Eastman Kodak Co (KODK) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the Eastman Kodak fourth quarter 2006 sales and earnings conference call.

Today's conference is being recorded.

At this 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 fourth-quarter earnings.

I'm here this morning with Antonio Perez, Kodak's Chairman and CEO, as well as our Chief Financial Officer, Frank Sklarsky.

Antonio will begin this morning with his observations on the quarter, and then Frank 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 R&D investment, margin improvement, the closing of and use of proceeds from the sale of the Health Group, successful monetization of intellectual property and the launch of new product categories are such forward-looking statements.

Actual results may differ from those expressed or implied in forward-looking statements.

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

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

Also, 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.

Lastly, as a definitional note, we have a minor change in terminology in that we are replacing the term "investable cash" with the equivalent term "net cash generation."

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

Thanks, Don.

Good morning, everyone and thank you for joining us for our discussion of fourth quarter earnings.

I'll start this morning with my thoughts on the full year and the fourth quarter, and then I'll turn it over to Frank for his financial summary.

As you will recall, Frank joined us during the fourth quarter as CFO and it's great to have him on board.

Before I discuss the fourth quarter, I would like to reflect on the progress we made during the full year 2006.

As I look back on the year's performance, I'm extremely pleased with our results with one exception, which I'll discuss in a moment.

On the positive side of the ledger for 2006, we came in on the top side of our expectations for net cash generation at $592 million versus a goal of $400 million to $600 million.

Digital earnings increased nearly five-fold on a year-over-year basis coming in at $343 million at the lower end of our aggressive target.

We continue to have success with our intellectual property program, signing various agreements with Sony, Sony Ericsson and a number of orders as planned throughout the year.

I fully expect that we will continue to be at least this successful in IP activities for 2007 and for several years to come.

Graphic Communications, as planned, reversed the previous year operating loss of $41 million, recording earnings in 2006 of $141 million, a year-over-year improvement of $182 million.

No less impressively, Consumer Digital, which posted an operating loss of $131 million in 2005, reached breakeven for full year 2006, a $132 million year-over-year improvement in line with our expectations.

On the M&A side, we successfully concluded the study of strategic alternatives for our Health Group with the signing of an agreement to divest the business to Onex for up to $2.55 billion.

Our [semose] of business went from concept to revenue generation as we began to build a meaningful business in this area during 2007.

We made conclusive progress in our inkjet program in 2006, and we are now poised to make major announcements in this area.

Consumer Digital will add this year two new measured product categories, semose and inkjet, with significant margin opportunities as these businesses ramp up in volume.

We also made significant progress on the cost side with SG&A reduced by $279 million year-over-year.

We exited a major, traditional manufacturing plant in France, chemical manufacturing operations in the U.K. and the U.S. and more recently a logistics operation in Rochester.

During 2006, our Film and Photofinishing Group succeeded in meeting their targeted operating margins of 8.6%, as well as the cash commitments to the Company.

This is superb performance in the face of a 22% revenue decrease for the year, which proves their ability to align costs as the revenue declines.

And finally, as a further sign of how far along we have come in our transition, while 2005 was the first year when revenue from digital sources exceeded those from traditional sources, in 2006 we achieved another major milestone.

Specifically, 2006 was the first year when the earnings growth from digital products exceeded the earnings decline from traditional products.

To sum it up, I feel very good about 2006, and I'm very excited about our prospects for 2007.

We have continued in each of the past three years of this Company's transformation to make very visible and significant progress against the important and challenging goals we set.

The only meaningful shortfall against our expectations for the year was our lower than planned digital revenue growth.

This was basically the result of enforcing our clearly stated objective to give priority to digital margin growth over revenue growth in our digital capture business that I announced to this audience on January 30, 2006.

As the year progressed, we saw more aggressive camera pricing, particularly at the lower price points, than we had anticipated.

As a result, we walked away from some Consumer Digital revenue in the fourth quarter and the year where prices were too low or where we didn't have yet a problem with the appropriate cost spaces to compete.

Also, you may recall that we reduced the number of retailers in countries we serve directly around the world as we redesign our go-to-market model for better productivity.

In the near term, this had a negative impact on revenue as well.

However, this was the correct decision to make.

They were an important factor in the turnaround in Consumer Digital earnings and will serve as well in the future.

And overall, I'm satisfied with the performance of our digital portfolio of products.

If you exclude the digital camera revenue that was affected by this one-time adjustment in the low-end segment, the rest of our digital portfolio achieved low double-digit growth year-over-year as per plan.

As we enter 2007, the results of the previous year give us a good foundation to work from as we invest for profitable growth in consumer areas such as inkjet, semose, the KODAK GALLERY and kiosks, as well as in graphic communications products and other attractive opportunities where we have work in progress.

