Eastman Kodak Co (KODK) 2007 Q3 法說會逐字稿

Good day, everyone and welcome to the Eastman Kodak third quarters sales 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 Director and Vice President of Investor Relations, Ms.

Ann McCorvey.

Please go ahead, ma'am.

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

I'm here this morning with Antonio Perez, Kodak's Chairman and Chief Executive Officer, as well as 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 activity 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 Securities Litigation Reform Act of 1995.

For example, references to the company's expectations for revenues, earnings, digital earnings, net cash generation, entertainment imaging film revenue, earnings from operations, digital revenue growth, working capital, and consumer ink jet units and revenue, gross profit margin, operating margins, restructuring charges, target cost model and capital expenditures 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 forward-looking statements need to be evaluated in light of these 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 near GAAP equivalent in the documentation released this morning, which can also be found on our website.

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

Thank you, Ann and good morning everybody.

I'm pleased we were able to continue to achieve in the third quarter the strategic objectives we set ourselves for this year.

We had good market success with our new digital products contributing to the 12% digital revenue, and we created value for our shareholders by growing net earnings from continuing operations by $117 million year-over-year.

Another highlight for the quarter was that earnings from our digital businesses nearly tripled year-over-year, and in the quarter, were roughly equal to the earnings from our traditional businesses.

At this point of the transformation, digital revenue is over 60% of our total revenue, and digital EFO is 50% of the total company's EFO.

These results include significant investment towards our digital future.

Our cash usage of $95 million in the third quarter was slightly more than planned.

This largely reflects the timing of receipts of receipts, and certain working capital actions which will now happen in the fourth quarter.

As in previous years, the fourth quarter is critical from a cash flow perspective, and I'm confident each business team is very clear on the actions they need to take to deliver net cash generation of $100 million for the full year.

The third quarter performance gives us the momentum we need going into the very important fourth quarter.

Everything is in motion to achieve our full-year key strategic objectives.

I'm specifically pleased by the positive results we're seeing from our expanded digital portfolio, together with our solid cost performance.

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

Now, I would like to summarize my thoughts on each of the business segments.

Let's start with FPG, the Film Products Group.

FPG continues to perform.

During the third quarter, earnings from operations improved 6% despite an 18% decline in revenue.

The FPG team truly understands how to manage the business with declining revenue.

As we forecasted, entertainment imaging film revenue softened from the strong first half industry performance and it was down 5% for the third quarter.

Because of this seasonality our expectations is that entertainment imaging film revenue will end the year in line with last year's as per our original forecast.

In anticipation of FPG's seasonality, we began adjusting production rates late in the third quarter to ensure we achieve our fourth quarter working capital targets.

Based on the strong third quarter earnings performance, and the plans for the fourth quarter, we now expect FPG to end the year with earnings from operations as a percentage of revenue in the 20% range, as compared to the upper end of the 13 to 16% range previously forecasted.

FPG year-to-year earnings performance gives me more confidence in the future sustainability of double digit earnings from operations as a percentage of revenue for this segment.

Kodak is and will continue to be a leader in film.

We continue to provide new and novelty products to the market.

Earlier this month, at Photoplus in New York, we introduced the world's finest grain and sharpest 400 speed black and white film.

Kodak T-MAX 400 affirms our commitment to professional photographers who see this film as a very powerful tool.

Next GCG, the Graphic Communications Group.

This is the third quarter performance confirmed the momentum we saw in the second quarter was real, and gives us confidence for the fourth quarter.

GCG'sthird quarter digital revenue grew 9% year-over-year, driven by digital printing, enterprise work flow, and digital prepress consumables.

Digital printing growth included a double-digit increase in consumables as year-over-year next press page volume grew 38%.

Our enterprise work flow business is growing on the strength of the fully integrated solutions we're bringing to the market.

Our customers tell us that product is the first to deliver a real wet-to-print solution that encompasses all the steps for (inaudible) entry to print.

One of our strategic objectives this year is to continue to expand our further lines in the market we serve, and GCG is delivering.

The expanded GCG product line was very well received with graphic expert with our sales exceeded our expectations.

In September, we introduced a new digital flexo graphic system for the packaging industry called Kodak Flexcell NX.

Customers of growth graphics in the U.S.

and label expo in Europe were very impressed by the offset light quality this system can produce.

The Kodak Flexcell NX system represents a significant step for the industry and further improves Kodak's precision in the large and growing digital packaging market.

We are delivering on the promise we had in mind when we created this group.

We have a strong GCG team, who understand what they have to do to achieve both the targeted 6 to 9% digital revenue growth for the full year, and the working capital targets.

Next, CDG, the Consumer Digital Imaging Group.

CDG achieved another milestone in the third quarter by growing both revenue and earnings from operations.

This progress was achieved while the company made significant investments in the introduction of consumer ink jet printers and managed declines in CDG's traditional products.

CDG's digital revenue grew 16% year-over-year, driven by consumer ink jet printers, kiosk and related media and digital capture end devices.

Digital capture growth is everything, the consumers are embracing our improved digital product portfolio.

