print shop for Caterpillar.

They actually manage sales brochures for Cat.

They do the inventory and make sure the brochures are in the right place at the right time and they fulfill when the salespeople from Cat make a demand on the system for some brochures.

So, they would use traditional offset printing for large trade shows and new product introductions, but they will be very careful with their inventories since Great Lakes Integrated is managing those inventories and if they spot out or get low or need to customize the document for a particular sales rep, they'll use digital technologies to fulfill.

So, what Great Lakes has done has pulled together a hybrid model of traditional production methods with digital to find more value for their business going forward.

This is an often repeated story in this industry.

Therefore, Kodak's vision is to be the lead neither this transformation from the traditional methods to digital methods and help our customers go through this transformation and I think we are in a good position to do that.

We will continue to focus on the cross media and hybrid production environment, and we're uniquely differentiated in this when you look at the product lines we have in our portfolio.

Speaking of these customers we segment them into four categories we're pursuing aggressively.

You can see them across the boxes at the top: Commercial printers, implant data centers, and service bureaus.

We have a range of products moving from traditional to digital to serve these customers.

If you can look at the column on the left that is labeled "traditional print," at the top we have a remote proofing station from KPG.

We have a very strong position in remote printing allowing proofing to occur on soft copy for very quick turn around and very ease of use in a distributed environment.

We also have hard proofers.

You can see an improval machine in the associated consumables as well as the computer to plate consumables.

In the middle column, "digital print," you can see a range of presses we offer, high speed ink jet presses as well as electro-photographic presses, both color and black and white and wide format ink jet output.

The right hand column is the work flow and professional services.

There is a picture at the top of that which is trying to show color management and color algorithm.

We have unique and optimized work flow from KPG that uses some Kodak color science which allows this redirection of output from traditional presses to digital presses.

That is actually a very difficult challenge in the real world.

And we have leading products to help attribute to that.

We have storage solutions and also consulting services for businesses that are looking at adding digital capability to their business.

Let's hear from a customer on how this works for him.

We're starting to deal with Kodak in May of this year to be the first company we believe in the United States to acquire all the family of products that Kodak has.

So think about that.

One company that can cover all aspects of all printing choices from offset to four color digital with absolutely matched output and work flow.

We believe that 24-hour production from graphic file to finished piece with 48 -hours delivery in the United States will give us a huge step up on our competition.

That will involve matching offset print to digital print, matching digital files in multiple locations and merging all those to generate a single output file for our customers.

Kodak has been able to offer us the ability to merge all those different technologies into a single integrated work flow that will allow to us complete our vision which is 24 hours from creation to finished mail; 48 hours delivery in the United States.

What a phenomenal opportunity we will have in setting the course for the future of direct mail in the United States and the world, with the help of Kodak communications group.

The feedback from customers are -- there are two things we can help them with in the strategy going forward.

First is, they are looking to reduce the number of suppliers they buy from, so a broad product offering from one supplier is good.

And, second, this need to balance the traditional with the digital capabilities and production methods within their shop and not just come in on the traditional side or not just come in with digital solutions, but actually work with customers to marry them together to optimize their business.

I would now like to give you some highlights and a snapshot of what happened in '04.

I think it was a very good year for this business.

I will step through each of these businesses briefly and let you know how they are doing and what happened.

Going forward this is probably the last time I will talk about them individually.

We now have the pieces in place that we wanted to pull together.

We are now in a position to integrate this business and that will be the work for '05.

But, to kind of cap off '04 I want to step through these businesses briefly.

Starting basically in order of age, INCAD introduced the "1,000 I " in May of '04.

This was a well received product that won several industry awards.

One that we're especially proud of is the Intertech Award for technology from GATF.

The strength of this product helped drive the financial performance of 14 percent year over year, top line growth.

Another thing to note is this is the first product from graphic communications that has the benefit of Kodak pigment and dyes in the inkjet and the photographic media is built by Kodak and optimized for this product set.

So it's the first evidence of pulling things out of the Kodak laboratory and getting them to market for a superior product.

The Versamark acquisition occurred approximately one year ago.

When we closed.

The story around Versamark is it has high speed and very low cost.

So, from a digital production capability its ink jet has the ability to pursue long run applications and move transaction printing, statement utility bill printing, more into the marketing camp by incorporating color.

So the challenge with Versamark we want to continue to improve the print quality.

We're happy with the other two attributes with the technology.

But proof we are making progress in ink jet print quality was the introduction of the "5,000E" Drupa in early May where basically we have taken the drop size down significantly.

We can use multi drop algorithms for a better color gamut and better performance on a larger range of media.

That product was announced in May.

We installed the betasites on schedule in late October, early November.

We also had great financial performance from Versamark.

The continued strong acceptance of ink jet technology for addressing and customization on the back in the presses as well as these large stand alone printing digital presses.

Top line growth was 16 percent year over year and the earnings performance exceeded the plan that we set out with the acquisition.

Nexpress closed in late April of '04.

Since then we had some very exciting announcements.

Between GraphExpo and Drupa, we announced two new digital black and white presses as well as Nexpress -- the Nexpress fifth station which is capable of putting a fifth colorant on the page broadening the color gamut -- or that fifth station can be used for over laying.

This allows us to print very high quality, print on demand marketing collateral with a lot of sizzle.

If you put the gloss coat down it is a very striking quality -- product with the best possible quality.

And this is opening up new markets for these devices.

In addition in '04 we crossed another benchmark which is over a billion pages have been printed by the installed base of Nexpress color machines to 2100.

Another high point in terms of the financial performance is the average through put per Nexpress machine has grown 30 percent over the last year.

But each machine now on average is producing 30 percent more pages in '04 than they did in '03.

And this speaks to the reliability of the machine, the work flow, the ability to get jobs to the machine and then have good up-time.

We've also made good performance in the integration of Nexpress.

We fully integrated all the front end order to cash capabilities from Heidelberg traditional services into Kodak in the first 7 months since the acquisition.