Let me now offer some comments specific to our fourth quarter performance.

In the Consumer Digital segment, we remain in the top three worldwide for digital camera market share through November, the last month for which we have worldwide data, consistent with our stated goals.

As far as the U.S. market, the latest NPD Group's market share data indicates that we have retained number-one market share in the U.S. for the fourth quarter and full year, even with our reduced revenue performance.

We'll retain as well our number-one share position in home printer docks.

Our kiosk business showed excellent growth with a 52% year-over-year increase in media burn volumes, and our EASYSHARE gallery contributed 36% year-over-year revenue growth and benefited from the positive margin mix associated with holiday cards, photo books, and calendars among other items.

Graphic Communications grew revenues 3% in the quarter, with good sales growth in digital plates, NEXPRESS color presses, and work flow, while NEXPRESS black and white printers and traditional products declined as expected.

The Film and Photofinishing Group turned in strong operating margin performance in the fourth quarter improving from 4% of revenue last year's fourth quarter to 8% of revenue in the current quarter.

Nearly doubling the operating margin rate in the face of the 16% fourth quarter year-over-year revenue decline is clearly excellent performance.

In distinct contrast to the declining portion of the FPG portfolio, entertainment field revenues essentially held steady on a year-over-year basis.

The Health Group in its last quarter as part of Kodak's results from continuing operations had a very satisfying quarterly performance.

Health care information systems, digital capture, and digital dental all experienced good growth while traditional radiography and digital output declined at their expected rate.

The fourth quarter provided a very good end to a very good year.

On February 8th, a week from tomorrow, I will be in New York with my senior management team to review our strategic outlook.

At that time, we will provide a more extensive review of our roadmap going forward, including new product introductions.

Now I'd like to turn the microphone over to Frank to continue our discussions of fourth quarter results.

Frank?

Thanks, Antonio, and good morning, everyone.

I would like to spend some time discussing our fourth quarter financial results and then Antonio and I would be happy to take your questions.

As Antonio indicated, we were very pleased with our fourth quarter financial performance with the exception of digital revenues where we made a conscious decision to forego sales in selected product categories in the interests of focusing on improving overall digital profit margins.

GAAP earnings per share from continuing operations for the fourth quarter were $0.06 compared to a GAAP loss per share of $0.48 in the fourth quarter of 2005.

Current quarter results included items of expense, impacting comparability, totaling $152 million or $0.53 per share.

The prior year fourth quarter included comparability items of expense totaling $1.02 per share.

Of this year's items recorded in the fourth quarter, two were significant in nature.

The first is a restructuring charge of $0.24, amounting to $82 million pretax or $69 million after tax.

The second is the recording of a valuation allowance against deferred tax assets of $0.31 or $89 million after tax.

Let me briefly explain the valuation allowance item associated with deferred tax assets.

These assets reside in various international entities and the valuation allowances result from a number of factors, including cumulative loss positions, driven in part by ongoing restructuring costs, along with operating results to date.

The recording of these allowances should not result in any near-term cash impact.

And I would point out that we are not completely excluding the possibility that these particular deferred tax assets may still be realizable sometime in the future.

Moving on to some other key metrics, fourth quarter consolidated revenue declined by 9% and included a 2% favorable exchange impact.

Fourth quarter gross profit margin was 26.4% versus 23% last year, an improvement of 3.4 percentage points.

The favorable year-over-year change reflects improved operating margins in the business segments, particularly within Consumer Digital.

This was driven by the kiosk business, the KODAK GALLERY, and continued success from licensing arrangements.

The Company also benefited from lower levels of restructuring-related accelerated depreciation and inventory writedowns in the quarter, as well as manufacturing cost improvements and the favorable exchange mentioned previously.

Partially offsetting these factors were lower revenues in certain areas and approximately $45 million in adverse silver and aluminum price impacts on a year-over-year basis.

SG&A for the quarter decreased $172 million or 22% and declined as a percent of sales from 18.3% in the year-ago period to 15.6% in the current quarter, reflecting cost reduction activities amplified by fourth quarter revenue seasonality.

R&D costs totaled $170 million for the quarter versus $212 million in the fourth quarter of 2005, led by reductions in the traditional product area and continued rationalization of GCG's acquired businesses.

If you look at the parts of the business that call for the most impactful R&D investments, namely Consumer Digital and Graphic Communications, we're continuing to fund them at an annual rate of 5% to 6% of sales.

We would also point out that going forward, we intend to incur a prudent level of future R&D investments in order to drive our intellectual property portfolio along with continued product innovation.

Our restructuring efforts continued throughout the quarter, with fourth quarter pretax charges totaling $82 million or $69 million after tax as previously mentioned, versus $295 million pretax in the year-ago quarter.

These charges included severance, accelerated depreciation, exit costs, and asset and inventory writedowns.