Digital camera unit volume grew 35% year-over-year, while gross margins improved.

We have strong growth in our digital picture frames, which was partially offset by the continued industry decline in snapshot printing.

This quarter, this quarter's results also include continued growth in our recurring ongoing intellectual property royalties, as well as a new nonrecurring licensing agreement comparable in size to the one nonrecurring agreement we have last year in this quarter.

Our focus for these cameras over the last four quarters has been on margin expansion.

The third quarter demonstrates our ability to deliver profitable revenue growth.

Additional evidence of our success is the significant improvement in inventory turns for digital cameras due to the improvements in our supply chain.

We believe we have the right portfolio of products in CDG to sustain this momentum of profitable growth into the fourth quarter, and beyond.

I continue to be pleased with the progress of consumer ink jet.

We have a strong value proposition unique in the market, a better printed page at about half the cost.

And the introduction is moving ahead according to plan.

Our consume ink jet products are now available in more than 7,600 retail outlets worldwide.

As I have said before, we have experiencing the difficult challenges associated with a set up of a major product line.

In the third quarter, to support the strong channel acceptance, we apply additional resources to resolve manufacturing and software connectivity issues, made improvement to our marketing programs to enhance our in-store presence, (inaudible) to accelerate the release of future generations of products.

We are committed to developing a business with $1 billion in revenue in 2010.

That's the target, and everything we're doing now is designed to achieve this goal.

We have a disruptive technology with a disruptive business model which gives consumers a wonderful value proposition of premium printing at up to 50% savings.

While providing a significant margin opportunity for Kodak.

Achieving our goal of selling 500,000 units by year-end is one milestone in that journey.

This quarter we expanded as well the profitable and growing kiosk product line by introducing the Kodak Picture Kiosk GS compact, an entry level self-service diligent picture printing solution.

Which open business opportunities for new retail locations, including smaller and non-traditional environments.

This new product provides growth opportunity for retailers, and for Kodak.

And finally, before I turn the call over to Frank, who will provide a financial overview, I would like to make you aware of an organizational change that would allow us to better manage Kodak's silver halide products.

As you will remember, last year we consolidated all of our output product offerings to retailers and the one go-to-market structure within the consumer digital imaging group.

That single go-to-market structure is working well and will not change.

But with the restructuring program behind us, we can now go further and leverage this business to maximize performance and drive faster decision-making by managing all silver halide based products in one place.

So effective January 1st, 2008, the Film Products Group, will be renamed the Film Photofinishing and Entertainment Group, FPEG.

It will be led by Mary Jane Hellyar, who has an exceptional track record for delivering results.

FPEG will include the current FPG portfolio of consumer, profession, entertainment, and industrial films and will have responsibility for graphic films, silver halide photographic paper and chemistry and retail and wholesale photo finishing.

The change that I have just described today, in conjunction with the digital business as led by Phil Faraci, represent a new product that is better prepared to increase shareholder value by more effectively managing both our traditional and our digital businesses.

Now I will turn over to Frank.

Thanks, Antonio.

And good morning everyone.

Today I will share with you some highlights of the third quarter financial results, and then Antonio and I will be happy to take your questions.

Overall, we are pleased with the company's third quarter results, particularly the strong revenue performance in several of our key digital businesses, and with the continued progress on our cost reduction initiatives including SG&A expenses.

We also have continued efforts underway related to working capital reduction, which are required to achieve our goals for net cash generation for the total year.

With respect to financial results, earnings from continuing operations for the third quarter were $29 million pretax, $34 million after tax or $0.12 per share, compared to a loss from continuing operations of $53 million pre-tax, and $83 million dollars after tax, or a loss of $0.29 per share in the third quarter of 2006.

This represents a pre-tax improvement of $82 million versus the prior year, and an after tax improvement of $117 million or $0.41 per share.

Third quarter results include items of expense impacting comparableity totaling $94 million after tax or $0.33 per share.

This is comprised mainly of restructuring charges of $96 million after tax.

The prior year's third quarter included items of expense impacting comparability totaling $137 million after tax, or $0.48 per share, primarily reflecting restructuring costs.

Total consolidated revenue declined by 1% and included a 2% favorable foreign exchange impact.

Third quarter digital revenue grew by 12% while traditional revenue declined by 16%.

Third quarter gross profit margin was 26.4% versus 25.1% last year, an improvement of 1.3 percentage points.

This improvement in gross profit margin was driven primarily by continued progress in reducing manufacturing and supply chain costs along with just over one percentage point of favorability from foreign exchange.

This was partially offset by pricing impacts in approximately $26 million of increases in aluminum and silver costs.

While gross profit margins can be seasonal in nature, we still expect to achieve our previously communicated gross profit margin of between 25 and 26% for the total year.

SG&A was reduced by $37 million, or 8%, and declined as a percent of revenue from about 18% in the year-ago quarter, to under 17% in the current quarter.

Year-to-date, the company has reduced SG&A costs by $230 million or over 15%.

