Eastman Kodak Co (KODK) 2006 Q3 法說會逐字稿

Good day, everyone and welcome to the Eastman Kodak third quarter sales and earnings conference call. [OPERATOR INSTRUCTIONS]

At that time for opening remarks and introductions, I'd like to turn the conference over to the Director and Vice President of Investor Relations, Mr. Don Flick.

Please go ahead, sir.

Good morning, and welcome to our discussion of third quarter earnings.

I'm here this morning with Antonio Perez, Kodak's Chairman and CEO, Bob Brust, our Chief Financial Officer, and Frank Sklarsky, who has just joined our senior management team as Bob's successor.

Antonio will begin this morning with his observations on the quarter and then Bob will provide a review of the quarterly financial performance.

As usual, before we get started, I have some housekeeping activities to complete.

First, certain statements during this conference call may be forward-looking in nature or forward-looking statements, as defined in the United States Private Securities Litigation Reform Act of 1995.

For example, references to expectations for the Company's earnings, revenue and cash would be such forward-looking statements.

These forward-looking statements are subject to a number of important risk factors and uncertainties, which will fully enumerated in our press release this morning.

Listeners are advised to read these important precautionary statements in their entirety.

Lastly, although Kodak has significantly reduced its references to non-GAAP measures, in those instances where they are used, they are fully reconciled to the nearest GAAP equivalent in the documentation released this morning, which can also be found on our website.

Now I'd like to turn the conference over to Antonio Perez.

Thanks, Don.

Good morning to all and thanks for joining us for our discussion of third quarter earnings.

This morning, I have the pleasant job of introduces Frank Sklarsky, who is marking his second day at Kodak, and will assume the CFO title on November 13th.

Frank, would you care to say a few words before we start?

Thanks, Antonio, Obviously, with something on the order of about ten hours on the job, I've got a lot of work to do to come up to speed so that I can continue and extend the progress that Bob has made before me.

I am excited to join this management team.

I'm very enthusiastic about the opportunities ahead for Kodak, and I look forward to working with the investment community, as we go forward.

Thank you, Frank, and once again welcome to the Kodak family.

I would also like to recognize that this is Bob Brust's last quarterly conference call with investors, bringing to an end seven years of invaluable contributions to Eastman Kodak.

Bob arrived when Kodak was truly a traditional imaging products Company and played a key role in moving us to the positions we are in today, ready to complete the final phases of our transition.

Bob has been a key strategic partner for me, and I thank him for both his tangible contributions and his counsel during these very challenging times.

We wish Bob and his wife Judy well in their future -- in their future activities.

Now let's move to discuss our third quarter performance.

I am pleased with the quarterly results we posted this morning, as they show the continued momentum we need to achieve our goals for the year.

Some of the highlights for the quarter include the following.

We achieved year-over-year earnings improvements of $85 million in our consumer digital group, resulting from our progress in implementing the digital operation model, as well as continued contributions from our FPG portfolio which are part of our full-year plan for 2006 and in years to come.

On the operating side we saw year-over-year earnings improvement in essentially every element of our consumer products portfolio; digital capture, image sensors, home printing and kiosks.

Going forward, we'll see an increasing flow of benefits from that improved operating model.

Media burn rates that will continue to build in our kiosks and dock printers, new products such as CMOS image sensors, a new generation of cell cams and inkjet, as they enter our portfolio.

As part of this [inaudible] story, we will continue to create value through a variety of intellectual property agreements, that will accelerate the creation of new businesses, provide access to markets previously unavailable to us, create advantageous business arrangement and important partnerships with key industry leaders, as well as, you know, providing returns on our R&D investments.

Intellectual properties are an ongoing multifaceted element of our business model and we will continue to manage it that way.

Depending upon the timing of the deals and the accounting treatment, which is very much deal dependent, there might be a noticeable impact in any given quarter.

However, our annual plans incorporate monetization of IT in a variety of forms, and this is part of how we run the business.

Again, our strategy is to create long-term value through IP while manage IP contributions on a full-year basis.

I remain confident we should get through essentially full-year break even performance for consumer digital, as we work to continuously improve the earnings performance of our key consumer digital businesses.

We maintain double-digit operating margins of 11% in our Health Group, despite the burden of additional costs associated with our strategic alternatives initiative as significantly higher year-over-year silver prices.

We see a satisfying order book for both our digital radiology products and health care information systems, as new product offerings are well received by the market.

It remains my objective to announce the conclusion of this strategic alternative study by the end of this year.

We continue to post earning improvements in the Graphic Communications Group and achieved a 6% digital operating margin in the quarter, enabled by continuing integration savings and a strong growth in digital plates, NexPress color products, commercial inkjet printing solutions and document scanners.

The [inaudible] earnings increased by $24 million from last year's third quarter, despite higher raw material costs for silver and aluminum.