The reduction from the prior year fourth quarter is driven in large part by the absence of certain severance costs and accelerated depreciation charges recorded in international entities in the 2005 period.

For full year 2006, total pretax restructuring charges totaled $768 million, compared with approximately $1.1 billion for 2005.

The 2006 amount was lower than we had originally anticipated for the full year.

In addition to items impacting the reductions in the fourth quarter amounts mentioned previously, certain other fourth quarter actions were re-timed to 2007 for logistical and operational reasons, and we achieved some pension-related credits in certain areas that were greater than originally anticipated.

Full year 2006 cash restructuring payments came in at approximately $550 million.

Approximately 1,200 positions were eliminated during the fourth quarter, bringing the program to date total to approximately 23,400 positions.

Consolidated fourth quarter GAAP earnings from operations were $222 million, an improvement of $393 million year-over-year, as a result of lower restructuring charges, but more importantly, significant improvements in the area of SG&A costs.

We believe this earnings improvement validates the strategy of focusing on profitable revenue that has and will continue to yield enhanced margins over time.

Fourth quarter digital earnings from operations were $271 million, an improvement of $130 million from last year's fourth quarter, as a result of our focus during 2006 on improving digital profit margins.

From a full year perspective, we posted $343 million in digital earnings, a nearly five-fold improvement year-over-year, and close to the aggressive target we set for the year.

The Consumer Digital Group posted earnings of $150 million in the fourth quarter, an improvement of $110 million from last year's fourth quarter, primarily as a result of improved performance from the KODAK GALLERY, the kiosk business, along with continuing contributions from licensing arrangements.

The kiosk business improvement was driven by an increase in digital media volumes of 52% year over year.

Fourth quarter Health Group earnings from operations were $86 million versus $87 million in the year-ago quarter, despite the impact of unfavorable costs for silver and costs associated with its divestiture activities.

Digital earnings in the Health Group remained unchanged at $58 million year-over-year, despite a lower contribution from the digital output product portfolio, which continues to be impacted by increased silver costs and the growing industry shift to self-copy diagnosis.

This decline was offset by improvements from digital capture, health care information systems, and digital dental products.

The Graphics -- Graphic Communications Group posted strong fourth quarter earnings results by more than doubling their earnings from operations from $28 million to $57 million.

Digital earnings in the Graphic Communications Group increased $18 million to $64 million in the fourth quarter, as a result of improvements from NEXPRESS color presses and workflow and pre-press solutions.

The commercial ink jet printing solutions business showed steady performance despite comparisons to a very strong fourth quarter last year.

Overall, GCG's quarterly operating margin improved to almost 6% from 3% in the year-ago quarter, with digital operating margin running at almost 8%.

The FPG segment achieved an operating margin of 8% for the quarter versus 4% in the year-ago quarter despite revenue declines of 16% as a result of strong cost reduction activities.

And on a total Company basis, traditional earnings for the quarter improved to $98 million compared to $57 million in the prior year quarter, an increase of $41 million or 72%.

This was driven in large part by the strong performance in the Film and Photofinishing Group.

The other income and charges category had a negative year-over-year swing of $27 million, primarily due to fewer contributions from asset sales.

Interest expense was $60 million in the quarter, a decrease of $7 million from the fourth quarter of last year, largely as a result of lower debt balances.

Fourth quarter net cash generation, previously referred to as investable cash, was $916 million, bringing full-year net cash generation to $592 million, which is at the upper end of the range we provided for the year.

Inventory declined by approximately $270 million, and trade receivables decreased $143 million.

Capital expenditures for the year totaled $379 million, almost $100 million less than in 2005.

Depreciation was $315 million in the current quarter versus $465 million in the year-ago quarter, primarily driven by higher ongoing restructuring activities in 2005.

We ended the year with almost $1.5 billion in cash on the balance sheet despite payments of approximately $550 million in restructuring cash and debt repayment of $805 million.

We achieved our full-year debt payment goal by paying $561 million of debt in the fourth quarter which includes $542 million of our secured term debt.

We recently announced plans -- our plans to sell our health group to Onex for $2.35 billion in cash at closing, plus up to $200 million in additional future payments.

The transaction is expected to close by mid-year, and we will initially use $1.15 billion of our anticipated proceeds to repay the remaining outstanding secured term debt.

As Antonio mentioned, we will be in New York for an investor meeting on February 8th, and I look forward to meeting many of you in person for the first time at that meeting.

Thanks very much, and now Antonio and I will be happy to take your questions.

Thank you.

The question and answer session will conducted electronically. [OPERATOR INSTRUCTIONS] We'll take our first question from Jay Vleeschhouwer with Merrill Lynch.

Thanks.

Good morning.

Antonio, I'd like to ask you about the licensing business in Q4 that was a substantial part of the profitability of CDG, even more so than in the third quarter.