Our R&D costs totaled $129 million for the quarter, or about 5% of revenue, and in line with our plans.

R&D as a percent of revenue is higher if applied to the revenue associated with our digital businesses where we focus most of our spending.

Our restructuring efforts continued through the quarter, with pre-tax restructuring charges totaling $127 million, as compared to $181 million in the year-ago quarter.

Year-to-date through the third quarter pre-tax restructuring charges totaled $594 million, compared to $621 million for the first three-quarters of last year.

In the third quarter, restructuring related payments from corporate cash were approximately $110 million.

We have previously communicated the total restructuring charges to the P&L for the year would run between $900 million and $1 billion, based upon our progress to date, along with your analysis of actions to be completed for the remainder of the year, we now believe total restructuring charges for 2007 will be in the range of $750 million to $850 million.

This reduction is due to a variety of factors, these include efficiencies associated with reductions in our manufacturing footprint, along with our ability to outsource or sell certain operations there by reducing employee severance requirements.

Payments made in 2007 related to restructuring actions from corporate cash for the current and prior years may be lower than the previously stated $600 million.

At the same time, a good portion of any cash payment savings we do achieve will come from funding for U.S.

based actions, which would have been dispersed from the company's overfunded U.S.

pension assets.

We would like to emphasize that we have been able to effectively manage restructuring costs to be somewhat lower than originally anticipated as just described, and the pace of restructuring activity, the efficiency with which it has been carried out and the reductions in the company's overall cost structure to date, gives us confidence that we will still complete the major restructuring this year and make significant progress toward achieving our target cost model according to plan as previously communicated.

Third quarter digital EFO almost tripled to $82 million as compared to $28 million in the year-ago quarter.

An improvement of $54 million.

Year-to-date digital earnings improved by $185 million, to $43 million, compared to year-to-date losses of $142 million in the prior year.

Consumer Digital Imaging Group improved their EFO by $13 million to $10 million, from a $3 million loss in last year's third quarter.

It is particularly noteworthy that improvements in both our digital cameras and kiosk businesses, along with licensing revenues, more than offset the significant costs associated with the wrap-up of our consumer ink jet business.

The enhanced product portfolio and go-to-market structure changes in digital cameras and digital frames implemented over the last several quarters contributed to substantially improved performance in those businesses.

Earnings from operations and the Graphic Communications Group for the current quarter were $42 million as compared to $26 million in the year ago quarter, an improvement of $16 million driven primarily by higher equipment placements for our next press color production presses, higher volume and work flow software, digital printing consumables, and digital plates, cost control initiatives and in SG&A and favorable foreign exchange.

These benefits were partially offset by the negative impacts of aluminum, along with product mix and work flow software and prepress solutions.

FPG posted earnings from operations of $122 million for the third quarter versus $115 million in the year-ago quarter.

This EFO at 25% of revenue demonstrates that FPG continues to achieve strong operating margins despite experiencing double-digit revenue declines.

This is due to a disciplined focus on maintaining revenue and margin in key product areas, while driving cost reductions across the board.

We are now forecasting full-year FPG operating margins to be in the range of about 20%.

Overall, total company traditional earnings were $91 million for the current quarter, versus $110 million in the prior-year quarter, down $19 million, mostly due to lower volumes in our film, paper and photo finishing businesses.

Separately, other income and interest expense improved by $51 million versus the prior-year quarter.

This is driven primarily by the benefits to both interest income and interest expense from the impact on cash and debt balances resulting from the health group divestiture.

Turning to cash, our net cash generation for the third quarter reflected a use of $95 million, an increase in usage versus the prior-year quarter.

Our year-over-year increase in trade receivables is largely attributable to the timing and mix of product revenues across our various businesses.

Inventories for the quarter were a bit higher in preparation for growth in fourth quarter digital revenues.

In addition, we have already begun to adjust production rates in FPG to reduce inventories in that area by the end of the year.

We also have some timing differences as compared to the prior year related to cash receipts associated with nonrecurring licensing agreements, and asset sales.

Lastly, we had cash payments in this year's third quarter to settle certain tax and legal obligations.

Our goal is to deliver a strong fourth quarter for net cash generation, by carefully managing our inventories, consistent with our revenue, and working capital goals, by continuing our focus on driving down past-due receivables, improving our payables cycle, and by delivering a strong earnings performance from our more seasonal digital businesses.

We ended the third quarter with $1.847 billion in cash, and cash equivalents, and our debt currently stands at $1.626 billion.

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

As stated in our press release, we continue to stay focussed on our goal of $100 million in net cash generation for 2007, and remain confident in our ability to complete the major restructuring this year and make significant progress toward our charted cost model.

With the success we are achieving in growing our digital businesses, we now believe that 2007 digital revenue growth for the company will be at the upper end of the 3 to 5% previously communicated, and total company revenue for 2007 will decline at the lower end of the 4 to 7% range previously messaged.

We continue to forecast the company's digital earnings of 150 to $250 million, which corresponds to total company earnings from operations of 300 to $400 million.

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

Thank you.

The question-and-answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS).

