Eastman Kodak Co (KODK) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the fourth-quarter 2010 sales and earnings conference call.

(Operator Instructions).

This conference is being recorded today, Wednesday, January 26, 2011.

I would now like to turn the conference over to Sandy Rowland, Director of Investor Relations.

Please go ahead ma'am.

Good morning and thank you for joining us today for Kodak's fourth-quarter 2010 sales and earnings conference call.

Here with me today are Antonio M.

Perez, Kodak's Chairman and CEO, as well as Ann McCorvey, Kodak's Chief Financial Officer.

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

Certain statements during this conference call and question-and-answer session 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 regarding the following are forward-looking statements -- revenue; revenue growth; cost of goods sold; savings from restructuring and rationalization; product pricing; gross margins; earnings; earnings growth; cash generation; emerging markets growth; demand for and performance of our products; consumables and services, including commercial inkjet, consumer inkjet, workflow software, free press, packaging and printing solutions, and products for thin-film displays and specialty chemistry; commodity costs; potential revenue; cash and earnings from intellectual property licensing; liquidity and debt.

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

Now I will turn the conference call over to Antonio M.

Perez.

Thank you, Sandy, and good morning, everyone.

Our fourth-quarter and full-year results reflect the consistent and sustainable momentum that we are having with our core growth initiatives -- consumer inkjet, commercial inkjet, workflow software, and services and packaging.

We grew these product lines 23% in the fourth quarter and 18% for the full year, demonstrating that our unique value proposition continued to resonate with consumers and our business customers.

In the fourth quarter, consumer inkjet had its largest revenue quarter since we launched the product line in 2007.

We grew printers and ink revenue 40% in the fourth quarter when compared to the prior year.

We built momentum each quarter during this year as we introduce new products, expanded our distribution channels, particularly in the office store segment, and resolve supply constraints that we had in the first half of the year.

We continued to expand our installed base as we grew our printer volumes by 45% during the year, including 63% printer volume growth in the fourth quarter.

This is remarkable growth when you consider that the industry grew less than 5% and is a testimony to consumers acceptance of our value proposition because we maintained our price premium compared to the market.

In addition, we know that we are reaching the right consumers, those who print the most as we grew our ink revenues 86% during the fourth quarter and 77% for the year.

More importantly, because of our increasing scale, we doubled our ink gross profit dollars in 2010, and we expect to sustain this momentum heading into 2011.

We are on track to become profitable during 2011 and to generate positive earnings for the total of 2012.

Our commercial inkjet business also had its largest revenue quarter of the year in the fourth quarter and achieved a number of key milestones.

The transformation in the graphic industry to this printing is happening now.

Our PROSPER Press is ready, and we are prepared to lead our customers through this transition with our color and black-and-white PROSPER Presses.

Our Press is based on our breakthrough stream technology, deliver offset plus quality, offset plus speed, media flexibility and lower operating costs combined with the ability to perform variable data printing.

Their productivity is superior to any digital press in the market.

We continue our PROSPER Press installations in all regions of the world.

In 2010 our growth was primarily fueled by sales of PROSPER components as we quadruple the number of "S" series imprinting systems that we sold.

Our FLEXCEL NX revenue within Packaging Solutions tripled in the fourth quarter.

Our FLEXCEL NX system is designed for a wide range of mainstream packaging applications and uses unique technology to deliver exceptional high-resolution print quality packaging combined with significantly reduced production costs.

This leading-edge solution helps our clients stand out in the market with packaging that really grabs customers attention on the shelf and drive sales.

We doubled our installed base in 2010 when we placed our 100th FLEXCEL NX system in the fourth quarter.

As with our other growth initiatives, our rapidly expanding installed base will drive higher margin annuities in future periods.

Finally, our workflow software and services business, which integrates all of our commercial print product offerings, picked up momentum in the back half of the year, growing by 21% when compared to the second half of 2009.

The growth was driven by strong demand for business process services in the emerging markets.

I am very pleased with the strong performance of these core growth businesses, which are critical to our digital future.

In the fourth quarter, we continued to see industry-related challenges in three of our mature businesses -- Prepress Solutions, Digital Capture and Devices and Entertainment Imaging.

As a result of the difficult market conditions in these businesses, we fell short of our 2010 revenue targets.

Revenue in our Entertainment Imaging business decreased 19% for the year.

During 2010 we saw industry-related volume declines as the major studios made and released fewer feature films.

In addition, the growth and demand for 3-D movies has accelerated the conversion to digital screens.

At the end of 2010, 30% of the first-run screens worldwide were digital screens.

While the revenue decline was in line with the updated forecast we gave you in the second quarter, the biggest challenge for the Entertainment Imaging business and our other traditional FPEG business is the increase in commodity costs.

Silver prices were higher than 2009 levels all year, but between September and December, the price of silver rapidly increased by about $10 a troy ounce to price points that we have not seen for over 25 years.

The increasing silver cost impacted our results in 2010 and is a significant headwind as we enter 2011.

Entertainment Imaging and our older traditional business themes will aggressively take costs out to better align our cost structure with the top-line in the silver cost realities.

We are also hedging, and we are indexing our new contracts to silver pricing.

We will also continue with our successful initiative to expand into adjacent growth markets where our material science expertise offers us real revenue opportunities such as thin-film for digital displays and specialty chemistry.

These programs are gaining very good traction and will help to mitigate the higher revenue declines in our traditional businesses.

For example, in 2010 revenues from these programs represented already 13% of FPEG revenue.

We expect that this percentage will grow to 30% by 2013.