I belive you said in your prepared remarks that you think the IP licensing could be similar in '07 as to '06.

And the question is, what gives you the basis for that expectation?

I would think that IP licensing is -- is somewhat unpredictable.

Secondly, with respect to CDG, have you changed your priorities at all from '06?

Are you still predominantly margin focused, or are you at the point now where you could begin to resume some more focus on -- on driving growth?

Then a follow-up, thanks.

Okay.

Well, first, I didn't say -- I said that we'll be at least as good so actually, I expect it to be better than that.

Why do I say that?

I -- I've been -- I said a few times before that this is very complex because what we do is we look for a combination of things in these deals.

Normally it's a multi-year contribution that we'll receive and the majority of the deals that we make, there is some multi-year contribution that will come to Kodak.

On top of that, we have business relationships and -- and supply agreements across the companies.

We have co-design in certain cases.

There's a variety of things that -- for competitive reasons we don't disclose.

But to answer your point about why would I say that at least as good is because since most of this deal, they've been signed already in the last few years, I know for a fact at least where I'm going to get in 2007, and -- and we have other prospects.

That's why.

I think the third part of the question was do -- did we change our strategy as far as growth?

I -- in the past, I said that the first two years, digital growth was mandatory for us to get to the scales necessary to be able to design with efficiency, purchase with efficiency, distribute with efficiency.

We -- we have those volumes.

I said as well that the last two years of the transformation we will be focusing more -- it's not that we won't focus on this sort of growth, but we'll be focusing more in -- in digital -- digital margins.

And part of the reason is because this -- this second part of the transformation the last two years, which there's only one left, we're going to introduce a series of new products that based on Kodak technologies, that although they're very -- they have a very high value creation embedded in the business model, they -- they will have losses while they're ramping up volume.

Therefore, it was very important for us to have a -- a stable base to launch -- to launch this product.

Now I'm not saying that we're not going for -- for growth next year.

I will -- we will go into, into more detail on the 8th.

But we will start to getting growth from our digital business next year and we'll talk about it on the 8th.

All right.

The follow-up is with respect to GCG, you had mid-teens growth in the digital prepress area and I'm wondering if you think that is a sustainable level of growth for that part of the business, and do you expect that GCG as a proportion of the Company can and will continue to grow disproportionately, particularly given that its gross margin structure is several hundred basis points higher than that of Consumer Digital?

I will answer simply saying that the possibilities for growth for GCG next year are higher than the possibilities for growth in -- in Consumer Digital given the status of both -- of both portfolios.

But yes, they have opportunities for growth in many areas.

Thanks, Antonio.

Thank you.

We'll take our next question from Matt Troy with Citigroup.

Good morning.

I had a question first on the film business, and Antonio, your thought process there.

You've now realigned those businesses under a more streamlined operating structure, under a single umbrella.

And I think certainly you've proven you've been able to make difficult decisions in terms of moving the camera business to Flex, moving the health business to Onex.

If film is going in one direction, I guess --

Matt, we didn't move the camera business to Flex.

The camera business is a Kodak business.

Okay.

So are you reversing your call earlier in the year that you would partner with them and move that business to them?

We -- we partner with Flex, yes, we didn't move the camera business to Flex.

We partner with Flex.

They are going to make the cameras, right?

No.

We design the cameras.

We make key element of the cameras.

They complete the cameras, and then we sell the cameras.

All right.

I fully understand that.

My point is, you're making some good --

The whole industry does that, Matt.

The whole industry does that.

Right, and half your business was that or roughly thereabouts before.

So again, I think it's the right decision.

My question is, since you're making those tough decisions, if film's going in one direction and arguably long term there maybe only need to be one person making film, is film a business that you need to be in?

If I think about your thought process, it's a very strong cash flow return business, I realize.

But if I think about the options -- outright sale, contract manufacturing or continuing to wind the business down, how do you think about the film business over the next three to five years?

If there's going to be one man standing, does it need to be Kodak?

Then I have a follow-up.

They're all -- they're all good options, the ones that you mentioned.

I mean, we look at every business constantly to see what is the best way for us to manage those businesses whether we should keep it within ourselves, whether we should partner.

So you mentioned fee options.

Those options are in front of us, and right now the business, the first thing we needed to do was to get the cost structure to align with the revenue decline.

I think we've proven that we -- that we knew how to do it, and it's performing very well.

We will keep watching the development of this -- of this business is -- and we will take -- we will make decisions that will lead to the best -- to the best value for our -- for our shareholders.

We don't exclude any of the options that you mentioned there.

We have not made any decision on any either.

Okay.

Then on the GCG side, certainly the progress with NEXPRESS is impressive.