Our Film and Photofinishing Groups performed better than expected, posting a 13% operating margin, as we continued to benefit from the effective cost reduction actions that we have been undertaking for the last three years.

As you have heard me say before, our objective is to take costs out faster than revenues decline, and the results show that we are getting that done.

Within the balance of the FPG portfolio, our Entertainment Film business grew 3% during this quarter, with no significant changes occurring in the industry.

We achieved another milestone in this year's third quarter, as it marks the first time that digital earnings growth exceeded traditional earnings decline, with digital earnings increasing [$98] million from last year and traditional earnings declining $48 million.

This follows another milestone we achieved during the third quarter of 2005, when digital revenues exceeded traditional revenues from-- for the first time in our Company.

This accomplishment are key indicators for me of the success of our strategy and key milestones on our part to complete the transformations of the business.

We achieved our cash goals, ending the quarter with more than $1.1 billion of cash on hand, which is almost double last year's result, while reducing debt by $129 million in the third quarter.

During the quarter revenue was a bit softer than planned, although I am comfortable where we came out.

We are making choices, and the time will come with our improving cost structure and the introduction of new product categories, when our focus will be realigned.

As we indicated earlier this year, the consumer digital group began to realize the benefit of trading on profitable revenue growth for margin expansion, especially in the area of digital cameras and in printer docks.

However, consistent with our long-term objectives, we were able to maintain the number three market share position, both in the U.S. and worldwide for consumer digital cameras on a year-to-date basis through August.

On the same basis, we continued to be the market share leader for our printer dock products in the U.S.

As you know, this is a year of significant transition for CDG.

Last year we completed our major acquisition program in this space, aiming at a revenue growth in 2006, including acquisitions, in the high 20s.

We're on track to achieve that.

This year, though, we are concentrating on effectively integrating the acquired business -- businesses into our [inaudible] single entity, so we can focus on growth next year.

The physical driver - the physical drivers of growth include digital plates, work flow software, commercial inkjet solutions, NexPress color products and document scanners, which are all posting strong growth.

Offsetting this growth this year are expected revenue declines, primarily from [monologue] plates and graphic sales.

Beginning in 2007, we expect the growth engines to more than offset the declines from the other elements of the portfolio, and move us toward our expected top line growth rates in this business.

As one more -- as one more proof point along this path, we were very pleased with our success at the recent Graph Expo show in Chicago, where we booked strong sales, particularly in the areas of digital prepress and digital printing, reflecting customer interest in expanding the digital print services.

As you know, our portfolio of digital businesses is very seasonal, with more than 50% of consumer digital sales and greater than 40% of total corporate digital sales occurring during the last four months of the year.

So, obviously, we'll need to work effectively to bring the year to a successful conclusion.

The key piece of our strategy this year will remain our focus on margin expansion.

As I said, in January, we have achieved scale.

Now we must achieve the earnings in cash needed to pay to complete our transformation and invest aggressively on expanding our product portfolio so we can achieve sustainable growth going forward.

It's the logical next step in this transition plan, and the plan is working for us.

As I think about digital revenues for the fourth quarter, we will continue to focus on cash and digital earnings at the expense of revenue growth, in route to our year-over-year earnings turn around in CDG.

As I conform to this strategy and look ahead to market forecast and last year comparison for the fourth quarter, while I'm not ruling out the possibility of 10% revenue growth, we could come up somewhat short of that goal, as we will continue to choose earnings performance over revenue growth.

In line with that, I continue to remain confident in our ability to achieve our digital earnings target for the year in the $350 to $450 million range, and our investable cash target of $400 to $600 million.

Now I'd like to turn the call over to Bob who will review the financial results in more detail.

Thanks, Antonio.

I would also like to welcome -- to add my welcome to Frank who, as Antonio mentioned, will assume the role of CFO shortly after we sign off on the third quarter of 10-Q.

As Antonio indicated, the third quarter represented continued progress in the path to achieving our full year and transformational goals.

The third quarter gross margin was 27.3% versus 25.9% last year, an improvement of 1.4 percentage points in clear progress toward our targeted model of approximately 30% gross profit as a percent of sales.

A number of items impacted gross profit.

On the positive side, these were manufacturing cost reductions, a non-recurring licensing agreement and foreign exchange, which together improved margin by approximately four percentage points.

These were partially offset by lower volumes and about $40 million of adverse silver price impact on a year-over-year basis, which together reduced gross margins by about 2.6 percentage points.

In the quarter, SG&A decreased $105 million or 16%, and declined as a percent of sales to 17.6% from 18.9% in the year-ago quarter.

SG&A represents the critical last part of our business transformation, as we need to reduce SG&A as a percent of sales by approximately three percentage points to achieve our target SG&A level of 14% to 15% of sales.

We will be working hard on this task going forward, as we plan to essentially complete all of our restructuring efforts during 2007.

R&D declined $42 million or 20%, lead by reductions in the traditional products area.