And we have also driven down the costs - the UMC costs on the product over twelve percent, and we executed the restructuring that we alluded to with the acquisition.

The net of all this is we are about a nickel less dilutive than in the acquisition plan.

Starting this year, not really part of '04, but we have incorporated a scanning service business from another part of Kodak into the business, which gives us the number one production scanner business which we can marry with transaction services as well as increasing our service footprint.

We recently signed KPG -- in fact, it was just two weeks ago.

We had press conferences and announcements at that time.

I don't think I'll say anything more now other than we're very pleased with this acquisition and this is allowing us to go forward with our integration plans in '05.

Let me talk about '05 now--- '04 was the year of bringing the right pieces together.

I'm pleased with that.

Now we have the opportunity to marry these lines of businesses into one integrated multi-billion dollar force in the market going forward.

That's what we intend to do.

We're going to focus most effort earliest on having one face to the customer and an integrated sales and service offering.

We have these multiple businesses, approximately, well, four of them, that we can now merge into one operation.

This is going to drive two things for us.

Obviously, the top line will grow.

We now have hundreds of thousands of customers, many of which want to buy from multiple product lines that we do represent.

And we all have access to these customers in a better way going forward.

And second we have a lot of efficiencies to go after in the back-office.

We have multiple order to cash, parts, warehousing, inventory systems that we can migrate on to one platform, one business going forward.

When KPG closes which we expect to be in early April, we will move to an organization that looks like this: There are three things I want to call out and bring your attention to.

First there are two business units focused on strategy and delivering powerful integrated solutions through the R&D labs with product marketing knowledge.

One in the transaction industrial space built around continuous ink jet which we think is a tremendous growth opportunity for Kodak going forward.

We want to make sure that it gets visibility and focus at the highest level.

And all the graphic product, services and solutions being pulled together to serve the print for pay customer I talked to earlier in the best possible way.

We have two gentlemen well renowned in the industry, well known who have operational track records that are outstanding leading these organizations.

The third piece which is that red line at the bottom, the unified go to mark in the back-office which I alluded to earlier, we will have a regionalized structure that reports up through Jeff so that we can make sure that we have a clear line of control and tie to what's happening in the regions as we pull these together and we serve our customers in a very smooth integrated fashion with no organizational discontinuities in front of our customers.

'05 is the year of integration and finding acceleration, business acceleration.

We have multiple work flow offering across the customers today.

Excuse me, across the product lines today.

We have good work flow from KPG.

We have great work flow from Nexpress, and the Versamark business has work flow solutions that are built primarily in partnership with third party target on the transaction space.

We see opportunities as we pull these various pieces together to have a more powerful offering for a broader set of our customers.

I already talked about operational efficiencies in the back end by pulling things together.

We are also going to -- you will see us move more and more to the Kodak brand.

We now have the pieces in place as new products come out.

We will be able to badge and lead with the Kodak brand which is very effective and powerful in this market place for us.

And we want to use it.

We will continue to use sub-brands where appropriate where there is market leverage and recognition, but you will see more that we build off the strength of the Kodak brand.

I have talked about sales and service.

We will continue to to invest in our direct sales capability.

We are also strengthening our relationships with our distribution partners to serve customers that want to buy through those channels.

We think we can deepen those relationships and move more products through those channels going forward.

So the net result of all this is to grow both the top line, be more efficient and drop more return to the bottom line.

In summary, '05 is an exciting year for graphic communications for a growing business we'll be about $2.5 billion in revenue in '05 and we'll be profitable.

Thank you and now I would like to introduce Bob Brust, CFO for Kodak.

Thanks, Jim.

Before I get started, I just wanted to make a few remarks on our announcement this morning which we said we are working on some tax issues going through the close.

As we started to close about ten days ago, we --- working with PWC, Price Water House, on the close, we notice that there may be some tax issues, particularly in foreign taxes and particularly in tax effecting restructuring charges.

And there are several issues we are looking at.

We have found a couple errors.

We will correct those errors.

But what we decided to do is take a complete sweep of all of our taxes and look at all these restructurings around the world and get this thing completely done in the next month.

When we file our K in about six weeks, these issues will be fixed and be accurate.

There is no -- as we look at this it may or may not require a restatement.

And it may raise or lower our after-tax earnings in the last couple years as we go through this whole thing.

It is hard and impossible to tell at this time.

We have a whole small army working on this thing.

We should have it resolved in the next four weeks.

Because of the Sarbane's Oxley treatment of processes not going to have a remote chance of an error.

We have two errors and that is more than remote.

This can be classified as a material weakness.

We will get this material weakness corrected quickly.

As part of this we are looking at what caused these problems so we can fix these problems.

So, when we file our 10K we're highly confident that we will have an unqualified opinion from the auditors on 2004.

Let me go on -- this is our fourth quarter results.

We came in with 0.78 as you heard in the press announcement this morning.

A lot of things happened in the fourth quarter.

The Homeland Investment Act changing convertible debt which is in there which we do see raised by 0.04.

The think I want to concentrate a little bit on as we move through is the earnings from operations.

You heard Antonio say that we are now going to have higher earnings from operations increases in digital and the decline in traditional and we want to work through that.

So, you can see our below EFO, I mean or EFO line declined 32 percent at - the reasons for those declines - and it starts to talk about the turn around we're going to get in EFO.

In 2003 we had 275 million. 33 million of the decline was the consolidation of Nexpress.

It was not in the same period last year.

That's how much Nexpress lost in the fourth quarter.

One of the new accounting realities we had, as you know, a settlement from Sun on a patent infringement of $92 million.

That was booked in nonoperating income.

The expenses of getting that settlement get booked to operating income.

It changed since I was a young man.

That was a misbalance, but we did get $92 million from that settlement.

We are working on some new technologies.

We talked about it in September in ink jet and display technologies.

We ramped up the spending on those and that's about $20 million in the fourth quarter.

