Eastman Kodak Co (KODK) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the Eastman Kodak second quarter 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, Ms.

Ann McCorvey.

Please go ahead, ma'am.

Good morning, and welcome to our discussion of the second 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.

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

For example, references to the company's expectations for net cash generation, revenue growth, digital revenue, digital revenue growth, digital earnings, digital earnings growth, entertainment imaging film volumes, earnings from operations, unit volumes, restructuring, gross profit margin, target business model, and target cost model, are 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 as any forward-looking statement needs to be evaluated in light of these certain important factors and uncertainties.

Also, 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 the website.

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

Thanks Ann, and good morning, everyone.

In the quarter we were essentially on our plan for revenue and ahead of plan for earnings.

Our cash usage in the first half was similar to last year, and we continued to be committed to delivering full-year net cash generation in excess of $100 million after spending about $600 million on restructuring as we discussed on the first quarter call.

We have made significant progress.

And now we have a solid first half behind us.

Giving us confidence that we will achieve our full-year key strategic objectives.

I'm especially pleased by our progress in expanding the breath of our digital portfolio.

As well as our significant progress in improving our supply chain management and platform design efficiencies.

The year-over-year improvement in gross profit margin illustrates that we are on track to achieve our target business model.

We are capitalizing effectively on a significantly improved product portfolio, supply chain, and go-to-market structure in our digital businesses.

This has allowed us to reach another milestone of positive earnings from operations for our digital businesses in the second quarter for the first time.

And we continue to take costs out ahead of the revenue decline in the traditional businesses.

Kodak employees around the world are working hard to deliver the SG&A reductions required to achieve our business model.

And I'm proud of their performance.

The year-over-year SG&A was down $87 million or 2 percentage points of revenue.

Digital revenue growth has begun to accelerate and while there is work to do in the second half, we look forward to achieving our goal of 3-5% digital revenue growth for the full year, which represents double digit growth for the second half driven by the expanded breath of our digital portfolio both in CDG and GCG.

Our confidence is reinforced by the positive reception we have receiving for our new line of consumer inkjet printers, our digital picture frames, or expanded line on express digital color presses, and our work flow software for commercial printers.

I'm very pleased, as well with the fact that we have designed and introduced the new Kodak Easy Share C513 digital camera to include a Kodak see more sensor.

While we already started to design see more sensors for other companies.

Although we don't have any new intellectual property deal, our plan is on track to achieve the $250 million we reported previously.

Now let's spend a few minutes on operational highlights for each business.

We will start with the Film Products Group, FPG, which perform exceptionally well in the first half.

During the second quarter, FPG revenues declined 15%, yet the business has been able to take manufacturing and go-to-market costs out ahead of the decline of revenue.

Improving both year-over-year gross profit margins and earnings from operations as a percentage of revenue.

Consumer film capture revenues declined 30% in the quarter while entertainment, image film revenues were consistent with last year.

While entertainment imaging field revenue was up 3% for the first half, we continue to expect that for the full year entertainment imaging film revenue will be in line with our forecast in similar to the prior year.

We now expect FPG to end the year with earnings from operations at the upper end of the 13-16% range.

Turning to graphic communications group, GCG.

As anticipated GCG digital revenue growth accelerated during the second quarter, growing 6% year-over-year.

We're pleased with the momentum generated by the second quarter sales success of our digital printing and enterprise solution businesses.

We feel comfortable we will achieve the targeted 6-9% digital revenue growth for the full year.

In conjunction with the digital revenue growth, GCG total gross profit margins improved 1 percentage point despite the fact that we had a negative impact from increased aluminum costs.

Now consumer digital imaging group, CDG.

CDG's second quarter results are evidence that the improvements we begun to implement in the second half of last year to our product portfolio in go-to-market structure are working.

Total gross profit margin improved 5 percentage points with significant improvements in digital capture and devices, which was partially offset by the decline in the traditional business and the introduction of consumer inkjet printers.

CDG's digital revenue was flat, reflecting the decline in snapshot printers, which was offset by the introduction of digital picture frames and the new consumer inkjet printers.