With R&D running at about 5.3% of sales level, we have essentially achieved our spending targets in this area.

Our restructuring efforts continued throughout the quarter, with the third quarter pre-tax charges totaling $212 million, and on an after-tax basis $202 million or $0.70 per share versus $363 million or $1.26 per share in the year-ago quarter.

These charges included severance, accelerated depreciation, exit costs and asset and inventory write-downs.

Year-to-date through the third quarter total after-tax restructuring charges totaled $613 million, compared with $752 million for the first three quarters of last year.

As we approach the end of the year, we can now better estimate our total restructuring charges for this year.

Our previous estimate had been between $1.2 and $1.4 billion pre-tax and our current estimate for full-year restructuring charges is now approximately [$800] million pre-tax, as we find some actions less costly than anticipated and some planned actions moving into next year.

We now expect full year cash restructuring payments will be approximately $600 million.

Approximately 1,650 positions were eliminated during the third quarter, bringing the program total to date to more than 22,200 positions.

Consolidated third quarter digital earnings from operations were $105 million, an improvement of $98 million from last year's third quarter -- quarter's nearly break even performance.

As Antonio has indicated, we are very focused this year on driving digital margin expansion, and the quarter shows we are making some good progress.

The Consumer Digital Group crossed over in the profitability during the quarter, with earnings of $24 million versus a loss of $61 million in last year's third quarter.

Consumer Digital gross profit improved across virtually all of the major product lines, as the result of a lower cost go-to-market model, improved portfolio participation strategies and proceeds from the nonrecurring licensing arrangement.

Digital earnings in the Health Group decreased from $50 million last year to $35 million this year, primarily as the result of cost associated with the exploration of strategic alternatives and a lower contribution from the digital output product portfolio, which continues to be impacted by increased silver pricing and the growing industry shift to soft copy diagnosis.

This decline was partially offset by increasing earnings contribution from digital capture, health care information systems and digital [steno] products.

Digital earnings in the Graphic Communications Group increased $27 million, driven by strong demand for digital plates, excellent acceptance of a new low-end document scanner product, and strong performance in commercial inkjet printing systems and service.

As a result, GCG's quarterly operating margin improved from less than 1% to 3.5% on a year-over-year basis, with digital operating margin running at 6%.

On a total Company basis, traditional earnings were $157 million for the third quarter versus $205 million in last year's third quarter.

The FPG segment, which is the largest contributor to traditional earnings, achieved an operating margin of 13% for the third quarter, which is unchanged from the year-ago quarter.

As the result of a strong focus on cost reduction, FPG was able to maintain flat year-over-year operating margins while revenues declined 21%.

The other income and charges category had a positive year-over-year swing of $63 million.

The largest single item was the gain on a sale of property made surplus by our restructuring actions.

As you know, our restructuring programs have created excess property, which we will continue to monetize.

We achieved our cash goals in the quarter through a number of factors.

These included holding inventory flat on a quarter sequential basis, as opposed to the historical tendency to rise sharply -- excuse me -- from the second quarter level, as well as [inaudible] managing receivables and capital expenditures.

This improved inventory discipline should position us well for meeting our full year inventory goals, as we move into the important fourth quarter.

As expected, cash received from IP and asset sales totaled more than $100 million.

Through three quarters our cash -- our year-to-date investable cash performance is slightly ahead of last year's pace, and we ended the quarter with $1.1 billion of cash on the balance sheet, nearly double the $610 million of cash we had a year ago.

Year-to-date we have paid out $408 million in restructuring cash, compared with $417 million for the first three quarters of last year.

We paid a $200 million debt obligation in September and subsequently in October, we retired an additional $100 million of debt.

We remain confident that we will be able to achieve our goal of reducing debt by approximately $800 million this year.

Interest expense was $74 million in the current quarter, an increase of $17 million from the third quarter of last year, largely as the result of a non-recurring charge relating to a non-U.S. tax claim, as well as higher interest rates associated with the Company's secured debt facility.

The Company reported a GAAP loss of $37 million or $0.13 per share on a containing operations basis in the third quarter, compared with a loss in the year-ago quarter of $915 million or $3.19 per share, when we recorded the large valuation allowance of $2.71 per share.

It is important to note that the third quarter results included $0.70 per share of restructuring costs.

Lastly, we have received some questions regarding recently enacted pension legislation.

As we review these laws, we see no impact on the required or the expected funding levels for our U.S. pension plan.

In summary, we are very confident the Company will achieve its cash flow, debt reduction and digital earning goals for the year.

And now Antonio and I would be happy to take your questions.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question from Jay Vleeschhouwer with Merrill Lynch.

Yes, thanks, good morning.

Antonio, I think it was two conference calls ago where you talked about some changes you were making in your global logistics and management structure, and you have since announced the Flextronics arrangement, for instance.

Can you quantify the impact, thus far, in terms of your operational or logistical systems in terms of any financial or efficiency benefits that you've implemented, including Flex or other parts of the Company?