We'll take our first question from Carol Sabbagha, Lehman Brothers.

Thanks very much.

A couple of quick questions, the first is on use of cash.

Antonio, is there any more clarity around what the potential uses are or the timing of when we're going to hear about it?

Not yet, Carol But come February when we do our meeting in New York we hope to have a little more clarity behalf we're going to do.

For the moment, we still have the three possibilities that we've been evaluating, are internal investments, some of the commercial action, the technology that we have in-house, obviously we are looking to see if there are M&A opportunities that are appropriate and are valuable and they are the right price and fit with our portfolio expansion, and then we continue to look at the possibility of shares buyback.

But no decision has been made.

We talk in every board meeting about this possibilities, and we keep evaluating them.

Okay.

And Antonio, a couple more questions on ink jet.

What do you expect sort of the,, a new product line to come up, to come out, and after, that how quickly do you expect to continue to refresh the product portfolio?

I don't understand the first part of the question, Carol, what did you say?

Oh, I know you talked about introducing new products by year-end, when you first introduced the three ink jet products.

Do you know when we may see more additions to the 5100, and 5300.

If I said by year-end, I guess it will be by year-end.

I don't recall saying that, but if I did say that, it's it's going to be before year-end, we'll be introducing new products, as the refreshment of the product line.

It will be around that time.

I mean, we, this is a very high season with a lot of volumes, it's very important for us to manage inventories into the channel, you know, supply chain and all that.

But obviously we've been working very hard to refresh the product line and, you know, we're getting close to introduce something when it's appropriate.

How would you characterize the pricing environment in ink jet in the third quarter broadly for the market, and specifically for you?

And it looks like some of the new channel partners that you've announced while large, like Wal-Mart and Sam's Club typically reach the lower-end consumer.

How would you, within those channels, try to reach the higher usage customer that you're targeting?

Actually, I don't agree with that statement, that's a very generic statement, Carol.

I mean, most of the soccer moms, they actually go and buy there, they are very, very high users, supreme.

So you cannot make that statement that in such a generic way.

So I think they are very good channels for us.

What is going to drive the right customer is the business model, it's not so much the channel.

You, as a consumer, have to be confronted with either you pay slightly less for the printer and a lot, a lot more for the ink., and I mean a lot more for the ink, or you might be more comfortable paying very little more for the printer but getting a better printed page because of our premier inks and saving a lot of money when you print.

That's going to define who's going to buy these printers.

My last question is for Frank, can you talk about how much of a headwind silver and aluminum were in this quarter?

And also how much lower D&A there was in the quarter versus a year ago?

That ran through the operating numbers?

Right.

Yes, if I look at the -- on the silver and aluminum, we don't split it out between silver and aluminum, the total of the two is $26 million.

And a lot of that was aluminum, and had a pretty significant impact on the margins for GCG.

So I guess what I would say, if it were not for the net impact of aluminum, GCG gross margins would have been up.

On the G&A, our G&A was down Q3, versus Q3 by that $37 million or 8%.

I'm sorry, did you say G&A?

I meant depreciation, amortization, sorry about that.

Oh, all right.

Depreciation and amortization was down I guess about 100 -- a little over $100 million Q3 to Q3.

But we're still on track.

We've had about $600 million year-to-date, and about $100 million of that was what I characterized as accelerated depreciation.

Thank you very much.

Okay.

We'll take our next question from Jay Vleeschhouwer, Merrill Lynch.

Thanks, good morning.

Antonio with CDG driving the bulk of the revenue upside, at least versus our model, I'd like to ask for a longer term perspective on how you see the end game playing out, particularly on the digital printing side on the consumer market, given there are a number of interesting trend going on right now, curious to see how you think it will all come together.

We see for instance that total print volume growth seems to be decelerating, although the market has substantially shifted to retail and online venues, digital camera growth lately has held up very well and seems to be meeting or exceeding print growth, again, that's recent data, and so when you put all that together, and your exposure, of course different venues, what do you think the ultimate structure of the market might look like and perhaps most importantly your share of the profit pool available with all of that printing in different venues, and then a couple of follow-ups.

Okay.

That's a short question.

Usually is, yes.

So this is a camera market, it is growing actually faster than we thought it was going to grow.

And we're benefiting, you know, we're benefiting from it.

We have a very flexible supply chain that allowed us to move up and down very quickly with volumes and this has been critical with the, not only with the growth that we have -- that we are experiencing, but as well the great improvement in the line of this business.

So we're very pleased with that.

We still see, looking forward, we cannot expect this growth to continue.

We believe that multifunction devices, such as cell phones, in which we, we are participating, as you know, co-designing a Motorola, will take a part of that growth.

Although, it's not clear.

We know that there is room for improvement in the cell phones to make a better cameras, and we we're not sure that the total digital camera single-function device will go down, but in our assumption of the numbers we're going to assume that it is going to go down.

That is not going to grow as fast as it is growing today.

We're very focussed in certain segments of our market, we feel very comfortable with the fourth quarter and with the portfolio we have for next year.