We have a good lineup of digital products for the second half, all across the CDG product lines.

Including competitive digital camera models at all key price points.

This positions CDG digital for double digit revenue growth in the remainder of the year.

I continue to be pleased with the progress we're making with our new line of consumer inkjet printers.

Consumers are embracing our value proposition, especially the claim of being able to print with premium ink at up to 50% savings.

This claim has been confirmed by QualityLogic, a third party provider.

Production is ramping up, ramping up well, and the third printer in our line has been added to the retail offerings.

As our capacity increases, we're expanding our distribution channels.

As of now, our printers have become available as well online through Dell and Amazon and very soon we'll be adding additional retail partners in addition to the Best Buy and Office Depot in the U.S.

and Dixons and MediaMart in Europe.

Our goal continues to be to sell at least 500,000 units in 2007, which will put us in the path to grow this business to achieve revenues on the order of 1 billion by 2010.

Now we'll turn it over to Frank for the financial overview.

Thanks, Antonio, and good morning, everyone.

I'd like to spend some time discussing our second quarter financial results and then Antonio and I will be happy to take your questions.

We're pleased our second quarter performance was in line with our expectations.

We are on track with our digital revenue growth, digital earnings, net cash generation, restructuring plans, and in very good shape as it relates to cost reductions, including SG&A.

We believe all of this positions us well for achieving our goals for the full year.

As we have mentioned previously, we managed the company on an annual basis.

Consequently, we're focusing on those quarterly performance metrics that reinforce our view of our full-year performance.

Loss from continuing operations for the second quarter was $173 million pretax and $135 million after tax or $0.47 per share compared to a loss from continuing operations of $294 million pretax and $355 million after tax, or $1.24 per share in the second quarter of 2006.

This represents a pretax improvement of $121 million verses the prior year and an after tax improvement of $220 million or $0.77 per share.

Second quarter results include items of expense impacting comparability totaling $266 million dollars after tax, or $0.92 per share.

This is comprised mainly of restructuring charges of $248 million or $0.86 per share.

The prior year second quarter included items of expense impacting comparability totaling $206 million after tax or $0.72 cents per share.

Both second quarter and first half revenues are essentially on plan.

For the second quarter, digital revenue grew by 3% while traditional revenue declined by 17%.

Consolidated revenue declined by 7% and included a 3% favorable exchange impact.

Based upon our results to date, we're reiterating our goal of achieving 3-5% digital revenue growth for the year.

With respect to gross profit margin, we're very pleased with the continuing progress verses the prior year and prior quarter.

The 26.2% margin in the second quarter compares quite favorably to the 21.4% from the prior year.

This improvement of about 5 points was achieved through continuing progress and manufacturing footprint and related cost reductions and slight improvements in mix and foreign exchange, partially offset by pricing, and to a lesser extent, volume.

This improvement was also achieved despite an increase of approximately $36 million in aluminum and silver costs.

Looking forward, based upon the seasonality of our business, we are still positioned to achieve our 2007 target gross profit margin of between 25% and 26% of revenue.

SG&A was reduced by $87 million or 17% and declined as a percent of revenue from 17% in the year ago quarter to 17% in the current quarter.

Year-to-date, SG&A decreased by $199 million or 19%.

We continued to show significant progress toward our target cost model, which is to achieve a run rate for SG&A as a percent of revenue of 16% by year-end.

Given the substantial progress to date, we are confident in our ability to achieve this goal.

R&D costs totalled $128 million for the quarter or about 5% of revenue and in line with our plan.

The spend as a percent of revenue is higher, if applied to the revenue associated with our digital businesses where we focus most of our spending.

Second quarter pretax restructuring charges totalled $316 million verses $224 million in the year ago quarter.

We completed the sale of a manufacturing site in Shaman China, which resulted in a non-cash restructuring charge to the P&L of approximately $238 million.

Second quarter cash restructuring payments were approximately $120 million.

We still fully intend to complete the major restructuring this year.

And as we stated previously, we're also very confident in achieving our target cost model.