Secondly, with respect to the Consumer business, or the Consumer Digital, excluding IP sales, can you foresee that the operating gross margin of that business could sustainably get to the mid-20s or better?

The Flextronics impact, I think, it's too early to give you a number -- but I think in -- in February or January when we do the conference call, I think we'll ha -- we will make an attempt to give you a number of the, you know, financial impact.

Obviously, the impact is a lot more than simply financial.

There -- there are a lot of other, you know, positive reasons why we did this.

But we make l make an impa -- we will make an attempt to give you the financial impact.

It's too early.

We just -- we're still working together with them.

We haven't -- we haven't passed along, all of the responsibilities the way it will be done within the next -- you know, within the next few months.

It will be a positive impact, for sure, but I -- you know it's too early to say.

The -- well, first of all, I don't know why you want to separate the impact of IP from the rest, because I think it's -- for me, it's an integral part of the business.

Obviously, you can use your active portfolio in many ways.

You go to an extreme, you could -- you could ask -- you could ask, people -- you know, not to manufactured products, which will obviously help with the sale of your products.

That's not a path that we have taken, and not a path that we will ever take.

But what we're trying to use is that -- is that capital, that know-how, and that position, and [inaudible] deals that will in doubt be revenue -- you know, revenue-generating deals, and as well because we need -- we need those partnerships in the future.

All of --you know, we are talking to all sorts of companies.

Many of them are key partners for us in the future and now, so -- But having said that about IP, yes, we are managing, the rest of the business to be standing by itself.

We -- we are looking for the present portfolio, you know, our goal is to be in the single-digits operating margins.

With the new portfolio that would include CMOS and some of the cell com work that we are doing and inkjet in the future, we will raise that number.

Obviously, we have to build scale on those business, for them to have -- you know, be impactful.

Two final questions.

Last year and again year-to-date in '06, you've had some good leverage in terms of improving turns as a source of cash.

Looking into next year, do you think that you would have as much leverage or opportunity to improve turns as a component of improving cash flow again?

And finally, this year, as you say, you've been willing to forgo revenue in favor of cash and profitability.

Do you think as you now get closer to the end of the restructuring tunnel that in '07 you could resume more of a focus on driving growth, having established a better base of profitability?

Let me answer the last part of the question, then I'll ask Bob to talk about cash.

The answer is yes As Bob mentioned before that the last leg -- the most important part of the last leg of our restructuring is the reduction of our SG&A, and we having aggressive plans.

We always did for this part of the transition to lower the SG&A.

That will, you know, improve our cost structure, and that, together with the -- you know, with the Flextronics, deal will help us to be more aggressive in that market.

Remember that the --you know, the deviation and the top line from the -- you know, from the numbers that we had originally to the numbers that we have now is by-and-large mostly -- mostly due to our selective approach to the digital camera business.

And that was done because we -- you know, with the structure we have, we couldn't make money in those markets, and I didn't think it was appropriate to continue to grow that way.

The first thing we have to do is put the cost structure where it should be, get --you know, get the supply chain what it should be that will affect the cost of these products too, and then go back to--you know, to revenue growth, together with again, new product categories that that grew will start to have -- will start to have available starting sometime next year.

Yes.

Jay, on the inventories we have been able to work the inventories good, and we have that opportunity next year as the traditional business go -- remains a multi-billion dollars business.

So the answer to your question is yes, there's a few hundred million dollars, anyway, available next year.

Also going into next year, you know, as we said we should really start winding down this -- the restructuring, both the charges and we should see a lowering in the cash requirements as we move through the quarters next year.

So, you know, these things should phase in nicely for us to continue to have pretty good cash performance in the Company.

Thank you.

You're welcome.

We'll go next to Matthew Troy with Citigroup.

Good afternoon, guys.

I just wanted to start off and say, Bob, I know it's your last call.

Thank you very much for all of your help, and always navigating the muddied waters with a smile and positive attitude for what I'm sure has been a difficult job.

So I just wanted to thank you again.

My pleasure.

I wanted to ask Antonio, on the Graphic Communications Group, revenues declined for the first time a little bit, only about 1% year-over-year, and a little bit down sequentially.

I realize a lot of things are going well at GCG, particularly on the cost side, which -- and I'd be happy to hear about -- but also was wondering if you'd put some more detail around what may have come in light relative to your expectations?

Yes.

And how we should think about top-line growth going forward, now that this is an organic franchise?

First of all, Matt, if you go back to the beginning of the year, if you remember what I've been saying is that the plans that we had for GCG top line was to grow, with acquisitions included, in the high 20s.

Right.

And this is what we are doing.

We are right in the high 20s.

We have another quarter to go, of course, and our plans to continue do this.

So I feel that the top line is just what we thought it was going to be.

Having said that, we did say, as well, that the most important objective that we have for this year -- for this [crazy] year was to take the six companies, four that we acquired from outside and the two that we had inside and make them one, which was not an easy task.