That business is doing pretty well.

With printing, we are participating in the different elements of printing, as you know.

We are still in photo finishing, although that is the silver halide based printing.

We have an important participation in that.

That business is going down.

And is being replaced by all the methodologies, all the technologies, such as kiosks, that's why we're enjoying such nice growth, top line and bottom line with our kiosks and we are expanding the portfolio because, as you said, it seems like more and more people are getting comfortable with getting those prints in the stores, which is great for us.

And we see that growing.

Because we believe eventually the silver halide mini lamps will be replaced at the appropriate time for more flexible, more economical technologies that we call dry lots and we are already offering those dry lots and we will continue to offer those.

That is a possibility for growth for us, because, as you know, we are not participating in the classic silver halide based mini lamp business, since that business, we believe, is going to be transforming into dry lot.

We see a very interesting opportunity for us for growth.

And then within the home, since we have so little of the market, such a small part of the market, everything is growth for us.

And we just have to get the word to the right people that we have a different value proposition that will be, in my view, unbeatable for someone that prints a lot.

So that's what we're up to.

We're after those people that print a lot, and they like a better printed page.

We believe we have a better printed page because it doesn't fade, because it's more robust, because of the type of inks that we use and we do it at half the price.

So we have to keep passing that message, and it's going to take a while to get to everyone that we're going to go but it's moving along.

And for us, we're happy with the overall marketing and just really that's much at this point, because it's all growth for us.

And we're going to get a piece of it, that's for sure.

I don't know if I answered the question, I went through all the topics I thought, but if I didn't, let me know what I missed.

Well, we can bring it up maybe at the analyst meeting in more depth.

But the second question, is within GCG, what is the best evidence that you can offer that the multiproduct or blended analog/digital portfolio strategy is really working incrementally?

Where's the one plus one equals three evidence that having that kind of broad product line is, in fact, giving you a competitive advantage for a material part of orders within GCG?

Okay.

Well, first, I forgot to say the statement that most of the progress was done in GCG, I do not agree with it.

I think the progress in GCG for me is phenomenal, and it's in line with what we expected.

Remember, there is no -- it was never going to be that easy to come into this market displacing the phenomenal companies that we are working with, and I did mention my speech that the number of pages printed with next press grew by 38%.

That's the money, that's where the money is.

And now, going back to the proof, the proof is that look at our work flow software progress.

That is a very important line is the glue of the whole combinement for this industry, we are making tremendous progress with that, we are recognized as having the most complete, if maybe the only, I wouldn't say universal, but, you know, comprehensive work flow that deals with most of the issues, whether it's production, work flow, color management work flow or business work flow.

We are integrating all of that and we don't know of anybody that is doing that certainly as well as we do.

It's that business itself, but it's as well that is the best lead generation and the best closing to that we have for the rest of the businesses.

And then the continuous improvement in the bottom line.

You see GCG, it keeps quarter after quarter after quarter performing better.

And this, it's because of the whole, not because of any particular part.

They all contribute.

We still expanding the portfolio.

We still have a lot, it's a huge market, and we have a -- as a portfolio, we apply to several parts of the business but within each one we have very small portfolios.

So we have to expand the portfolio of electronic photographic printing, we have to expand the portfolio of inkjet printing, which as you know we will be announcing things this summer, very fundamental things for us, we will be increasing the portfolio of our work flow, of our scanning, all of that.

So you will see a very steady growth in steady progress in the top line and in the bottom line of this business, which is what we want, because the traction we have is a solid traction for this business.

Okay.

Finally, if I may, a geography test for you, in the consumer business, on a currency adjusted bases your U.S.

business in CDG is out performing your non-U.S.

business, on the other hand, within GCG, your non-U.S.

business is materially outperforming your domestic business, both in the quarter and year-to-date.

There's a pretty widespread there, particularly in GCG.

Very good.

So we have work to do, I agree.

I agree that we have to -- I will talk to Phil tomorrow morning, tell him that he has to improve his performance outside the U.S.

Believe me, he's been hearing that from me.

Yes, we have a task to improve.

I mean, I see that as an opportunity more than an issue, but it is an opportunity for us to increase our CDG results outside the U.S.

I'll tell you the reasons for this, there is a reason for all these things.

And then as well for -- as far as GCG, there are different parts.

You know, different parts.

EP is actually doing better in the U.S.

than they're doing outside the U.S.

Plates is probably slightly better outside the U.S.

You can take the whole GCG as one and say that we better in one place for the other.

But for the consumer market, the logical thing for us is introducing things first into the U.S.

Tune up the value proposition, then move.

So obviously, since we are new in this market, you're going to see first the impact in the U.S.

market, and then hopefully we can move that and we are moving that into the rest of the world.

We always introduce products sometimes six months or nine months after the U.S.

so you can't possibly see the same revenue stream.

Okay.

Thank you very much.

Thank you.

And our next question comes from Matt Troy, Citigroup.

Question for Frank.