We continue to track cost reductions along with restructuring charges and associated cash payments.

To date, we've been successful in reducing our costs in a very efficient manner.

So we'll be sure to keep you posted as we continue to refine our analysis as we work to complete the remaining restructuring in the back half of the year.

Second quarter digital EFO was $19 million verses a loss of $78 million in the year ago quarter, an improvement of $97 million.

Year-to-date digital losses are $24 million compared to year-to-date losses of $169 million in the prior year an improvement of $145 million.

It's important to remember that the second half of the year is typically much stronger in terms of earnings performance in our digital CDG and GCG businesses so we remain confident in our full-year digital earnings forecast.

Consumer Digital Imaging Group EFO improved by $78 million from $133 million loss in last year's second quarter to a $55 million loss this year.

The year-over-year improvement reflects the favorable impact of SG&A reductions, improved gross profit margins, and digital capture and kiosks, and increased intellectual property royalties, partially offset by pricing in various product lines, volume declines in traditional retail printing and increased costs associated with the ramp-up of our new consumer inkjet products.

EFO in the Graphic Communications Group for the current quarter was $44 million verses $16 million in the year ago quarter, an improvement of $28 million, primarily driven by higher volume and digital plates and work flow solutions, cost control initiatives in both manufacturing and SG&A, and favorable foreign exchange partially offset by the negative impact of aluminum and modest pricing changes.

As a result of cost improvements, the Film Products Group posted an EFO of $137 million for the second quarter verses $119 million in the year ago quarter on a revenue decline of 15%.

We continue to see year-over-year improvement in our total traditional earnings reporting $112 million in earnings from operations in the current quarter compared to $81 million in the year ago quarter.

This was driven by the continued strong performance in our Film Products Group.

Overall, other income and interest expense improved by $27 million verses the prior year quarter, this is primarily driven by the benefits to both interest income and interest expense from the impact of cash generated by the Health Group divestiture.

Net cash generation for the second quarter reflected a use of $251 million, an increase in usage verses the prior year quarter for the first half of 2007, cash use of just over $700 million was in line with last year's figure of $691 million.

As expected, we are showing significant cash usage in the first half of the year, due primarily to seasonal effects, and increases in working capital associated with projected second half revenue growth.

We expect net cash generation to improve in the second half consistent with seasonality effects and planned initiatives to accelerate revenue.

We also continue to focus on working capital efficiency initiatives across all elements of the cash conversion cycle.

Cash expenditures for the quarter were $59 million, down $24 million from the year ago figure of $83 million, reflecting improved efficiency around spending.

We ended the second quarter at $1.925 billion in cash and cash equivalents.

This balance reflects the net effect of receiving pretax cash proceeds of $2.35 billion from the Health Group divestiture and fully repaying the $1.145 billion of the outstanding secured term debt.

Our debt currently stands at $1.624 billion.

We're very pleased with our strong balance sheet and the significant liquidity it provides us.

Overall, we remain confident that the company will achieve previously stated 2007 goals for digital revenue growth of 3-5%, net cash generation in excess of $100 million.

And our digital earnings goal in the range of $150-$250 million.

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

Thank you, sir.

(OPERATOR INSTRUCTIONS) And we'll go to Jay Vieeschhouwer with Merrill Lynch.

Thanks.

Good Morning.

Frank, I'd like to ask a corporate-level question first and then for Antonio turn to the segments.

Could you talk about where you see capital expenditures going?

Do you see them continuing to tail off as we saw in the first half?

Or where do you foresee having to still make significant commitments, if any, to capacity notwithstanding the footprint reductions you've otherwise made in the company.

Secondly, there was a substantial year-over-year increase in inventories.

Is that second half preparation for the home printers?

Or is there something else, as well, driving the inventory change year-to-date?

Then question for Antonio.

Okay, sure.

On the CapEx, Jay, we still expect year annual CapEx this year to come in at between $300-$350 million range, as previously communicated.

Combination of capacity in various parts of the business as well as new product tooling and things like that.

We're still holding to that number for this year.

As far as inventory goes, a couple of factors driving that.