And some of you -- I think you, too, remind how difficult this is, and I agree.

So the focus has been let's make sure that we have one Company.

Then let's make sure that we -- as soon as we can go after the co -- after the cost synergies, which as you can see they are coming out.

And then get ready for growth next year, which the second part of your question we expect that will be within the high single-digits for that group next year.

I guess turning my attention -- I think when we were up in there in the summer, I kind of delineated the chapters of your legacy.

You've certainly done an excellent job of being more of a pit bull, Antonio, for Kodak on monetizing IP.

Certainly seeing that this quarter.

I think a second issue, which you've been able to pursue very well, has been the ability to partner with external parties.

If I look at the GCG group, particularly on the revenue side, a question that I ask, I think, every call -- and I'll just reup it now -- is you've got some strong products at the high end.

But potentially in some of those products you lack breadth to complete with folks like Xerox and Canon and others -- Canon being a partner, at the same time -- is there a thought process?

Are we any closer to potentially seeing a partnership between a Kodak and perhaps a Japanese OEM, just to scale the product line, whereby you'd share technology, potentially [inaudible], but just to flush out that product line more definitively in '07?

Thanks.

The statement that our product line is on the low end is weak, I fully agree, and our team is working to solve that.

And I think we are -- we have an opportunity for revenue growth, if we fill that gap.

We have a partnership with Canon, and we are looking for other partnerships to fill that.

We don't have any one that I can announce, but we couldn't agree more that there is an opportunity for us in the low end of the electrophotography base prices.

We don't have a solution today, and we want to have one.

And we have some internal work that's too early to disclose, but we have, as well.

We have been evaluating partnerships.

We don't have anything yet, but we acknowledge that this is an opportunity and an issue for us.

Okay, I appreciate that and there's one last quick one.

The stream technology with the [high-stream] industrial inkjet, very promising asset in the Kodak portfolio.

Should we be thinking of that as kind of an announcement at the next DRUPA show, in terms of time frame?

I think we originally talked about '08, '09, 2010, Are we still on that track?

Yes, we're still on that track.

I -- certainly our mission will be to make an important statement at DRUPA in 2008, and start to get revenue in, certainly, '09, fully develop the technology in a larger portfolio in 2010.

But I still want to agree with what you said.

The -- that will be a very significant disrupting and very valuable imposition for this Company.

At the time it's a pretty complex technology where we are still doing the right things, in my view, and we have work to do, but the plan is to be in DRUPA showing what we can do with with stream in 2008.

Thanks, Antonio.

And Bob, thank you again for all of the help.

You're welcome.

We'll go next to Carol Sabbagha, Lehman Brothers.

Thank you very much.

Just a couple of questions, sticking with the graphics business for a second.

You talked in the MD&A about pricing hurting in the quarter, which seemed like pricing may have gotten a little bit more aggressive, especially on the digital side.

Can you talk more than about and give us color on what you are looking for going forward?

So much, Carol.

I think the thing that bothered me the most of that thing was actually the price of silver and the price of aluminum.

That hurt us the most, especially silver.

Aluminum kind of quiet down for a little bit, and hopefully will go down.

If it goes down we'll have a great opportunity next year.

I don't think pricing was -- pricing is always an issue, but I don't -- I don't recall being of any magnitude this quarter.

And if I'm wrong, someone here, but I -- I don't recall that was very significant, Carol.

Okay.

And then moving on to Consumer Digital, given that the fourth quarter as you have pointed out many times in the past, is a huge quarter for that business, what would make you -- what would you like to see next quarter on the revenue side or on the performance of the, you know, three main businesses there in the fourth quarter?

You don't have to give exact numbers, but some way to measure what would make you happy.

The biggest goal -- I mean, you know this.

We talked about this so many times.

The biggest goal, I really want that group to be break even by the end of the year.

And this is very, very important strategically for us, because we're getting now ready to introduce new products, and we don't want to carry P&Ls that are at a loss.

And we're going to have -- you know, enough cash and stamina to put into -- into the development of the new product line.

So the most important goal for that group is to be break even.

Now, we are growing in every single P&L that remember, except for digital cameras and printer docks.

And if I missed any of the little ones, let me know.

But out of the big ones, those are the two.

And fundamentally it's digital cameras and that was the decision that we made at about this time last year, when we saw that there was no way with the cost structure we had that we could make that business an attractive business for us.

In the borderline it wouldn't do something different, so we decided to do something different.

When we -- so this -- so going back to your question, the objective for this quarter for [inaudible] important thing is to get to break even.

And I-- if we have to sacrifice top line, you know, we will.

You know, I don't expect anything very different than what you've seen from the rest of the year, so far I will expect, because we are focusing in that middle range of cameras where we're doing so well, and they work well for us.

And we've been very timid and very sensitive in the low end because of the reasons that I said and I don't expect expect change.