During the fourth quarter, our traditional business profitability declined by 50 million.

And as we look at next year, holding that at a ten percent or better ROS and a 16 or 17 percent decline revenue, that traditional [client behind next year starting to be] about 175 or $180 million.

So that's expected; that's holding the return, the sales flat.

It is a very good job.

Now, the digital growth is new news.

It's up $35 million this quarter versus the same quarter a year ago.

And we expect that digital growth to be more than $250 million next year which more than offsets the decline we're going to see in traditional.

So, Nexpress we'll circle that by May.

We bought that May 1st, so that actually becomes a positive soon.

Sun Legal was a one time.

New technologies ramped up this year, we'll show you the ramps up much smaller in '05.

That becomes not a material change and the whole action is going to be in the digital growth of earnings offsetting the traditional decline.

So we issued guidance in the fourth quarter of 0.51 - 0.71.

Not included in that guidance, because it was hard to determine these things and we pointed that out, was the tax valuation allowance reversal from the Homeland Investment Act which was $56 million or 0.18.

I think everybody that has foreign tax operations, this has nothing to do with the tax issues.

We are talking about it a few minutes ago.

That's the ATI accruals for the [inaudible] which is now gone.

We also had recast our share count because of the convertible debt we put up last year.

And that reduced earnings by 0.04.

If we would have adjusted the guidance, we would have said 65 to 85 with that good tax tale wind and so our operational earnings came out in that range.

As you look at the total year now, we are seeing a big shift in the company.

That's the revenue in 2003 where we had 25 percent digital grown and we're a little more than 25 percent of the company went digital.

Going to the 2004, digital growth accelerated from four to two, but the traditional decline accelerated from four to ten and it accelerated more as the year went on, and so that put a lot of emphasis on keeping that ROS actually turn on EFO to return on revenue at or above ten percent.

So, for the year we grew at about five percent; [inaudible] exchange.

Earnings were at 262, which included the accounting change in convertible debt of minus 13.

The EFO, you want to go back to the EFO again, declined nine percent for the year.

As you look at that, 2003, we earned 954 million of earnings from operations.

Nexpress depressed that by 83 million as Antonio said.

Now we, we bought, we consolidated Nexpress on May 1st.

So that downer will continue with us through the first four months of '05 and we will see that as we talk about guidance.

The Sun Microsystems was a one timer.

The new technologies for the year, the spending increased 75 million.

And we'll show you that in the chart.

We showed you that chart in September.

That gets much less in '05.

And we got way ahead of our traditional cost structure in '04.

We did a lot of restructuring.

Actually our traditional business with a ten percent decline in revenue earned 64 million - $52 million more.

And that's a good thing, but we don't envision that with a 16 or 17 percent decline coming in '05.

Holding that at ten percent will reduce earnings about 175 million.

And our digital growth - our seasonalities changing, especially in consumer a lot of that happens in the second half of the year and the digital growth was 35 million, and that all occurred in the fourth quarter.

So if we look at the guidance on operational earnings for the year we had guided the 244 to 264.

The tax valuation again was 0.18 plus and the convertible contingency debt was minus 13.

For those of you who don't know what that is, there is no economics in there, all we do is adjust the share count so it'll look like if somebody converted that debt which isn't due to 2033 or something, into shares.

So there's no economic impact there.

So I would have had an adjusted guidance of 249 to 269 and we are closing at 262.

The 262 was the operational earnings to get to GAAP which was 65 cents.

We did a lot of restructuring last year.

We accelerated restructuring way beyond what we indicated last January as we saw the traditional revenues falling a little bit faster.

The 0.20 of the settlement with Sun which ended up being a gain in non-operational earnings.

The restructuring last year totaled $896 million.

When we were here last January we thought it was going to be more like three to $400 million.

So we vastly accelerated that.

A lot of that was foreign. $554 million of that restructuring took place offshore.

You can see the type of categories we're in here, and that, of course, compounded from the tax issues we were dealing with as how to get this all accounted for properly.

Again, I didn't say in that tax issue, and I'll get back to [inaudible]-- this has nothing to do with filing of income taxes.

It's only how we accounted for it.

These areas that we found, these tax returns have not even been filed yet so we will get those squared away.

At any rate, lots of restructuring and that restructuring ended up costing us almost $100 million more cash than we envisioned when we guided the cash usage.

But from my point of view it's cash well spent.

It lowered our cash input this year but helps the company get to where it has to be and hold that return on EFO.

So our cash flow for the year came in at 536.

We had guided to a midpoint of 650, down 114 million.

About 100 of that was more restructuring than we envisioned when we put that cash forecast out.

And as you heard Antonio say we were a little disappointed in the inventory reduction.

We got - we are going to redouble our efforts on inventories.

Receivables, the year ago generated a couple hundred million.

It didn't this year.

Our receivable profile is changing in the digital world where there's a lot more sales in December than we used to so so we had better collections going on now.

Our days receivable went up a couple because of acquisitions there.

Qualities of receivables remained good because the past dues did not increase during the year.

We ended up generating $536 million of cash, before, investable cash before acquisition.

Total cash flow just is after acquisitions plus the sale of the RSS Business.

So in 2004, you know, the digital revenue grew 42 percent.

We really accelerated the business model change.

We put the foot on the gas as we saw the traditional [declining star ratings].

We had good cash performance.

We missed by 100 but that 100 was well spent.

It was put in the restructuring.

And we reduced debt by $927 million during the year.

The cash balance was $1.255 billion during the year.

Our capital spending was a little lower than we anticipated 462 million.

Inventories were down but not down enough.

We had two-tenths improvement in turns.

We are going to work that inventory hard this year.

And, the DSO was up two days by product mix and acquisitions but the quality of the receivables remain pretty good.

So, as we go on to 2005 and, I mean, this is the big news from my viewpoint, this is what we've been working for since we started this strategy, getting those digital earnings to more than offset the decline in traditional.