One, as you said, preparing for the double digit digital revenue growth in the back half of the year in both CDG and GCG.

Another factor that did impact us in the second quarter was a build in inventory related to paper as a result of the closing down of the Shaman China facility.

So we built a little bit of a bank for the transition of that facility to other facilities.

We expect a lot of diligence around working capital in the back half of the year to get ourselves where we want to be.

Okay, for Antonio first with respect to CDG, two things, could you comment on the restructuring benefits of the changes you made in your camera distribution and portfolio over the last year?

Are you pretty much done with the retraction of your exposure in different markets?

and are you now prepared to start seeing some year-over-year positive comps in cameras and in profitability for cameras longer term, which I think is more important.

Is it really the home inkjet printers, you think that will provide the most earnings leverage in CDG?

Or will it necessarily be elsewhere that you would get the best leverage in long-term profitability from CDG, mainly retail printing?

Okay, Jay.

We expect any, every product line to make money in the company.

Some, obviously will do -- will produce more than others.

But every single one has to standby itself.

And contribute to the bottom line.

The first part of the question was about the work that we've done.

The redesign that we've done in CDG.

It affected a few things.

The first one was the -- the way we design our products, we have improved dramatically in the way we design our products.

We use rather than individual products, we use more platforms.

This is something that you heard me say now for three years.

And this has been a process.

But the company has made terrific progress in being able to design out of the same platform different products, and therefore, satisfy customer needs on a much lower cost.

And dealing a lot better with high cost parts.

This is one element that you can see the affect right now.

The 5 points improvement in gross margins comes in part from that and part, as well because of the supply chain.

We had a very -- well, we thought it was efficient supply chain by working through others and with others and taking advantage of the volumes that others have, we still have control over the whole process, but at the same time we took advantage of a much lower cost and much more efficient way of doing our products and distributing our products.

That you can see, as well as part of the 5-point improvement.

I think, as well, is the product portfolio growth.

The product portfolio growth is a lot more balanced.

We have products that we didn't have before.

And they cover the size of the customer better than we have in the past.

And so we compete better against our competitors, and we're in better shape.

Who is going to -- we're not bettering the company's just one product line.

The inkjet group is very important part of the company, but so is digital capture and is getting to be a very, very nice business.

And as you notice now, although you didn't ask me the question, we are going back into the low-end of the product line.

If you remember a couple of years ago, a year and a half ago I mentioned that we we were going to abandon the low-end of digital cameras because with the design strategy that we have with other platform strategy and without the supply chain that was appropriate for those products, that was not an attractive business for us.

I said at the time it was a temporary thing we needed to do our work, and then of course the fair element is now we are putting our own see more sensor into those cameras, which obviously helps, as well with the margins.

It is a combination of those.

Inkjet is very important, so is kiosks, which is continues to do very well.

You are going to see quarters where you are going to see more top line growth, other quarters where your going to see some bottom line growth.

This particular one, we have higher percentage of media than new installs.

And therefore, less growth in the top line.

But phenomenal bottom line.

That's important bottom line.

Retail printing is getting better too.

So we don't want -- we don't want to have any business in which we don't see a way to make money with.

Finally in GCG, your pre-press business was up only 1%, I assume that's even with currency benefits.

And your digital printing was also down 2%.

So I assume that's NexPress and Versamark.

So I guess the question is why do you continue, particularly in printing to see such little year-over-year progress when the overall production printing market seems to be doing reasonably well?

Are you seeing the joint benefit yet that you would like in terms of leveraging combined analog and digital sales, which is the strategy behind creating GCG?

Yes, we actually, we do.

We see the benefit.

You see the numbers, they include everything there.

They include black and white, they include color, they include all sorts of things.

You can't really go through the comparison and get to that conclusion doing that, Jay.

The color market we're doing very well.

We're very happy with our growth in the color market.

We do have -- we just introduced a bunch of products that are very important in NexPress for the color market that we're going to see the affect more in the second half than in the first half.

And we've seen already some of that effect in the second quarter, by the way.

You've seen the how well we've done in enterprise software.