One of the questions I think I ask every quarter or every other quarter is product breadth is obviously a focus relative to Xerox, some other folks out there that are making concentrated bets in this segment.

If I think about build versus buy, if you could just help me in terms of your thought process around the digital press technology?

Can you move page speeds up and down in-house or might you seek to partner with someone like Canon or Konica or a Japanese OEM to expand that portfolio later into '07?

Thanks.

Full agreement with you that we need to expand the portfolio within -- we've been trying to -- haven't been easy, an easy thing to do.

At this point in time, we have partnerships planned that will help us to do that.

But we're not -- we're not quite there yet.

But the preferred path for us will be a partnership.

Okay.

Thank you.

We'll go next to Jack Kelly with Goldman Sachs.

Good morning.

Antonio, just going -- looking at CDG, if we look at revenues in the fourth quarter, they were down 25%.

You had indicated earlier that Kodak made a conscious decision to not participate in certain portions of the market.

Should we conclude then that the -- that all of that 25% was due to that decision, or can you share with us what the market might have declined?

So what I'm trying to discern is 25% down in revs, how much because of your decision versus what happened to the market in the fourth quarter?

Most of it I think -- most of it, it was our own decision, and it was our choice.

Either we didn't have the -- the right cost for the product to participate in those really low prices or the prices were so low that we wouldn't participate in any case.

We still have an objective to be one of the top three suppliers.

So -- which we watch very, very carefully, and we think we can.

We think we have the technology, the brainpower, the distribution and the product portfolio to do so.

We just have to manage carefully the earnings because although this is a -- a great enabler for the Company, it's very important for our semose strategy.

It's very important for our printing strategy.

It's very important for all sorts of relationships that we have in the market.

We know that the margins for digital cameras were never going to be huge, but what we're trying to do is -- is balancing the -- being a strong participant in certain segments of the market because it's important for all the other things that I said, and at the same time, increase margins from where we were last year and the year before.

This is the plan we have.

I look at this -- at this action last year as -- as a one-time deal.

I don't expect, we'll talk on the 8th about this, but I -- I don't expect similar results as far as the decline next year.

I -- we'll talk in detail about the size of the market and what we expect to do.

But it wouldn't be anything even close to what we've done this year.

But the X-ing out your own actions and the impact on revenues, you're basically saying the market for digital capture products was down in the fourth quarter, and looking out to '07, do you see any change in that, in the underlying -- ?

I'm not sure that's the case.

I mean, you're talking about revenues or units?

No, I'm just -- well, I'm talking about revenues and/or units.

But you did disclose the revenue number so that's the 25% decline.

Was that all of you, or is the market weak?

And if the market was weak, how does that play out in '07?

The best understanding that we have, the data of the market is coming little by little now.

So I don't know that we have all that data that you -- that I will need to answer your questions precisely.

But I believe that most of that decline was caused by us, by our decision.

We believe that the market, the market grew about -- overall about 11% for the year.

That's the best data we have.

Okay.

Okay.

So -- and so this is -- it was caused by, by our decision, which by the way, I -- I would like to remind everybody that this decision was taken on January 30, 2006.

And the reason why we took that decision is that the actual results of the industry during the 2005 holiday season were not as good as anybody in the industry thought they were going to be.

And we could smell at the time that this -- this increased pressure and presence was going to happen over the year because it was going to be a lot of inventory and therefore, especially in the low end business, going to happen.

That's why we took the decision so early.

Okay.

And just moving over to gross profit for CDG.

It -- it rose $76 million fourth quarter-over-fourth quarter.

Based on the discussion you had in the MDNA, it appears that about $66 million that came from incremental licensing revenues and so assuming though numbers are right, the thrust of the question is, it doesn't look like the underlying profitability of the business, ex-licensing, improved a lot and I just --

Well, I think the -- I don't know what you call the underlying.

For me, the IP revenues and the IP profits are part of the businesses, is the way we decide to use our IP portfolio.

You can understand that you can use your IP portfolio to stop people participating, which is -- don't think is a wise thing to do.

Or -- or you can -- which obviously will help you with your profit margins.

Or the logical thing to do and that's what the industry does, is you get on -- an agreement with this companies and you -- you find a mutually beneficial deal.

The -- the same patents and the same investment that was put into developing of those patents is the investment that now you charge on the cost of the digital cameras.

And it's not fair to say that IP doesn't count.

I mean, IP -- I mean ideally, you would -- you should -- you should put all these costs associated with R&D across everything that you get from the R&D including IP, of course, because [inaudible] you can't do that and dangerous to report this way.

But for me, this is part of the business.

It's an integral part of the business.

And that's why specifically I put a note in my comments today that say that we expect to get at least the same in 2007 and for years to come.

Yes.

Well, it's not -- it definitely counts because it's real.

But the point is it -- everything else in that group in terms of products don't look like fourth quarter the earnings improved.