Antonio, is it still important -- and I applaud you for focusing on the cost side -- but it is still very important to be top three in Consumer Digital cameras or would you be willing to sacrifice that goal, too?.

,No, the -- long term it will be less important, Carol, because digital capture is what we're after and, again, we've talked about this before.

It's digital capture what we're after and as you can see, there's going to be many more instruments doing digital capture that are not pure digital cameras than digital cameras next year.

So we have to be the leaders in digital capture, and that's the stated objective and that's what we're going after.

Now, digital cameras will still be an important part of our contribution because of our own cameras, and because what they represent for the brand.

So we need to make digital cameras a good contributor to the Company.

But -- so longer term I care less about what the digital camera by itself -- you know, our market share over there l be, although I expect it to be similar to what it is now.

I don't know if it's third or fourth.

The most important is to have enough size that you can buy from your suppliers at a price that is relatively competitive to your competitors.

That you have enough volume and enough presence that the retailers will sit with you to talk about what they're going to do next year and they give you space.

And as well that you have enough of a portfolio that you can design plat -- you can design platforms, and, therefore, you can have the same, you know -- you know, high cost and -- You know, the important parts of the camera, you can buy them in a way that you can use for six or seven products, and therefore, to justify the cost, you lower the cost.

You can play with the platform a lot better.

I don't know if it's number three or if it's number four or it's number two, but it's out there.

And I think as long as we are within digital cameras, we will aspire to have those volumes.

One more thing this is a decision of business.

There are companies that could come, like we used to do in the past, and go after market share.

And they go after market share, so you'll see one quarter that we might be number two or we might be number four, but we have to be out there if we're going to stay in that business and make money.

Very helpful.

One last quick question.

On inkjet I think the last official word from the Company, if I'm not wrong, is that you want to have an inkjet product out -- I don't know what that means -- by year end.

Where do we stand on when we're going to see something, either in the market or a prototype, however you want to answer it?

We-- we have very good technology.

We are obviously very late, like 20 years late into this market.

So I'm not going to bother about a month or two about this, as you can imagine.

The plan was always to have an affect on our financials in 2007, and we still debating when we're going to make an announcement.

My plan will be to do something -- announce something before the end of the year, and at this point I can't say any more yet.

But financially, the affect was always going to be of any significance in 2007.

You know, we're still on that track.

Okay.

Thank you very much.

We'll take our next question from Ulysses Yannas, Buckman and Reid.

Bob, we shall miss you.

Well, thank you.

A question, if I may.

As I understand your pension plan is overfunded, right?

Correct.

The U.S. pension plan, which is about 82% of the whole obligation, is well overfunded.

I heard someplace that you might be using the over funds to pay for severance costs.

Is that true?

No, let me-- let me go through this.

What we -- I saw your name in an article, too, and thank you for your kind words about the Company, by the way.

What we have announced is that for the restructuring actions announced after October 18th through most of 2007, the termination benefits for the majority of the impacted U.S. employees will be provided in the form of special retirement benefits payable from the Kodak's overfunded U.S. pension plan.

And, yes, one effect of this change will be to increase the amount of cash that is available for the Company in 2007.

Is the number that I calculated over $700 million correct, available?

At the end of last year, the -- we had approximately $6.5 billion in asset, and it was overfunded by about 12%, so your calculation is about correct.

Yes.

At that time.

It's actually a little better now.

Thanks very much.

We'll go next to Shannon Cross, Cross Research.

Hi, good afternoon.

Question for you on just -- can you provide more details -- I know you said health imaging remains on track, you're going to close by the end of the year.

Just in terms of the results that have been coming through in the business versus what the expectations are of the companies that you're talking to that might acquire, I'm curious as to how things are tracking?

I think they are tracking fine, Shannon.

We -- there is a cost associated with announcing something like this, in two ways.

One is obviously you're going to have consultants.

They tend to be be very expensive.

I hope they are not listening, but they are very expensive.

And that a cost that you have to incur and there's no way out out of that.

The other thing is that you do effect, somehow, sales.

There are customers -- and we know them by name and everything -- that they have decided to delay some purchases or they're still waiting to see what we do.

And that is a cost that we evaluated when we made the announcement.

Even knowing all of that, we thought it was fair to our customers and it was fair to our employees, and I think it was the best thing for our shareholders, anyway, to be open about what we were doing.

So those costs we have to be dealing with.

And those plus the silver, those are the two big differences that you see from -- you know, from the plans they have and the ones that came out, is we -- you know, our results.

I think the --you know, whoever's looking at this business, whether to form a partnership with us or to buy the business, they understand that and we obviously explained that with incredible details to them.

So I think the progress is doing fine, Shannon.

It's a complex progress.

There is -- there is a very complex carve out, even though we have cleaned up the Company very significantly, in my view, and it's cost us a lot of money in the last three years.