This year it sure looks like that's going to happen.

We feel very good about this and that's the turning point in the company on the quality of earnings, the whole E. F O. earnings from operations discussion.

So the highlights in the budget or the budget in the pan we are going to show you, revenue grows by around six percent to around 14 billion and we'll show you the turn on that.

Our digital revenues exceed traditional, we keep telling you the same thing we have big improvements in digital earnings, we'll show you that.

KPG is assumed to close around April 1st.

And will be consolidated in the business.

We are going to start expensing stock options this year effective this quarter.

We made that commitment at the last annual meeting.

That should have a negative impact of only about two cents this year.

We see our EFO, which declined last year nine percent now growing seven percent, and our EBITDA growing eight percent.

And these are turnarounds in what we've seen from the last few years.

We have, we think we'll have plenty of cash to support the business [inaudible].

This is just a definition again.

We showed you this in September, the top line hasn't changed and that's the traditional business of films, the papers, the chemicals, photo finishing.

The digital gets, is more items in the digital because we will have a couple more big categories in there from the KPG.

Acquisitions and the new technologies inkjet systems in displaced technologies remained unchanged from what we told you in September.

This is a revenue outlook.

We had 12.9 billion in '03, 13.5 in '04 and we think somewhere between 14 and 14.6 for next year including KPG for nine months.

And the way we look at this, 13.5 is what we booked last year.

KPG will add about 1.1 billion for nine months, about 1.1 billion.

The organic digital growth other than KPG should add 1.2 to $1.4 billion toward our revenue.

And the last year hopefully that the traditional decline may exceed the digital growth, the organic, the high-end of the range would decline 1.8 billion and the lower range 1.4 billion.

So we think somewhere between 14 billion and 14.6 billion is where we'll end up.

The variable again as we had last year is the traditional decline, has a little bit of a wide range on it.

So if you look at this the same [ball] charts I showed before you can see the dramatic change in just two years; the size of the digital position is now more than half of the revenue of the company.

We have in here the traditional decline rate of 16, 17 percent and the digital growth rate of 36 percent.

This is why the EFO of the traditional will decline and the 17 percent revenue drop we can't hold that EF O in traditional any longer.

We did for whatever we can in '05.

That's just the graphic - the showing the cross over in the sales.

The digital revenues will be up, approaching $8 billion; the traditional revenues will be going down in approaching $6 billion and that's cross over takes place this year.

Gross profit for the year we are estimating around 31.3 points.

We did a lot of restructuring last year as we showed you, 900 million.

That helps the gross profit.

We took down a lot of manufacturing parts.

KPG is also slightly above our company average so that helps prop that up a little bit so we think it's around 31.3 for 2005.

R&D we are holding kind of flat, the percent comes down a little bit.

The revenues are increasing.

Much more of the R&D as you know is being focused on digital.

We are only doing R&D on very fast cost reductions and somewhere as Antonio says it makes sense such as D.I. or emerging Nations.

SG&A continues to get a lot of work.

We are going to increase advertising quite a bit.

All these new digital products we need to make sure we get those to market effectively.

So advertising last year was 513 million.

We envision that going over $640 million this year.

Under SG&A we will continue the decline as a percent of sales to be down to 14.4.

This is a consolidation of the whole company.

If you take out the digital PC you have different numbers as Antonio was talking about.

But, a lot of work is going to be continued on SG&A.

Our tax rate we envision it going up, you know, by the work we are doing on taxes at the close of '04 has no impact on this.

We see our tax rate moving up from nine percent to fourteen percent in '05.

And that is because we are making a little more money in higher tax jurisdictions and the [FISC] is going away.

ECI and that's the reversal of that one accrual.

So this is my favorite chart.

I mean, this is the digital earnings.

In 2004 it was 46 million.

As Antonio said it was 83 million of negative earnings in there from Nexpress.

It was really a little over 120 million if you take Nexpress out.

That same negative's in '05 because we have Nexpress now for twelve months, not eight months; it's getting better but we have the twelve-month impact.

So if you look at the upper end of the range without Nexpress, we are looking at something like around $400 million.

So there's a $250 million even with Nexpress, about a $250 million improvement in visions in our digital earnings from operations.

So the good thing about it: it's broadly based, it's across the company.

If you take that $250 million, about 21 percent of it is in DFIS And that's all those digital products: the cameras, the printer docks, the papers and stuff, [At] H.I. about 29 percent of that -- improvements in H. I., about 22 percent in Jim's group before KPG.

KPG adds another 17 percent and about 11percent of that is in the display technologies that are not in the new investment, like sensors and optics and stuff like that.

So it's a broad-based improvement across all of our major businesses in the company.

The EFO for traditional on the other hand we think is going to decline by about $175 million; totaling the EFO to sales rate of more than ten percent.

And a range something like that, and we will continue to restructure and try to hold that at a ten percent or better; that is our goal and we intended to that, but EF O, it will decline, it's the first time, it did not decline last year but we are looking for it to decline this year.

That is pretty much concentrated in our consumer business, the F IS--- three quarters about $175 million decline is in the DFIS Business.

About 20 percent is in Health Imaging and that's the X-ray film and Antonio said that decline rate is picking up a little bit.

And the rest of it is in Jim's business and that's just some graphic products, graphic films we sell and that's declining.

We are pretty much focused in one business, the decline in EFO to 175 million.

There's the plot of how this is moving.

You can just imagine how those lines will go across next year in '06.

I would hope that in '06 we have visual profitability as that's the biggest part of the company's profitability.

The new technologies, this is inkjet and new display technologies which become more material after 2006 for revenue and earning.

We invested 75 million more in '04 than we did in '03.

And that dropped our earnings.

But in '05 we don't see that getting much bigger than the '04 so that doesn't have a big deterioration effect on earnings from operations.

This is below EFO., hard to track.

It used to be a big negative back in '03.

And in '04 we moved NexPress up in the EFO's.