So that's really the thrust of the question.

It's not dismissing the IT.

It's there.

It just doesn't like the -- I say underlying, the product revenues or the product profitability doesn't look like it picked up much.

I -- we did mention an improvement, a clear improvement in kiosk, a clear improvement in -- in GALLERY.

So I -- I don't know if -- I don't think your statement is, is correct.

Okay.

And just on the traditional side where the performance was traditional Film and Photofinishing where the performance was pretty impressive, with -- with 8.6% margin.

The question is, Antonio, do you think from this point on that even with revenues declining there you can improve margins so that we're going to continue to get a positive earnings performance even though the revenues are continuing to tail off?

That's what we're going to try, and if we cannot achieve that, then we'll look for another alternative.

Which would be cutting costs.

Okay.

No, no, not just cutting costs.

It would be otherwise to dispose of the business or do something else.

If the business is not sustainable for our shareholders, we'll find ways to deal with it.

To actually sell at some point if it didn't -- if you couldn't get decent profitability, sell the Film and Photofinishing business?

Yes.

Now, what we know as of today is that business has been improving year over year.

We have, we have great performance.

We're very happy with the business.

We're looking at this year with a similar performance.

And then we will be seeing how the industry evolves.

How big -- how big are the declines, what happens with the -- with the raw materials, how many people remain in that business.

There are a lot of developments they can influence this.

Okay, and just finally --

And by the way, remember that the biggest part of the business is EI and that was steady again last year and the year before and the year before.

Yes, Entertainment.

Yes, got it.

And finally, last year at this time, you offered up your estimate of what digital -- total digital profits for the Company would be which was the $350 to $400 number.

You did the $343 this year.

What would be a good range for '07 for total digital profits for --?

We'll do that on the 8th.

We'll -- we'll keep improving, but let me -- let me wait until the 8th to get into that conversation.

I could explain better why the numbers.

Okay.

Good.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS] We'll go next to Jake Kiminny with Morgan Stanley.

Hi, good afternoon.

Could it be possible for you to outline your cash priorities for 2007, seeing as pro forma for the sale of the Health business you're going to have a very large cash position, and assuming the large cash restructurings go away in '07, your free cash flow should be better than it was in '06.

Okay.

A few points, in '07 the restructuring for -- the restructuring casual notes will go away. 2008 will, but not in 2007. 2007 is the last year of the restructuring.

Second, as much as we would like to, I would like to have my hands on that cash, we don't have it yet.

The deal has to be closed.

We think it's going to be closed sometime in the first half.

When that will be closed.

Will we know for sure that we will spend about $1.2, $1.15 to pay debt.

The rest we have a variety of options that need to be discussed with the board and I don't have an answer for you yet.

Okay.

And would it be possible to give us some sense of what you think investable cash flow or what you now call net cash generation will be in '07?

For the year -- on the 8th, again, we'll talk to that.

We won't have the time -- if I give you a number now, I won't have the time to explain why we reached that number.

The -- and why we have the -- the two, three hour meeting on the 8th.

We'll do a much better job at that time.

Okay.

Okay, I tried.

Thank you.

Thank you.

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

Thanks.

A couple questions.

Going back to the cost cutting which significantly showed through this quarter, what was the inflection point or what happened this quarter that finally allowed the significant cost cutting that you've been doing to show through the results in such a big fashion?

It's -- Carol, there's been so many things that we've been touching.

I don't know that I can point at one that is an inflection point.

When you start with this restructuring, which has been so long for three years already, there are things that appear the moment you make the announcement, and others that keep coming along like the string of things that come along.

And then a building gets empty, it's completely and then something else comes by.

I can't point out a one thing that happened the quarter that was different than anything else.

Maybe -- I don't know.

Maybe the fact of this is sort of high -- high revenue quarter, then you -- you see the -- the SG&A as a percentage of revenue lower.

But when you look year over year, we've been reducing SG&A every single year.

Okay.

And --

Frank, do you have anything else?

Yes.

I mean, you've got a -- a full run rate during the quarter on a partnership with [Questronics] and CDG.

You've got G&A and footprint full quarter impact on some actions in FPG, and you have some improvements in the rate of rationalization of GCG.

So across the board, a lot of things picking up steam and full quarter impact.

Great.

Thank you.

A couple more questions.

You've always talked about or the Company has already talked about considering different options for all the businesses.

You got the question from Matt about the film business.

When you talk about potentially considering other options, is Photofinishing part of that discussion or now that we're going to move Photofinishing into CDG, that you believe that's core to the future digital profitability of the Company?

No, we -- we think Photofinishing is an integral part of our -- of our future, Carol.

I -- there might be different technologies hopefully.

There might be different business models but we think retail is a -- is a crucial part -- is a crucial destination for -- for customers when it comes to photographic products.