Even with all of that, the carve out of health is pretty complicated and all of that influences the evaluation of the group, the way you do the carve out.

So we're doing that very consciously and we are on track.

We have -- we have options that we can choose and we still have a couple of meetings with the board, you know, to decide what path we're going to take.

And my hope is that we will make that announcement before the end of the year.

Okay.

And can you talk a little bit about from a manufacturing standpoint on the analog side.

I think you are at six sensitizing facilities or maybe five?

And just where you are running in terms of usage rates on the facilities?

Just trying to get an idea of as you stairstep down and shut down facilities, where we stand in terms of manufacturing leverage?

We have less than six sensitizing sites.

I think we have four, if I count well.

Four of any significance, not -- not six.

And we will have less and, you know, next year, so -- And, obviously, the utilization for those facilities has -- you know, have gone up.

That's why FPG is doing so well, apart from other things, is that the utilization of the factories is obviously better than it was before, as we were aiming at, because we are concentrating certain products -- certain product categories only in one place.

So we have some issues with, you know, inventory and supply chain, because we're only producing one place, but the balance is positive for us.

I don't have a number specifically to give you.

We haven't disclosed by plan, but I could try to -- when you call next time, probably I could try to give you a magnitude of the improvement, you know, for the Company.

But I know per plant, I don't think I would like to go per plant through these things because things change anyway.

But yes, there's an improvement in productivity and that was part of the restructuring plan.

Okay.

And then just one last question on your CMOS opportunity.

I believe last time on the conference call you talked about -- I'm not sure how the cell phone carriers refer to it, but sort of beta testing or you had some sensors out for evaluation.

Can you give us an update on where you stand?

Yes, as you know, in the semiconductor business what you do is kind of work with the possible customer for a design and you create something, and then the customer evaluates that together with some of other competitors, and then they will choose you or they will not.

This is what is called a design win.

We have a portfolio of design wins that are in the -- well, I'm going to say it anyway, you know, more than $100 million at this point.

And this is the beginning.

I mean, that doesn't mean that that is the number we're going to get.

You are still lose those orders if you don't produce well, but I'm trying to give you a sense of where we are with the business.

This is a new business for us, so we are building the expertise to gain those design wins.

And we've been involved with those in the last four -- you know three or four months and more during the rest of the quarter, and we're building a portfolio of the design wins with which I'm very happy with.

Okay.

Thank you.

We'll go next to [Eli Lapp], Dillon Reed.

Yes, thank you.

On the health imaging business, I was wondering if you could break out for us -- because you attribute the lower earnings to higher silver prices and the strategic alternative of -- I was wondering if you could break those two down for us in terms of how they contributed to that decline?

Yes, Eli, this is Bob.

We don't disclose that amount of detail on how we do that.

The silver for the Company was about $40 million, and they -- they are a large user on x-ray films, so that hurts.

And we also have -- the biggest -- you know, the biggest issue is the film decline and the silver on the film.

Okay.

All right.

Thank you.

You're welcome.

We'll go next to [A.

J. Kirchwall] of Goldman Sachs.

Thank you.

Just one follow-up question on IP.

Antonio, you mentioned IP's an integral part of the operating performance, but could you quantify how much was income from IP in the first half?

Looked like it was approximately $60 million in the quarter.

And also, if you could compare the first nine months this year with full-year last year?

And secondly, in terms of your digital earnings quote for this year, the 350 to 450, how much of IP income is baked into that number?

We can't -- we can't do tha -- I don't even know how to calcul -- I mean, even -- I mean, this $57 or $60 million that you just calculated is fine, if you want to calculate it like that.

But the truth is, we -- you make that calculation without no SG&A whatsoever associated to that number, right?

This -- this is just -- and that is just not real.

It's not real for me.

I mean, those are the same engineers that are making the digital cameras and the image sensors, the same one.

So I don't know how to split fairly what it is IP and what it is pricing that you put into one product.

Plus the IP acquisitions we have, they're actually a lot more than that cash that in this case we had to disclose, because of the nature of the deal.

The IP deals have much more complicated like that.

We get co-designs, we get component supplies, we can get shading of the revenue of somebody else's product.

I can't possibly -- I can't possibly take all of that and create a new P&L in which I have to arbitrarily put some SG&A into it, I can't do that.

That's why it's an integral part.

It's not because we don't want to give you a number.

It's just it's because it is an integral part of the business, and I don't know how to split it unless we do something completely artificial.

Alright, just following up on that.

So the break even target for the Consumer Digital group for the end of the year, does that include IP or is that more an operational --?

Includes everything that has to do with that group, so within the digit -- when the P&L that we call Digital Capture, that has the IP associated with Digital Capture, and then -- yes.

I mean, the answer to your question, in a simple way is yes.

It's part of -- it's actually part of the Digital Capture P&L.

Great.

Thank you.

We'll go next to Sam Doctor, JPMorgan.

Thank you.

A couple of questions.