Kind of a counter to Antonio's commentary on the uses of cash, the deployment of cash, Frank, you've been there for about a year now, observed the different seasonalities of the old and new business, when the dust settles on Antonio's plan at year-end and you think about the run rate business model targets being achieved that you've articulated clearly for us in margins and growth rates, I was wondering how much cash do you think you need to run the business over the course of the year?

If I go back in history, Kodak was a company that could very efficiently run with 3, $400 million of cash on balance sheet, you obviously have several multiples more than that today.

How should we think about the cash operating needs of the business in '08?

That's a good question, we've thought about that quite a bit.

I think over time, as we raise the overall water level of profitability beyond the major restructuring, once we get beyond the end of the year, the overall profitability level will go up and the cash needs obviously for major restructuring go away.

So the water level goes up and so the seasonality won't be as much of an impact on us as it is today, where we dip in the first half the year and then recover later in the year.

So clearly, at some point in time we don't anticipate that we're going to need a billion dollars on the balance sheet to run the business.

Currently we want to make sure we get through the restructuring, we demonstrate the growth that we've messaged in the digital businesses, and the other thing, as you're obviously aware of, is given our current rating category, make sure we have that cushion as we complete this transformation.

But obviously, your point is right on, that at some point in time, whether it's later next year or the early part of the following year, we don't expect to require that same level of, we'll call notional cash on the balance sheet, just as that cushion.

Just another point, we only have really two or three digital product lines that I consider mature, which the running rate of capital going to be used is going to be low.

Many of the product lines are new, and it's better to have a little more cash at hand than not, because you're going to be making single moves in there to speed up the maturity of the product line.

When you look at the volume, the relative volumes of the recent product lines, there are only two or three that I would consider we're already there, and we're managing this business with certain growth and all that.

But many of them are in need of some kind of investment, again, whether it is a significant internal investment when we get to the right packaging of the technology, or when we get to the right application, or maybe an M&A, acquisition here and there.

So we're still building.

Like the first four years, the first four-year plan was about two things, basically.

Cleanup the film business, deal with the excess assets that we have there, and the excess number of people that we have there, make it such that it is a sustainable business.

And we've done that very much.

I mean, that is done.

And second objective of the first four years which we are finishing now, was to create a group of nation digital business with a lot of possibilities for the future.

We've done that very well, too.

If you allow me to be the judge of this.

Second phase, which we're starting now, is to scale those businesses.

And out of those businesses, we have, I believe, phenomenal properties in the digital space that have enormous possibilities for expansion.

And there's no (inaudible), I understand there's no (inaudible) and I understand the complexity of the market.

But we have six, seven digital properties that have phenomenal capabilities for value creation, and this is why you see us, I won't say tentative, but prudently looking about what do we put our resources, which one of those are the ones that we're going to go four, which obviously we know a little more than we're telling you, but this is the process right now.

Thank you.

And I understand.

I'm in the camp that there is no quick lightning bolt use either, I'm just trying to get a sense of what kind of cash needs the business has, obviously structurally lower than what you've got today, which is a good thing.

My second question, I guess would be for you, Antonio, and Frank.

The silver halide paper and chemistry business has moved around, you've indicated you're putting it back into a newly bundled group with film.

I was wondering if you could help me understand the thought process there a little bit more clearly.

Are you seeing a change in the way that retailers are buying product?

Certainly I think if you talk to retailers today, there seems to be a greater willingness to invest in on-site photo finishing, whatever the technology and form, I was wondering if you could share with us the thought process or reasoning behind recoupling that with the film business?

What did you learn in the last 12 months?

The go-to-market is going to remain the same.

The same people that are talking to the retail stores, they have to be able to contemplate the whole system of printing in retail, whether that is kiosk or home printers, or web-based with distribions to the stores, or mini labs, all those options.

So the go-to-market has no change.

But we have found, though, in the last year, is that we want to manage very efficiently the resources we have dedicated to silver halide.

You can imagine that when a business, some part of the business is going down, others are stable like EI, others are in a phase that might start going down, you would have managed all that capacity in a unified way.

In an integrated way.

That's why we've done what we've done.

We have not changed to go to market, so none of the trends that you were describing that went away, that we are aware of, have made a dent or influenced the decision.

The go-to-market is the same, it's the same people that are going to deal with the customer issues and try to make the most appropriate deal for those customers.

Is the back office, is the back end of the business, that's the one where we can improve by putting it all under -- under one hat and managing those assets in the most effective way.

Why didn't we do that before?

With all the work that we're doing with the restructuring, it was something that we wanted to do, it was just not possible.

It was not just the prudent thing to do.

We think this is the right time to restructuring, so we're going to ask Mary Jane to run this and get the maximum efficiency those assets that we have.

And an additional benefit to the investment community is at least at the business unit level there would be a good transparency between our digital and traditional performance.

Last question, in terms of just messaging and to make sure expectations are level set, in materials of the stream technology that you previously indicated we can expect to see something at Drupa in 2008.

Is that a demonstration technology?

What is the product path there in terms of commercialization?

Is it a demonstration to be followed by launch later in the year or is it more of a 2009, 2010 launch.