So that got less negative but we had a nice positive for KPG.

That positive will go up to EF O. Starting in April.

Less the changes we see in that is the negative for interest will go down because we reduced our debt by $927 million last year.

And the positive of the 52 will go down because KPG will be consolidated in EFO now, not below the light line.

So the below the line should be somewhere around 80 or 90 million negative this year in 2005.

This is where we think earnings will be.

We think for the year somewhere between 260 and 290 for the first time in several years that includes a five-point increase on our tax rate.

In the first half we are looking at $1.10 to $1.20.

In the first half of 2004 we earned $1.14.

One of the compare issues is NexPress.

NexPress will cost us a dime on that.

We added that dime in we are going to be slightly better than the first half.

But most of the growth in the earning will come in the second half as we do the work with KPG and we have a different seasonalization.

But, we look that the midpoint of that range is 275 which is a nice continuation to our $3.00 goal in 2006.

We did spend $2.11 in restructuring.

If you do the math on these you will see that the restructuring estimate is about 135, $1.35 this year in '05.

That's about $300 million less restructuring than we did in 2004.

Okay.

The cash.

Having been burned last year by spending more on restructuring we did increase the cash outflow for restructuring in this estimate from four to $500 million in '05.

It's hard to tell.

We put up the accruals last year.

It's hard to tell exactly how the cash will come out but we think the investable cash from that higher restructuring will be somewhere around 500 [million] this year.

We are going to do some more work on inventories.

We are going to let capital ride up a little bit because we are expanding some of our media capabilities.

We normally keep that number anyway so we are looking about a year similar to '04 investable cash.

We started this year at 1.255 billion of cash, if we add 500 million from operations we'd be at 1.755 billion

The KPG acquisition, we will write a check on April 1st for about $317 million.

K. P. G. on their balance sheet and what they expect to generate this year will give 250 million back.

We bought a small company called OREX which Antonio mentioned that was 50.

And we are going to reduce debt by $500 million this year.

We will put a note payable up on the KPG acquisition for about 500 million and we will take straight debt down 500.

So debt will not change over the year.

We are going to maintain debt where it is.

With 1.138 billion projected year end cash we should be able to operate the company with no issues.

This is just our debt profile as a company.

The yellow color, or orange color is the offshore debt for KPG, about 80 percent of K P G is offshore so we will be able to use offshore cash to pay for that.

So we had some debt to pay off for '06; '07 is debt free and it spaces down pretty well after '06.

EBITDA, which is one of our measurements with our rating agencies has been declining for years; in '04 it increased four percent and we are projecting in '05 it increases eight percent, and this is again the turnaround with the digital earnings now outpacing the traditional decline of all these measurements become more favorable.

So that's kind of the story.

A gross over $14 billion in the company.

The big head line is a significant improvement in digital earnings becoming a positive contributor to the company and outstripping the decline in traditional earnings.

Our EF O grows 7 percent, and our EBITDA gross 8 percent and it sure looks like we have plenty of cash to operate the company effectively through 2005.

I'd like to turn it back over to Dan for his summary.

For 2005 we are coming out of 2004 with good momentum across pretty much everything we planned to do.

And we've got a real solid plan, I think, for 2005 to deliver the range that Bob said.

I think the smartest thing to do would be to ask the guys to bring the chairs out, ask Jim and Antonio and Don Flick to come up and we'll take some of your questions since we are running just a little bit late from where I thought we would be at this point.

[Caller Instructions] We will start with Matt Troy.

Thank you.

Matt Troy, Smith Barney, Citigroup.

I was wondering if you could give an update with respect to the emerging market operations, I think specifically with respect to China and Russia; the fact that those two markets are key to the consumer film, finally I think through the restructuring if you could give me a sense for what end market demand looks like there this year and how you reconcile that with your outlook, I think you said, of decline of 20 percent consumer film?

Yeah, the emerging market continue to look like a big area of opportunity particularly China.

As you know emerging markets are inherently volatile.

We are seeing some economic problems in Russia tangled up in their politics.

But it continues to look like a great opportunity for our traditional business.

Now, it won't offset the decline in the consumer film business.

U.S. and western Europe just exceeds those markets by so much.

We never thought it would.

But it does drive good cash flow over the interval.

We are just exceeded about our progress in China as we've ever been.

If you could perhaps give an update with respect to profitability and digital capture, SPG, I know it's a seasonally profitable fourth quarter.

I think you got over the bumps, if you could help me just with the linearity in 2005; is this a business that we can continue to expect year on year that it will be seasonally profitable or is there a hump that we've now passed that those numbers should look better going forward?

Matt, it clearly is very profitable in the second half.

We sold almost half the cameras in the fourth quarter.

I think as Antonio said we are coming out with new product offers and we are coming outspread over the year and with the package of the printer stuff it would look to me like digital cameras profitability would be more evenly spread over the year.

First quarter might be a little weak but I think that's going to be a little more evenly spread over the year.

It's not going to be the big numbers are going to be in media and stuff like that.

But it's not as much, it's not as stressful in the first half of the year.

We will go with Carol Sabbagha next.

Carol Sabbagha, Lehman Brothers.

Just a couple of questions.

The first on guidance for 2005.

I know initially the estimates you laid out in September included the KPG acquisition.

Do the current '05 numbers that you laid out include any more acquisitions other than KPG or is that basically it?

Guidance for the earnings?

Yes, earnings and revenues I guess, yes.

We said in September that there could be as many as two more acquisitions.

I am not going to specifically comment on that.

You know, that guidance is the way we see it falling now.

And the other question is on the graphics business, Jim, given that you've put together a big portfolio of businesses, I know each different part has different growth dynamics.

As a total of the current business that's going to look like in '05 what do you think over the next couple of years that business can grow both in the top line and EF O?

The drag on growth is the traditional film business, for making the computer plates that's embedded in KPG.

And that as a percentage of the business is rolling off.