We need to follow up on some of them [inaudible].

In terms of the $100 million in design wins that you have for image sensors, can we expect that to transit into revenue in 2007 or will it extend out beyond that?

No, I -- I won't even -- I won't even go, Sam into that, the revenue for 2007.

You know, design wins are -- I was trying to show you -- I was trying to give a sense for Shannon of what kind of business we are building, within -- and, you know, design wins they are different projects.

Some of them are for three months, some will come out in a year and a half, others in nine months.

We don't have a projection for next year.

We will do more in February -- I mean, when is this date?

Is it February--

February 8th.

Yes, February 8th we will dig more into that.

We'll give you our best shot about what the influence of the new portfolio could be, so you -- so you can work it with us.

Right now I was just trying to show to Shannon that we are building a decent business with that, but I don't have a number for 2007.

All right.

On SG&A you did a great job reducing numbers this quarter.

How much of the reduction came from advertising?

And what would be the new sort of advertising expense within the 14% to 15% target model?

I don't -- I don't know the answer to that, but it's -- advertising we've been running around what we wanted to do for the year.

Our biggest concentration in SG&A is about -- honestly, you know, individuals and processes.

That's what we're after.

Advertising is going to be with us for the rest of our lives, so we're not going to save anything out of that.

It might be in different-- it might be in different shapes and forms.

We're doing a lot more web advertising than we used to do in the past.

We do less TV than we used to do in the past.

We do a lot more at the store level, because most of the battle for this product is at the store level rather than in the mass advertising that we used to do with film, but we're still doing advertising.

Okay.

And finally, could you comment on shared manufacturing facilities that you might have between the x-ray and photo film and how would that impact the ability to spin out the health business to a private equity or any other buyer?

No, health is -- health is very concentrated in Colorado, but you're assuming that we are going to sell it and we haven't said that we're going to sell it.

But we do need to carve out -- You know, Colorado is the key facility for that and it's -- you know, obviously we use it for a few other things but it's mostly -- it's mostly health.

Okay.

Okay.

Thank you.

We'll take our final question from Adam Comora, EnTrust Capital.

Yes, hi.

Great.

Just one quick -- I just wanted to get your quick thoughts on what is happening out there in the motion picture industry?

You know, if you could give us a ballpark on how big that business is it'd be great, and what what your thoughts are?

It's little a little more of a $1 billion.

The business is very stable.

This quarter we happened to grow 3%, but we expect the business to be flattish for the year.

There is, you know, a transition going on to digital.

So far it hasn't had any influence whatsoever in our numbers, but we are following that.

We are part of that, as a matter of fact.

You know, we collaborate very intensely with the industry in that -- in that transition.

We have one part of our business, although small, that is dedicated to digital cross processing.

We have two companies working on that, as well as special effects, which is all digital.

So we are part of that transformation, but it hasn't affect -- you know, it didn't affect our business.

We have, obviously, a path to deal with it with time, but so far this is a flat business with good margins and about $1 billion in revenue.

When -- when do you see the impact starting to effect you guys or when do you see that digital transformation happening?

Digital transformation, I guess, started many years ago.

It's just the speed in which it's developing/ It's not steady for all sorts of reasons.

There are, you know, business models.

They have to be effective in the side of print, which is the copies that have been sold to theaters.

And then as well in the -- in the originated film -- originating film, the quality of film still is far superior there any digital camera existing in the market.

So there're two different parts of the market.

You could ar -- one could argue that technology has been existing for the transformation of the projection and distribution.

That technology's been there for years.

The business model doesn't fit well, and I think is going to take some time.

In the case of originating I think there's more --you know, the technology is not -- and the methodology of dealing with all the different elements of getting the look and feel of a movie, that's just so different that I think it will take longer for that to happen.

We have -- we've been saying in the past that we don't expect significant changes in the next two years.

I said that two years ago.

I'm saying it again, although it's one year later.

I don't expect significant changes -- significant changes in the next two years for the overall business.

I would expect to see the print to go down a little bit first.

And I said as well as I've been saying that as long as this last for another two years, we will be very happy.

The plan is that part of the business is -- is crucial for the transformation, because it generates a lot of cash and we have been in need of a lot of cash for the transformation.

We have one more year has Bob said.

We're going to start seeing after the second quarter of next year that the cash that we need for the transformation is a lot less.

Therefore, I hope the business lasts for a long time.

And I think there are many signs that will indicate that, but they're not going to be crucial for -- you know for us -- they're not going to be an impediment for us to build the digital company.

Okay.

Thanks.

And Mr., Perez, at this time I would like to turn the call back over to you for any additional or closing remarks.

Well, thank you very much for attending.

And we -- we are very committed to the fourth quarter.

We are fully aware of the --you know, of the challenges we have, but we -- you know.

I have full confidence that we're going to have a good year and have a good trick-or-treating tonight.

And this does conclude today's conference.

Thank you for your participation.