That is the glue that links all these things.

And you mentioned the hybrid market.

The hybrid, the type of hybrid industry that we decided to serve was that is that working -- it's working you can see.

The great growth we had in enterprise software, which is basically serving as the glue for all of these customers to be able to deal with their [analt] printing, and remote printing, and digital printing and alike.

Yes, the strategy's working well.

The fact is is the digital part of GCG, which is the majority has grown 6%.

That's at the end of the day that's what counts.

They have improved the bottom line significantly.

I can't complain that it would have been a lot better without the aluminum, there's nothing I can do about the aluminum, but it would have been incredibly much better without the aluminum.

We hope to one day that will slow down again.

But anyway, even with that, they have a great top line improvement and a very important bottom line improvement.

And the best part for them is still to come in the second half.

I'm very pleased with that group.

Thank you very much.

Thanks.

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

Thanks, very much.

Just some a couple of questions.

One very broad on cash.

Now that you have the cash in hand after the sale of Health, can you talk about the process you're going through to decide exactly how to use that cash?

And over what time -- what's the timing when you may be able to share more details about what your plans are around the cash usage?

We don't really have a timing, Carol.

We haven't changed from the last time we talked.

We have those three options that we continue to examine with the board.

We're looking at the market, as well.

We're looking at our competitors, we're looking at the how our internal investments are coming along.

We're looking at the ecosystems to see if there's something that's attractive out there.

And we keep examining the possibility of buying back stock.

We haven't changed.

And we don't want to put a deadline to ourself.

We want to do what we think is best.

As soon as we have any indication of what we're going to do, we'll go public with it.

Okay.

And then a question on FPG.

It's been the margins have been up year-over-year in the first half and nicely so.

You talked about for the full year you now expect to be at the end of the 13-16% range.

But given the strong performance in the first half of the year to end up at 16% would imply that second half margins will be down year-over-year in that business.

Is something changing in FPG in the second half of the year?

Or is this just a way to be consecutive?

Well, that's the conversation I had with Mary Jane earlier.

As a person that runs.

We're trying to give you our best guess.

And that is our best guess.

Could it be better than that?

Yes, it could be better than that.

But we're trying to give you the best guess that we have.

We believe very much in this business, especially.

Yes, and we believe it has strong contribution to make to this company.

But we did have an extremely, extremely successful first part of the year that was a little better than we thought it was going to be.

Therefore, we're going to be prudent and say well, we don't know that we have the same reasons to believe that this is going to continue at the same level.

And we can be wrong, obviously.

But this is our best guess.

Our best guess is that the second half is going to be a little lighter than the first half in volumes, but we can be wrong.

If one or two (inaudible) make it big, then we can be wrong.

But this is our best guess.

Nothing else is changing.

The structure of the business is the same, nothing else except is basically is the revenue going to be as high in the first half or is it going to be a little lower?

That's going to be the difference.

Okay.

And my last question is on aluminum, can you talk about what you think the impact is for the -- what the impact was for the whole company of aluminum costs this quarter and what you think what type of headwind, sorry, is it going to be for the year?

Yes, Carol this is Frank.

It was about $21 million for aluminum, virtually all that in GCG for this quarter.

And it's a difficult call for the rest of the year quite honestly.

But our internal planning horizon tells us that on a proportionate basis the second quarter was about what we expected.

So for modeling purposes in our internal planning purposes, that's about the right range on a quarterly basis.

At some point, Antonio said, hopefully it will level off, but that was the impact this quarter.

Okay.

And you don't expect the pricing actions to really kick in till next year in terms of starting to offset some of the headwinds?

We expect some of those pricing actions that have been put in place already to get some affect in the second half.

Okay.

Got it.

Thank you very much.

We won't get -- we won't get it all back because this market like every market we are is very competitive.

There's only so much you can do.

But we put those actions in place.

Terrific.

Thanks a lot.

Thank you.

And we'll go next to Matt Troy with Citi.

Yeah, Frank.

I had a question as I reconcile EPS to cash EPS, it looks like the depreciation and amortization fell about 50 million sequentially accounting for about half the gross margin improvement.