So you'll see the overall average growth of the entire business start to track more like the [hydra] parts which are double-digit growth for the presses and the digital plate business.

So we're about 80 percent digital now and as we get closer to 90 percent you will see it in the low double-digit sort of growth rate.

And lastly, if I may, just on oled and inkjet, just your growth initiatives since you increased investments.

Could you just talk about what we should expect from a product perspective and over what time period from those businesses since they could be a big opportunity that we are not factoring in?

Nothing significant, Carol, in 2006.

In 2006 our plan is to come up with [inaudible] space on drop on demand inkjet technology, we haven't specified which ones.

We are looking across the company.

Obviously we have a specific plan to shift to one of these we just don't want to disclose them.

Oled, you're o.l.e.d., we keep filing patents, the licensing business although small is growing very nicely.

We have not found a business model for commercialization, LCD companies continue to improve their technologies significantly.

This is not the time to invest and commercialize o.l.e.d.from our point of view.

But we keep investing because we know it's a very valuable technology and we will see how the market evolves.

Hi, Rob, I thought you were in Palm Springs.

Rob [inaudible] research.

A couple quick questions on first the Kiosk business: 50,000 in [twelve] days, we had 50,000 end of last year, half of those are gen threes and 30,000 shipped this year.

Do we wait for a gen four before the install base grows substantially or what are the drivers in that business?

And also could you break down perhaps the equipment versus supplies since you haven't exposed that before.

No, the growth actually, if anything, the growth was limited by ourselves because we had the inability to supply enough media as we shared with you before.

That program is over.

So we are going back for growth.

The biggest improvement in G3 you know, is to start to network this Kiosks with, we call it gallery and retail and look for integration and for the repurchasing of those, of those files.

And we haven't put, in 2004 we haven't been aggressive enough in Europe with the Kiosks.

We are going to be more aggressive this year.

So with we don't need G4 we need G3. with network and be more aggressive with Kiosks and having even media to support them.

And your new media plant comes on line when?

Comes on line?

When.

Well, we already have a new media plan.

What we did, we announce before that we, that we got in touch with all the suppliers, one, actually, a key supplier of the media that had capacity that was not selling and we are buying from them the basic media that we then would certify finished products.

We did put investment, capital investment and I believe some time in the middle of the, of next year we will come out that online.

I'm not sure.

It's in the middle of 2005.

That's what we said we would put investment in next year, 2005.

But we will, we will continue to use the other supplier.

We think it's, it's a good way of balancing the needs that we have for volume.

But between consumables and equipment?

We don't disclose that but what I did say is that the growth in Kiosks, media is spectacular.

It's really going very well.

The business of the [prima docks] is more we have to put more [prima docks] in the market.

The amount of media that is current is growing a lot slower than the Kiosk.

It is a good media burn but doesn't grow as fast as Kiosk.

So the business there is we have to see a lot of -- that's why the deal we have with Image Link I think is going to help.

One quick question on digital cameras.

Did you sea ASPs trends up in fourth quarter?

Your goal has been to increase APS over the next few quarters.

As you look at our portfolio you realize that we have many more cameras more in the high-end on the packet.

So we are aiming at that.

The new color one that we have an announced is at the very high-end so obviously we are pushing the average selling price higher, yes.

Okay.

The gentlemen in the front row.

Good morning, [Derek Queen from Ritchie Capital].

Two questions for Bob.

Bob, how much cash do you really need to run the business?

Well, in the old days we used to run it with about 250 when we had access to commercial paper.

We relied heavily on commercial paper and this is three, four years ago.

And we had much bigger distortion, we had much heavier cash ins in our first half and bigger generation in our second half.

As we move down through this transformation in our credit ratings we've discontinued a reliance on commercial paper.

I think somewhere over 750, 800 million is plenty of cash on hand to operate the business.

We are on a high side of that just as a safety factor.

Who knows where the credit rate will go in the future but we will continue to operate like we are now.

So roughly three times what you used to need?

Yeah, because we have no commercial paper.

I don't want to into any kind of off balance sheet stuff or anything so we will just use cash.

Okay.

Second question is, just a follow up on an earlier question.

You ran through a number of charts and numbers and projections for 2005 and I just want to be clear, do any of those projections implicitly include acquisitions besides KPG?

No.

Okay --

As stated up here, but that doesn't say we won't do anything.

I am not going to specifically say we not doing anything.

These projection will stand on their own.

The other comment you made: two acquisitions potentially this year in 2005, given that you need 750, 800 million just really to run the business, how would you fund those acquisitions?

We are really happy with what we have acquired so far.

And we are not saying that we are not going to make any more acquisitions.

That would be silly to say.

But we are really happy we've done.

Our business is right where we thought.

If we have an opportunity we will take it.

But the plan that we showed is the plan that we have.

The strength of the company across many vectors is what we have which is really what's important right now.

Hypothesizing on anything else would be a mistake.

The period we were talking about was not '05.

Planning was '04 through '06.

And that's where we said, if we do do another one it would be in the next two years, maybe this year and maybe next year.

And it depends on the size, the scope, everything how we would finance it.

Thank you very much.

You're welcome.

Let's turn around and go up to Jack Kelly up behind you there, please?

Jack Kelly, Goldman Sachs.

Bob, just two questions.

In the past and I know this number has probably been revised a bit but maybe you could just refresh us on it, you talked about four to five percent profitability in terms of operating margins for digital cameras somewhere out there.

I know the media side is where you make the bulk of the money but just if we could focus on digital cameras, what would be an update on what you think the ultimate profitability could be there?

And kind of where did you come out in '04 on that?

It's going to be low single digits for the digital capture in consumer.

And I think it's going to change, if it is one, two, or five where it appears you are introducing products.

This is driven by seasonality and as well by new platforms heavily.

It's going to be positive.

It's going to be low single digits and is going to drive a lot of growth and a lot of bottom line with services, accessories, and printers, and everything else.