Second question, would be simply product breadth, you've taken the Canon product and made it your own, I wonder about your trajectory there and thoughts on expanding the portfolio further, either build versus buy, if you could talk about breadth, that's all I've got.

Thanks.

As far as the continuing in jet stream, you're going to see both in Druba, you're going to see products we're starting to sell at that time, you're going to see as well demonstration of technology that who's real volumes will come the year after or six months after that.

You're going to see both.

You're going to see as well the possibilities of the technology.

So maybe those three things.

There are going to be real products that you could take or some people will take, I don't think you will buy one, but you're going to see as well products that are not ready to ship but are going to be demonstrated, and will be shipping a few months after that, and then you're going to see the power of the technology and the role, the possible role that this technology could have within the world of printing.

I mean, you're going to see those three things.

As far as portfolio, we didn't take a product from Canon, we took an engine.

We took an engine, and with that, and a lot of things that we put in, we created a product.

That is not the end of our activities.

We will continue to do things like that and we'll continue to do our own engines as well.

We were looking at all sorts of possibilities.

We will expand.

We have to expand, the portfolio of EP to be a better participant.

We're doing very well with next press, but we're not taking advantage of the whole EP market.

So we need to do that.

But again, we didn't get a product from Canon and make it our own, we did not do that.

That is a component that comes from Canon and from that component, we made a product which has a lot more than that component.

We believe our product is significantly different than the Canon product.

And you've been pleased with what sell through trend thus far?

It's early days, I realize, but the initial traction has been good?

I am never pleased with any of my sales, I always say to my people, we should be selling a lot more.

But having said that, it's moving well, we're getting into markets and into deals that we couldn't get before.

So I'm happy with the product.

I'm happy with the product.

But there's so much in EP that we can have access to that I'm not happy with the whole idea of our EP portfolio yet.

But it's an opportunity.

Understand.

Thank you very much for the time.

And we'll take our next question from Shannon Cross, Cross Research.

Hi, good morning.

Or we're getting close to afternoon.

Anyway, just a few questions.

First, can you talk a little bit, Antonio, on the ink jet side, I'm just curious, you had some advertisements when you launched, they were TV commercials, and that, trying to explain.

I would have thought you might be out more with that.

So if you can talk a little bit about that, then I have a couple of follow-ups.

Yes, we did spend a lot of advertising, Shannon, but not so much in that type of media.

We do a lot of the work and we spend a lot of money in store.

At this point of time with the capacity and the volumes that we have, our business thrust is to get our products in the channel and make sure that when they're in the channel they are well-presented.

So we have to make enough, we have to put them in all the channels, and they have to be well-presented in the channels.

We know that the traffic to buy a printer is basically done for us by the other guys, the HP's of the world and the Canons of the world, the Epsons of the world, they are all luring you into going to buy a new printer.

All we have to do for now, for now, is wait for you at the store, and when you come into the store, you call you aside and say ma'am, did you consider the fact that we have this phenomenal value proposition.

So you print a lot, this will be useful.

There will be a time that you will see us more public to create traffic to our own product.

We don't think it's the most efficient way right now.

We're basically selling the products that we make, so creating more traffic is not going to help us.

What we have to increase is the number of people that we can attract once they get to the store, attract to our products so we can improve the velocity in the store.

That's the whole evident, but we are spending a lot of money doing that.

Okay.

And can you, there is another question.

With regard to ink jet manufacturing, it appears that there have been some, at least some issues in terms of ramping production.

Can you give us any more specifics in things that you're doing to change?

I would have thought manufacturing with slacks, it didn't seem to me that you had a new technology with a print-head side but in terms of reinventing the wheel, where have the issues come up and how can we be confident that you've alleviated them enough to hit the 500,000 target.

There are a bunch of things that you said there, Shannon.

Flextronic is one of our partners, is not the largest partner we have, known if you know that, but it's not, it's not just Flex.

We have other partners and they have many other lines.

And to get this volume of printers, there are a lot of issues that happen when you try to raise volumes.

We don't have, in my experience in inkjets, we don't have any problem that I haven't seen in any other company that I worked for when you trying to increase the volumes of a complex product like that.

We do have those issues.

We had some connectivity issues because we missed some of the configurations of the business and the homes are very different than we were expecting.

So there were some connectivity issues, we dealt with those, we're dealing with those.

When you try to, the process you have to create certain sub-assembly, it works very well when you have to make 2000 a week, it's not as good when you're going to move to 4,000 a week, so you keep improving those.

This is just the everyday thing on the manufacturing scheme.

There is nothing specific that I can mention that will be different than the normal issue that you will have when you do that.

That's why we actually said ourselves for a number of 500,000.

Honestly, we could have gone and said well, we're sure we could make a lot more, we should go for a higher number.

We looked at it and since I make few mistakes in this business in the past, let's put a number that we can -- let's make they are the objective is get our market, get some market share of there, get our notion in the market, get customers to understand, you know, who we are, why our value proposition, 500,000 is a good number, it's a good number to start, and learn a lot from the first budgets and things that you have to do, like for instance, we didn't want to introduce the next generation of products which you can imagine we've been working on for the last two years already, we've been working just one, we work on several, as any other company does, I'm not saying anything silly.