Those are rough estimates, just backed out from your cash flow statement.

Is $200 million or thereabouts a good run rate for D & A to assume going forward?

Is the majority or entirety of the facility rationalization done so we can start to think about that number leveling out?

I was just wondering if you could help me with the trajectory there.

You're talking about on a quarterly basis?

Yeah, a number to use in the second half in terms of D & A.

Yeah, it might be a little bit heavy on an accrual basis in the second half.

It's going to continue to taper off as we finalize and complete the footprint production.

Somewhere in the range of $700 plus million for this year probably be a little less next year.

So, $200 million a quarter is probably a little heavy.

Okay.

Okay.

Antonio, I know it's still early days in the wake of the CMOS announcement, but based on your initial conversations, I'd be interested in your thoughts, where do you see the opportunity with that product as I turn the dial?

Is it selling co-manufactured chips into handset makers?

Is it licensing it to other chip manufacturers?

Is it putting into your own cameras?

I know it's some combination thereof, but just wondering where you see it, at least in the next 12 to 36 months, the largest opportunity based on your conversation so far.

Well, I think the largest is in the handset, Matt.

As you know we have close relationship with Motorola.

We're working diligently to help them develop improved cell phones with our see more sensors.

And manage to be able to announce, for them to announce something like that, we're working very hard to get it to market quickly.

That's best opportunity -- not just with Motorola, but our plan is to serve anybody that is in the digital capture markets.

Having said that, we have one camera that is going to come with our see more sensors.

We would like to see many more.

And other people, you've seen our see more sensors like today, some of our competitors, they use our CCD sensors already.

Right.

In their cameras.

So, we don't see a reason why if we have the quality that we believe we do have in the differentiation that we believe we do have in the pixel technology and the imaging technology that we embed in those sensors, we should be able to get a good share of the market.

Our tentative goal that we share with investors so far is that I don't see a reason why we shouldn't get to $300 million by 2010.

If we hit it well it could be a lot more than that.

But that's the number that we're planning to for this purposes.

Last question or series of questions.

Related to Drupa, obviously a big technology show from you and a lot of other folks, potential.

I was wondering, are we still on track to see at least a demonstration of the Versamark stream product that would be question one?

Two would be have you seen, I would expect not yet, but starting to hear grumblings elsewhere in the industry, some deferral on hardware purchases?

Obviously an externality you can't control, but I would be interested to see, on the hardware systems side if your seeing any deferral in spending as people hold off ahead of that.

And three, echoing questions I've asked earlier, now that the Cannon co-product is out, is there opportunity and are you in discussions to further partner to flush out that product line by filling in the bookends you have in the market today?

Thanks, guys.

Well, we're right on track for Drupa.

It's a very important moment for GCG.

We've been working out for more than three years on getting the stream to be something we can put in a product.

So yes, we are.

And we will have -- we will have units there that will demonstrate the power of that technology and the possibilities of that technology.

No, I haven't seen any purchase delay to that.

I think that the people need to see that that works.

We've been talking about it, we've been talking about this to many, many people in the industry.

A few days ago I talked to 400 owners of printing houses.

And we talked about that too.

So we're trying to make sure that the industry understands that this is coming and try to raise that interest to see.

There are a lot of obligations that they can get into.

And we have a lot of respect for the power of offset, but we think we can make a dent mind you.

A small dent at the beginning in the market and get some of the jobs to this technology.

What was the third question, Matt?

Cannon, Cannon.

Partnering.

It's something I asked for 18 months and the Cannon product finally came.

Just wondering if there's opportunity to further increase the breath, either filling in the bookends or taking the technology higher?

We keep looking for that, obviously, but the relationship is doing well.

They sell their own product, we sell our own product.

We use their engine, but we have a very significantly different product.

And by the way, it's doing very well.

We're doing extremely well with that product.

We got a lot of awards.

And we got a lot of sales with it.

So we're very pleased with the relationship and where this is going.

And we keep looking to expand the line, obviously.

Great.

Thanks for the time.