And we've -- we thought we don't have any -- any plans to abandon that.

Okay.

And my last question is on the Graphics business.

Revenues came in better than expected.

But if I look at the breakout between the U.S. and international, it seems like international did really well, but the U.S. was weak, down I think 10% if my memory serves me.

What were the dynamics there that led to that divergence of performance?

I think it's normally like that, Carol.

We always had a better business in place internationally than we had in the U.S.

And our presence in some of the digital printing as well is stronger internationally.

We keep -- we keep growing our presence in the U.S.

But I think we always -- the balance of that business has been always favorable to international versus the U.S.

I don't -- I can't point at any issue that we have in the U.S.

It's just -- keep growing the business, whatever we have in both sides of the ocean.

Okay.

Thank you.

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

The rate of decline in Film and Photofinishing seems to be going down.

What do you attribute that on?

Hard question, Ulysses.

I wish I know the answer to -- if that decline is going to slow down more or not.

It's really hard to know.

We need to track that quarter by quarter.

We still think -- we still think it's going to go, it's going to continue to go down.

There is this theory that one day we'll stop going down, and we'll -- we don't put that in our numbers.

In our -- in our plan of record, we continue to assume that film-based products, film-based products, I'm not talking about paper, but film-based products will continue to go down significantly still.

There might be a time that will slow down, but it's not going to be within the next three years, we don't think.

What's happening with paper, though, your silver highlight paper as part of -- of the mini labs.

It's actually a very competitive printing technology for the mid-sized volumes that are -- are necessary in retail.

That is the reason why we are moving, we are moving paper to the -- to CDG next year because it's -- in fact, it has become part of -- of the digital work flow.

You might go to retail in -- in one lab and print your pictures, take your pictures from your digital camera, but it will be printed with a silver highlight paper because there is -- because there is the opportunity to do so.

And -- and the -- and it's very competitive.

So we believe the paper is going to remain there for a long -- for much longer because there is no other media marking technology to date that could compete efficiently with the cost and the -- and the quality of silver highlight.

Therefore, paper -- we have hopes for much longer life.

Film, so far, we continue to believe it's going to go down and we will plan for it.

On another subject, a favorite of mine, you had in the "Other" category a loss of $214 million, $71 million in the fourth quarter.

Can you give us some idea as to what percentage of these losses are created by your inkjet project?

A lot.

Would that help?

A lot.

Meaning more than 50%?

It's a lot, Ulysses.

A lot.

But what are the other components?

You have [olade] in there, yes, but it can't be as big as the inkjet project.

Anything else?

No, no.

Olade actually, some of it is paid by itself because of the -- of the licenses that we have.

Yes.

So the licensees pay for some of their own investment.

The majority is inkjet.

And we'll have news about inkjet on -- on February 8th.

So in theory, as you move from development to marketing of the inkjet projects, these losses should start declining, don't you think?

Well, yes and no.

In the inkjet business, you still have to build your -- your install base for a while.

So of course you're going to get revenues and that will help.

But you're still going to have losses.

But you get revenues and losses.

That's the question of beginning of magnitude.

That's what I was wondering.

Yes.

Yes, yes, your statement is correct in principle, yes.

The -- finally and hate to keep you that long.

Shutterfly is talking of gross margin at their online business of 56%.

They're smaller than you are, considerably smaller.

So in theory, your gross margin should be at those levels, shouldn't they?

The business at the -- the Kodak GALLERY is a great business for the fourth quarter.

We made good money in the fourth quarter because of the volumes.

But we have to get with -- with the Kodak GALLERY is rates and volumes a little more during the rest of year and we'll have a great business in our hands and that's what we're doing.

We'll keep growing, and we'll get there.

How about charging for storage?

Or for --

We actually do have programs that charge for storage, Ulysses.

I will --

I thought you abandoned them.

One of the premium packages, I think you should sign for that.

I had signed for it, but they're not charging me anymore.

Oh, they are charging.

I'm going to take care that they charge you now.

It's not much.

It's like $24 a year.

But you get incredible, incredible benefits out of it.

It's just the -- the adoption rate is -- is low for those things.

Have you considered doing it a bit differently?

Yes, we do.

Meaning based on the volume of storage rather than a flat fee for storage?

We have all sorts of options that's we tried in focus groups and the small communities and we keep trying.

Yes, we have -- we have a variety of them.

Some are based on the views -- certain usage you don't pay anything.

Others are if -- if you allowed advertising, you don't pay anything.

Others -- we keep testing with -- in small communities, different ideas.

In the meantime, we just -- we're just building up the base, which is the most important thing.

Your base is now 50 million or more?

It's more.

It's a little more than that.

More than that.

Thank you very much, and I apologize for taking so much of your time.

It's okay.