In '05 that is in the forecast you have some improvement in operating margins in digital capture?

Yes, we said it's going to be positive digital capture, we call it.

And then secondly, Bob, in terms of the tax rate, it's coming up this year but it's still pretty low, I mean if we look out the next couple of years, something structurally that's keeping it let's say below 20 because most companies it's scantily higher than that, then let's assume you hit your forecast for the next couple of years, does it jump up significantly?

It will continue to go up.

One of the--one of the issues we've had in our, in our tax rate is we do not makes money in the United States because we have our large costpool here and this is a very high tax, U.S. is as high tax as there is in the world now.

We have all our R&D here.

We do heavy restructuring here.

So we have not had earnings in the U.S. which has the high tax rate.

We have very strong earnings in Asia which is the very low tax rates.

That tax rate will jump up in a few years.

So you can look for that going up.

It will be awhile before it gets to 20.

I would envision that tax rate going up.

The issues we are dealing with are the ends of the year, according to some of the things, has nothing to do with that structural tax rate.

That's driven by where we operate.

We have through this period actually favored production out of low tax rate countries where we can move product around to help us fund through this transformation.

So, I'd look for it to keep going up.

Thanks.

[conversation] Okay, we'll go down to [Joan Lappin] down at the very front.

Good morning.

Joan Lappin, Graham Mercy Capital.

Number one, I don't see on the slides here or in the press release that you said how many cameras you actually sold this past year.

I wondered if you would fill in that blank and if you would tell us how many you think you will sell this year.

And also the printer dock situation, doesn't that kind of -- if somebody buys another camera other than a Kodak camera, they can't dock in your printer.

So what have you done or, I mean I guess this Image Link will solve that problem but does that new one just like accept a little [tandis] chip or something?

How is that operating?

On the digital cameras, I will let Antonio describe the Image Link program which is terrific, the digital cameras, we really don't divulge unit shipments.

What we do talk about is the possibility of the capture line which we just talked with Jack about, as well as market share.

And as Antonio said, we firmly believe we will have number one market share in the U.S. in and last year when all the numbers are in.

Then you will be able to get the industry estimate for the number of cameras and take your stab at what you think the [inaudible].

The Image Link, though, is really very important.

You can print in a dock printer with another digital camera.

You can do it through your PC.

You can connect our dock printer to a PC as well.

So you can print through that.

Or you can print through [pic bridge] if you have a dock printers with pic bridge.

With them as well is this association with another six manufacturers of cameras that do not own printers or printing technology to execute printers with the same, same specification that we have, therefore we can interchange cameras and printers with all of those manufacturers.

We are the suppliers of the media.

Okay.

We'll go to Ulysses right next to you, then?

Wilma?

You've mentioned the idea, Antonio, as to what is the market share of the six participants in the Image Link?

Yes, I do, I can't remember right now.

But it's probably, it's more than 15 percent.

I know that.

I can come back to you and give you the number because by looking at the names, data, data is probably, it's a very significant, significant chunk of the market.

There was an article in Forbes I believe from China where [inaudible] was talking about moving plants camera from factory facilities to the province and also about an increased capital spending in China.

Can you talk about that?

It was a big convoluted the report, so I didn't understand it.

The pockets of the press in China is always challenge to get it to come through.

But we do most of our digital camera assembly in Shanghai.

And it's growing fast and we are looking where else to move it.

The second factor as much right now I think we are producing a little less than half the cameras ourselves and getting half from others.

And, of course, the part suppliers to us are all over the country in there.

So we are kind of comfortable where our current level is and where we are building them but we are looking to see weather it should move somewhere elsewhere for the pieces we assemble ourselves.

We haven't made any big decisions on that yet.

What we have done of course is consolidated our one time use camera, the traditional cameras, in the [Sho-min] area and brought it in from many parts of the world then might have been what that -- I can't related to the exact statement that was made but that might have been what it was.

[The results of peak Capex ]

Well, no, we are pretty happy with the investment that we have there now.

There has been increased capital with the one time use cameras going in there.

But our future looks good in China.

If we continue to perform like that I'm sure we will be spending some of that capital Bob showed in China but there's not a a big program announced for China.

The gentlemen to your left.

Good morning, Paul Carpenter with [inaudible]management.

In Antonios remarks he noted that there was going to be an 80 million reduction in corporate overhead in '05.

Can you give a bit more detail about that?

That sounds like it's going to be a significant component of your earnings increase.

What percentage of the earnings increase is from that?

And then your numbers for '06 to get to that 3-dollar number, does that imply more reductions in overhead and at what point will we start to see earnings growth coming from items that are not just cost cuts?

We are ending the target model that I show in the pictures and one of the things that you will knows is that our SG&A is higher than it should be and it's higher than it should be because we have inherited a business infrastructure that came from a very different business that was very appropriate for the business we were running at the time with very, very high GMs and one clear example is the way we used to run inventory.

The idea was you should never lose a sale when you make 60, 65 percent, 75 percent GMs, you make enough money that you don't want to lose a sale.

Therefore you are going to have a lot of with a lot of products, a lot of inventory, cash is not an issue and everything else.

In the same manner we have the work flow within the company, the way we do things.

It used to be a little more complicated because of the type of business we were running and are running now.

So we will continue to adapt the cost structure to the business that we are running.

But the increase in the bottom line comes from also some things including that.

One of the, as you look at the two companies, almost, the traditional shrinking 15 to 17% this year in revenue, that's a lot of cost work to maintain that EF O. Rate for sales.

And a lot of the corporate overhead, as Antonio said, came from the past where we were so vertically integrated we did everything but drill oil.

And we had coal, we had oil, we made everything in these plants.

So we had big overhead structure to support in all that.

In the digital world it's more of an outsourcing model and so a lot of these reductions go toward that traditional side of the company so we can maintain in EF O. Rate.

The earnings, the earning growth in digital is pretty much from selling products at good prices and getting into these markets and getting some size, it does benefit as we take out overhead cost, it does help the digital business but it's mostly maintained that EFO and traditional.