And we'll go next to Shannon Cross with Cross Research.

Hi, good afternoon.

I guess good morning, sorry, I'm rushing things.

Couple of questions.

Curious if you could talk a little bit about the impact of inkjet business on working capital and how we should think about that both this year and next as it runs through the model?

Yeah, Shannon, so far this year, I wouldn't say it's the biggest part of the working capital change as we're ramping up and because of the model we've had, it hasn't been a huge impact on the second quarter.

That will increase in the back half of the year as we invest in the inventory to supply the other channels that we have announced and still have not yet announced.

I can't really give you a number right now, but you will see a ramp-up in that.

The good news is, however, that because of the way we structured the model and the supply arrangement, a good part of the inventory will not be on our books.

So it's mainly going to be in the area of receivables where you'll see that ramp up in the working capital.

Okay.

And then if you could talk a little bit about your IP licensing revenue.

I don't believe you had anything that was big enough to call out from a nonrecurring standpoint in the quarter since it wasn't in the release.

But maybe what you could do to help us out if you could is of the $250 million approximate goal for the year, what percent of that has already been reached and that'll give us an idea of how to think about the second half of the year.

I can take that one, Shannon.

We did say at least $250 million for the year.

We're still on track for that.

And if you would look at both the second quarter and the first half of the year, I would say that on a proportionate basis, that puts us on track.

Okay.

But no idea of what percentage you've done so far?

Not an exact percentage.

I'd just say proportionately we're on track, and you are correct, there were no significant new deals in the second quarter.

Okay.

And just to clarify, there were no significant deals either in the first quarter, is that correct?

No, no.

I said there are no new deals.

No, I said first quarter, not second.

No significant or not significant.

We don't have new deals.

Right.

I said in my speech.

No, no, I said first quarter, I just meant for first half of the year.

No, no, no.

Just clarifying.

First half we didn't have.

It's just the ongoing licensing.

Okay.

And then Antonio perhaps you can talk a little bit about your thoughts on the entertainment film business.

It was flat this quarter, obviously it was up significantly in first quarter.

How should we think about entertainment film as we go through the latter half of the year?

I actually say to Carol, we have -- we think our best guess is it's going to be flat year-over-year.

Flat year-over-year as far as revenue.

We still have the efficiencies of the cost of the new cost structure, obviously.

And the fact that we do all the film in just one size and everything.

We have those sufficiencies working in our favor.

But for revenues, the best information we have is that the second half should be a little lower than the first half and will make for a flat year overall.

It is an industry that could move.

You get a couple of (inaudible) -- as I said before and all of a sudden you get a different mood in cases start to change.

We know the movies that are coming.

We know the deals we have with the studios.

We know the amount of people that go through the theaters.

We put all that, we have a complicated chart to get through all of this.

And it looks like it's going to be flat-ish for the year.

That's very helpful.

That's our best information.

That's very helpful.

Just one final question on inkjet.

When you launched inkjet, I think it was March.

You talked about having, I think Phil talked about having three product lines by the end of the year or more.

I don't want to put words in anybody's mouth.

I'm trying to think of what exactly it was but you know.

Additional products.

So I'm just curious as to the pipeline and how you're feeling, your comfort level with your manufacturing capabilities in order to meet sort of your internal targets of new products as opposed to just units.

Well, I'm getting more confident with time.

We had what I would call normal ramping up issues that I live through all my life and we have them again.

But we went through those and we sold those.

We finally put the third product into the line, two or three weeks ago, I believe.

We finally have the three products that we wanted.

And I feel more confident now that we went through all of this that we are capable of bringing more products into the lineup.

Of course, you know that I'm not going to tell you when and what, but I feel much more comfortable now that we went through this start-up and learning and learning not just ourselves but with our partners.

We have -- as you know, we have a value chain that is very distributed.

It's very efficient financially.

But it is slightly harder to control.

You have it all in one building and you control everything.

If you make it work, it's very attractive.

That's what we're trying to do.

We need to do to compete with whom we are competing.

I feel a lot more comfortable.

And anxious to see new products in the product line and I hope we can call you soon with those.