Thank you.

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

Hi.

Good morning.

Good morning, Shannon.

Just One clarification, and I'm not beating the IP bandwagon of whether or not we should include it.

All I'm trying to find out here is when you say that you expect IP to be up in '07 versus '06, you had I think $315 million in nonrecurring IP license revenue in 2006.

Are you saying that the -- basically the recurring, which we don't know because you don't break out, plus the $315 million will be up in '07, or are you saying --?

I think that number was cash, Shannon, if I recall well.

Did you say revenue?

Well, I'm sorry.

I meant -- however you want to look at it, what I'm trying to figure out, I'm taking any data that you guys have given us.

So --

Yes --

If we think about it from a cash standpoint --

Let me give you my -- the best again.

First of all, Shannon, it's not that we don't want to hide these numbers, okay.

Well, you're not.

You actually broke out --

We want to go as much -- we are really proud of our IP, IP program.

And I think we should.

It shows that we -- we have a very valuable asset.

We are -- but we're building relationships with various companies.

And -- and there are certain few ways in which these deals have made.

So I'm not at liberty to -- to share data that -- that maybe you would like to have.

What I'm -- what I was trying to say, no matter how you read, the IP program that we had in 2006, my expectations is to be at least like that in 2007.

So whatever conclusion you get for -- from the data, from the proxy, from wherever it is, whatever conclusions you get from that, you're going to assume that it's going to be about the same in 2007, you will be fine.

Okay, I guess people are just trying to figure out what's recurring versus what's one-time because one-time is more like last time.

Yes, this is -- this is because -- the deals that get published with names are only caused because -- if you have a legal case when you have to publish the name of the company.

But we have -- we have deals with many more than those two companies that they will publish.

Okay.

And out of -- out of all of those things that we have, the majority, I said 80%, 85% of them are multi-year deals.

They are recurring in some shape or form, whether it's cash or revenue or -- and then the other 20% are things that are concluded and they are non-recurring, approximately.

Can you tell us what you ended the year with in terms of deferred revenue from licensing?

No.

We don't do that, Shannon.

You'll put it in the 10-Ks, though, right, because it was last year.

You can probably figure out in the-- yes, when you --

No, it was published last year.

I'm just verifying --

I know, I know.

On the 10-K, you probably get your best analysis of the deferred revenue that we'll get from this deal.

And I think it will be a pretty -- a pretty clear deal.

Okay.

My other question is just with regard to entertainment film.

Obviously Eric left.

I'm just curious what your thoughts are in terms of that business, flat this year or flat this quarter -- but how are you going to continue to dry up the business since Eric's gone, and how comfortable can we feel with the management team that's in place?

Just any update because we really haven't talked about it since he left.

I -- I still think it's a wonderful business, Shannon.

I think obviously I know that digital will come one day, and it will take first a portion and then more.

But for, for many reasons, I believe that this is a very valuable business for us, and we're going to manage this year exactly as we managed in 2006.

I will look at other options that we have.

We're always looking at options that we have, for that business and for any other one.

And we'll be -- we will be watching the key players in this market.

The -- the producers, this studio, the technology, and -- and then we will judge if there is an imminent risk to the business and what it is we should do about it.

We don't see it like that today contrary to many of the things that you read in, in the generic press.

And the proof is that we've been dealing with this issue since I came here three years.

And -- and the truth is, nothing has happened.

The business continues to be very stable, very profitable.

It is a great business.

As far as the management team, Mary Jane Halia is an incredible leader of this company.

She -- she used to work in R&D.

She worked with all the film business of the Company.

She's a phenomenal leader, and I think she's the right person to run the show.

Okay.

Thank you.

Thank you.

And ladies and gentlemen, we have time for one final question today.

It comes from William Dietrich with Citigroup.

Yes, hi, guys.

I noticed you had a nice cash balance at the end of the quarter, and just wanted to check and confirm that your revolving facility was still undrawn and ask if you had any plan to do anything with that facility in the future?

Thanks.

I have no -- no imminent plans for any changes in that facility and it remain undrawn given the cash, given the cash balance and the strong balance sheet.

We don't have any draw on that currently.

Good, great.

Thank you.

And at this time, this does conclude our question-and-answer session.

I'd like to turn the call back over to Mr. Perez for any closing remarks.

Thank you for attending.

Again, I feel this was a great quarter for a great year for us.

Sorry.

One more -- one more year to go.

One more year to go with restructuring.

Hopefully not a full year -- maybe only nine months.

I'm very excited with the new product introductions that we'll talk about on the 8th, in the -- the improvement in every single portfolio of the Company basically that we've done this year.

So I think we -- I feel more excited than ever with, with the possibilities of this Company.

Thank you very much.

This does conclude today's conference call.

We appreciate your participation.

You may disconnect at this time.