The gross margin of the businesses, the digital business are very good.

You look at the gross margin over our digital business are very good, are over 30 percent, from digital cameras but mostly anything else is higher than that.

The issues we have, we are dealing with those products and the infrastructure that was created for something else so we have to continue to do that.

But the important thing is the gross margin, if you look at the, if you look at the top of the business of the company, even this year the gross margin of the company is very similar to the gross margin of our [inaudible].

So we are running a solid -- those are solid businesses where we do have as an issue with the infrastructure that they have today to go to market, we have to solve that.

The GMs are good.

I accept all those points.

I was wondering if you could explain what percentage of the earnings growth comes from the $80 million whether that's build into the numbers as well for [inaudible] circumstances, I assume that it is just based on those comments?

Yeah, we like every other company, corporate overhead gets allocated back to, our business units.

And business units within business units.

And so that allocation goes on.

I mean why have to guess, I don't know how much of the digital is at 80 million.

We have a lot of cost reduction going into the from the traditional side.

I would say some of it, not much.

Most of that is just the 36 percent revenue growth.

Some would be cost reduction for sure but most of that would go to the traditional side aimed at the traditional side.

I think this will go on in terms of taking some cost out.

I mean I think it will go on for awhile around SG&A.

I think Antonio has the right vision of where he wants the company to lands on SG&A.

We have to get it down with the drop in traditional and the change of business model.

This is a big program for '05 around SG&A but it's not unheard of and I think there will be some more reductions in SG&A as we go forward as the traditional business sooner or later bottoms out and we will have a structure supporting it that's right.

The gentlemen immediately in front of you.

Just in terms of the balance sheet, it looks like for '05 total debt levels will be flat.

When you look going forward in terms of your own priorities are you comfortable maintaining debt at existing levels with the assumption that earnings will continue to increase?

And is that type of story that you've laid out in your ongoing conversation with the agencies?

Yeah, in the model we have we talked to the agencies, we have a three-year model and we showed that when we were down here in September.

We would in '06 and '07 if we do nothing else we would be, we would have more cash than we will have debt or get them very close.

Net debt will continue to drop substantially.

So one of the things we want to do is sustain investment grade so we will continue to at least in the near term pick away at that in 2006 if we get a surplus cash position I would continue to work on that, on breaking down debt in the near term.

At what point then do either return to prior dividends levels or a share repurchase program start to become

When we get upgraded.

How's that for an answer?

I want to get upgraded before I start using cash for anything else.

Final question.

As your three segments grow in scale, is there a point down the road where one of those businesses maybe more valuable as a stand alone business rather than continuing to be part of Kodak and in the existing format?

As Antonio said a lot of our technology right now is cutting across those three businesses.

I think you laid out the different technologies.

So obviously our job is shareholder value and we use that as a principal in creating the strategy.

As we go forward if there's a way to create more shareholder value different than the way we've got it structured we, of course, will it do it but it's way too early.

We still have worked to in this transformation.

We didn't declare victory.

We said we have good momentum coming out of '04.

We have a strong plan for '05 but it's going to take sometime to get this transformation settled down.

We have time for two more questions.

We Will Go With Laura Star and hen the individual toward the back.

Laura?

I had a question on the graphic communication.

You said you are one of the few companies that seems well-positioned with both the traditional and digital on a strategy per transition to take to the customer.

No one else is has sort of seen the light here?

No one else is doing what you are doing, who are your competitors, are you worried about them?

And how are how fast can this and this $112 billion, and seems like two or $3 billion, that's a very small market share.

What's the real potential over five years?

Not to comment specifically on what our competition might or might not do, I do believe that KPG and the business that represents and the lines of businesses with computer to plate products combined with the digital press technology is a unique combination in the market that does serve and reflect the kinds of problems our customers are trying to solve.

The top line growth, 112 million in retail shipment in U.S. for print is not growing very fast.

Digital technologies are competing for those ways of communicating.

So the real opportunity is in the digital production of pages.

Because those pages are more valuable.

They can be targeted and customized and unique.

Each one different.

So they can be used in ways of communicating with customers and tracking and selling to those customers.

So the growth opportunities is in digital and customized documents and it's going to be a blend as the existing print for pay customers, our customers figure out how to better serve their customers going forward.

Your customers currently had someone else's product in their shop, but now you have something that could replace that, is that a two or three-year process to get them to turn everything over to you, do they actually have to get rid of something else and put in a machine, can you just do media, just trying to figure out how you can double your share or triple your share over four, five years?

This is not so much of a turn game of displacing the competitor.

You saw the red part of that gold bar which is the digital pages, nine percent of the pages for these, produced in '03 were digital.

That's expected to double.

So that the demand for more digital production presses in the market is what's driving the growth and it's a tide that's floating all of us.

It's not a zero some gain where we are trying to actively displace an entrenched competitor.

These comments are on color which is where the growth is.

Okay.

We will go with Wilma for our last question.

Carolyn Gates with Wells Fargo.

You mentioned, Bob, earlier that the restructuring costs had accelerated this year beyond what you originally estimated.

Is there any estimate you can give for 2005?

Yeah.

We spent $2.11 last year on restructuring and this year we look at our guidance from operations to GAAP is $1.35.

I would say that the restructuring instead of being eight or 900 million would be more in the 500 million range.

Now that's almost an impossible number to gauge because we will, we will kind of gauge that as to, as to what we need to keep that traditional business earning more than ten percent.

So we may accelerate that again or keep it at that rate.

But it should be less this year than last year, a few hundred million dollars.

Okay.

With that I will turn it back to Dan for any closing comments.

Thanks everyone.

We appreciate you're coming.

You are watching a great transformation.

Antonio and I believed in this in 2003.

Antonio and I believed it in in 2004 and we darn well believe in it today in 2005.

Thanks a lot.

Thank you.

That concludes our webcast.