We're not going to ship them until we are sure that we understood the issues that came when we introduced the first one, or the second one should be able to not to have any of those issues and be a better product overall.

So we are right on that track.

We are planning to make and sell, you know, 500,000, learn a lot, not only from the manufacturing point of view, suppliers, we'll have new suppliers, they'll have to learn to give us more parts in higher volume, sometimes they do it, sometimes they don't.

So you have to look for another supplier that is able to scale better, so on and so forth.

So this is the year of doing what I just described.

The year of scale is going to be the year after and the year after.

Okay.

And then can you give us an update on your CMOS business?

I didn't see much discussion on it within the -- all the D&A, I may have missed it.

We make the announcement about the processing technology, the progress we making in technology, I think we make some public announcement about low light capabilities which are fundamental one of the objectives of our CMOS team to make sure that eventually we come with cameras that don't need a flash, which is one of the gauging elements of a good digital camera, a lot of trouble for color management and many other things, battery power and all of that.

So we made our progress there.

We are working, I think we said that we are working the large volume product that you're going to see is going to be in a cell phone and this is a project that we're working intensely with a leader in the industry, Motorola, and we will try to, you will see the effect of that, and then the other one is in the fourth quarter, you're going to see, we just introduced it about a month ago, one of our digital cameras, very low end, that has one of our CMOS sensors.

Again, this is a long-cycle business.

We have our plans there for volumes, but the two places where you can see the CMOS business come into relative volumes is in our low-end digital camera, and in the first and second Motorola phones.

That's what you're going to see, we're working on other deals but those are things that you're going to see soon.

And I just have two quick questions, the first one, you talked about earlier in the year $250 million in IP licensing revenue, about 70% of which would be nonrecurring.

I never said that.

Never said that.

I said $250 million was recurring.

I said -- I said at least 2,050 from the deals that we have already signed, that's what I said,-- $250 million, at least, I said, from the deals that we have already signed.

And I didn't want to do any other forecast for any other thing because I don't know what deals we're going to have.

We might have deals that are going to be based on cash or we might have deals that are going to be relationship for a new business, or we might have deals that would be very different like this.

So I can't -- we can't and we don't want to and wouldn't be helpful for anybody, especially for us, to set a forecast of royalties.

All I said is what I -- the only thing I could say, which is the deals that we have signed so far I know they're going to deliver in 2007 at least $250 million.

Okay.

And the other deals --

And my last question is, can you talk about when we can expect, maybe this is for Frank, GAAP earnings to equal pro forma from the standpoint of -- so actually, of the $250 million, within that number, was there a portion that was nonrecurring of the deals you had signed at the beginning of the year, if you can answer that?

We're not really characterizing a split in the amount that goes in either on a quarterly basis or a year-to-date, split between recurring, and nonrecurring, I think we want to stick for now to our at least 250 thought year, as Antonio characterized, and then look at additional licensing deals as they might occur.

Okay.

A last question, with regard to GAAP equals pro forma, any idea when we can start to see that from an earnings standpoint?

You say major restructuring, I assume, we've seen this with a number of companies like Xerox and others, restructuring can go on for a long time.

I think the best way to characterize that one, we said the major restructuring will be completed this year.

We are still holding to that, very confident of that.

Every company, and every company in the world has ongoing initiatives to further drive its efficiency and costs and so on and so forth.

Will be no different.

I think with a we had said back in February is that there would be about $100 million in potential cash payments in 2008 as it related to what I'll call the flap over, associated with 2007 and prior actions, we're still holding to that.

In terms of any P&L impact of any actions we might take in the future, nowhere in any realm and order of magnitude that we've seen over the last four years, we're talking about well under $100 million, and whether we characterize that, how we characterize that on the P&L, we haven't specifically landed on that just yet.

But very, very little.

So you'll start to see a much closer connection between pro forma and GAAP earnings going forward after the fourth quarter.

Okay.

Thank you.

Okay.

Thanks very much.

This does conclude today's question-and-answer session.

At this time, I'd like to turn the call over to you, Mr.

Perez for any additional or closing remarks.

Thank you for joining us, thank you for your questions, they're always very useful.

In my view, all the pieces are coming together and we're delivering the objectives that we set ourselves for 2007.

First we have expanding digital product portfolio that customers are embracing, we have created a great team of people, not only at the top level, like Phil and Mary Jane, but as well underneath those managers, we have very strong people, the managers, that manage the P&Ls and I feel very comfortable with the level of expertise and their commitment.

We have created with all this work, a much more cost-effective business model, and then we have the IP and we have the brand to work with.

So this is the platform from which we -- I believe we can launch and sustain profitable growth, and this is the new product that we have been saying that will emerge after this four years of restructuring.

This is where I believe we are.

Thank you very much.

And again, that does conclude today's conference call.

We do thank you for your participation, you may