Okay.

Thank you very much.

And we'll take our final question from [Alis Yonus] with Buckingham Buckingham and Reid.

Antonio, I hope that you don't fall in the same trap as two of your predecessors as far as using your cash.

I notice on your balance sheet you have $5.7 billion worth of treasury stock, 100 million shares.

Buying stock at a multiple of book value doesn't exactly enhance shareholder value.

It creates a nice flow for traders.

Any thoughts on the subject?

Give me again Alis, I don't know if i follow you, I couldn't follow the numbers that --

Okay, your balance sheet carries treasury stock at $5.8 billion.

That represents 100 million shares, which in turn tells me that you -- two of your predecessors used $5.8 billion --

As a company I think it's wise we bought back stock.

That's what you mean?

Yes.

We did that.

I can't remember the years, but I did go through the history, yes, I remember with you.

And I looked actually.

Since we're doing this investigation, we looked into the effect of the company in doing that, and it was pitiful.

Yes.

It was pitiful.

Okay.

I got your point.

I got your point.

And I appreciate you telling me this Alis.

I will be very careful with this.

I have another question, if I may.

Sure, sure.

Last year it appears that your printer, which was in the other category, cost you $26 million in the second quarter.

It was higher/lower this year?

You mean the inkjet printer?

Yes.

It will be more.

It will be more.

Yes.

Yes.

We have all the cost of the ramping up, we have all the costs of -- we're building all sorts of things and relationships.

It will be higher than that.

Then, can I ask the question about when do you expect to start seeing lower losses?

Well, we said it sometime in -- the beauty of this business model is that the moment you get to a point where the revenue that you bring from hardware equals the revenue you bring from ink.

That's the key thing, yes.

Life becomes a paradise, right?

Becomes a paradise.

So it's up to us.

Then we brought business model that should be attractive in our view to people that print the most.

Therefore we expect to have a slightly higher burn than our competitors if we achieve, we pass the message appropriately, we should be able to have a slightly higher burn.

Than the average of your competitors?

Yes.

For the whole year, in our plan we've been public saying that for the whole year we would like to be profitable in 2010.

If we achieve the profile of customers that we are looking for, it is very possible that sometime during 2009, we will break even and then we'll start moving.

But it's really early to know.

But a lot is going to depend on our ability to pass the message appropriately and get the type of customers that we would like to have with this business model.

You also had the loss from the transfer of the -- I'm sorry photo finishing and printer business -- was this loss bigger or smaller?

Smaller.

Smaller.

Smaller.

Smaller, yeah.

So in essence, the improvement you had in the CDG was despite an increase in costs associated with the printer?

Oh, yes.

Yes, yes, yes.

We had those five points of gross profit improvement.

They come through operational issues, really, better operations.

We have better pricing, better margin in the products that we're selling, we have low costs in the distribution.

We just have a much more efficient operation that is allowing us to go now into lower price points that will help with the volume and with the and the overall cost of the unit.

The IP as you will see was slightly better than last year, but based on the same deals we had last year.

Most of two-thirds or so of the improvement are operational improvements.

Incidentally, let me congratulate you on the speed in which you are using your SG&A.

Well, you have to congratulate about 35,000 people, because they're working really hard on this.

The hardest thing that we have to do and thank God we're almost done.

Antonio, thank you very much and good luck.

Thank you.

Well, I think this closes the call.

Thank you, again for joining the call.

To give you my summary.

We remain focussed on delivering the key strategic objectives, completing the restructure to achieve our targeted business model is fundamental.

Achieving market success with our new products is critical.

Driving double digit revenue growth for the second half, we haven't done this as you know organically.

So this is a challenge for us.

But we think we have the portfolio and the cost structure and the go-to-market and the supply chain to do that.

And we feel very confident.

And obviously we want to deliver in our goal of digital earnings growth and net cash generations after the large cost of restructuring.

The last year that we have too that.

So I believe this quarter is a great in our plan to that we want.

Thank you very much.

And that does conclude today's call.

Again, thank you for your participation.

Have a good day.