These initiatives are all cash accretive and are largely independent of silver.

Our Digital Capture and Devices business, excluding nonrecurring intellectual property licensing revenue, decreased by 21% as customer demand in the digital still camera, particularly in the point and shoot category where we participate declined significantly in the fourth quarter.

This was a steeper decline than we anticipated or experienced in the prior three quarters.

We did, however, continue to gain traction with our award-winning pocket video cameras, growing both revenue and market share.

We doubled revenue in the fourth quarter and grew by approximately 170% for the full year.

We continued to focus on profitability rather than chasing volume, and we made progress.

Excluding non-recurring intellectual property revenue, Digital Capture and Devices finished the year with a higher gross profit rate and comparable gross profit dollars on 13% lower revenues.

We will aggressively follow this strategy in 2011 and focus on the profitable segments of this market trading top-line growth for improved earnings.

Despite 4% year-over-year digital plate volume increases, Prepress Solutions revenue declined 6% for the year and 8% for the fourth quarter.

As we have previously indicated, the decline was primarily due to the competitive pricing environment, especially in Europe where industry overcapacity continued to have the most negative impact.

We recently launched our innovative new Trillian Plate, which brings an impressive combination of outstanding productivity and performance.

It significantly lowers the lower cost of ownership when compared with typical digital process plates that are in the markets today.

We are now ready to scale this product offering, and it will position us well to compete in the current pricing environment.

In the fourth quarter, we continued to see very strong demand for our pre-press output devices with 19% year-over-year volume growth.

This is a positive sign since we know that this increase in our installed base of computer to plate devices or CTPs will yield consumables growth going forward.

Also, we continued to see strong Prepress Solutions growth in the emerging markets, which for Prepress Solutions represents already over 20% of its business.

Our business grew 14% for the year in those regions.

In fact, for the year we saw double-digit growth in the emerging markets in all of our GCG businesses.

We believe that because of our broad and integrated commercial portfolio and the positive market dynamics, we will continue with strong growth in the emerging markets in GCG.

Now let's turn to intellectual property and cash.

We successfully executed our intellectual property strategy in 2010.

We exceeded our goal for generating new innovative patent applications, and we entered into three significant intellectual property arrangements, including adding a new license during the fourth quarter.

Each of these agreements is in line with the three fundamental objectives that we have for our intellectual-property licensing program, which are design freedom, gaining access to new markets and partnerships and generating cash and earnings.

In anticipation of a question about Monday's news from the US International Trade Commission action, it is important to remember that this is one step in a longer process and that the full ITC Commission will ultimately determine the final outcome of this case in May.

Beyond that, I don't intend to say anything further related to outstanding litigation.

While our cash performance was off of our projections, we finished the year with $1.6 billion cash balance.

So with also the refinancing activities we completed earlier in the year, we have no significant debt maturities until 2013.

I'm comfortable with our cash position, which will enable us to continue to invest and scale our growth initiatives and execute our strategy.

Overall I'm pleased that despite the smaller top line that we had anticipated, we delivered earnings, and they are within the range that we had targeted, and we accelerated momentum with our four growth initiatives that are so important for our future.

I will turn now to Ann who will provide more details on our financial performance.

Thanks, Antonio, and good morning, everyone.

I will provide a detailed look at our fourth-quarter financial results, a quick summary of the full year's performance, and then Antonio and I will take your questions.

As Antonio indicated, we continue to gain strong traction in 2010 with our growth initiatives -- consumer inkjet, commercial inkjet, workflow software and services, and packaging.

We are very pleased with the marketshare trends we are seeing for these businesses, and we see plenty of growth in their future.

When we entered the fourth quarter, our internal plans and our external indicators predicted a stronger selling season than actually occurred.

Most noteworthy, revenues for our digital cameras were impacted by increased pricing pressures as consumers opted for cameras at the lower price points, and consumer demand was lower than expected.

Revenues for our digital plates were also impacted by competitive pricing environments, especially in Europe where industry overcapacities continue to have the most negative impacts.

The revenue decline in these two large businesses is the primary reason we did not achieve our 2010 digital revenue growth goals.

While full-year revenues were below our targeted range, we did achieve our goal for segment earnings from operations by delivering above planned intellectual property licensing revenue and continuing to improve our cost structure.

We ended the year with a cash position of approximately $1.6 billion.

Now let's turn to the fourth-quarter and full-year results.

Consolidated revenues for the quarter were $1.9 billion, a 25% decrease versus the prior year.

A significant portion of this decline was due to the timing of intellectual property transactions.

Other factors include the continued industry-related volume declines in our traditional businesses, accelerated market softness in consumer discretionary spend for digital cameras, and lower kiosk media burn.

For the full-year 2010, total consolidated revenues were $7.2 billion, a decrease of 6% from the prior year.

This decline is largely due to lower volumes in our traditional businesses and the previously stated pricing pressures in our digital businesses, partially offset by higher intellectual property licensing revenue.

Our fourth-quarter gross profit margin was 19.4% versus 34.4% in the year ago quarter.

This decline is largely due to the results of intellectual property licensing transaction in the fourth quarter of 2009.

For the full year, gross profit margins improved approximately 4 percentage points.

This increase in gross profit margins was largely due to higher intellectual property licensing, cost improvements in both Digital Capture and Devices and consumer inkjet, partially offset by negative price mix for digital cameras and digital plates.

The net silver and aluminum commodity impact to gross profit was an unfavorable $13 million during the quarter versus the prior year and a favorable $9 million for the full year.

As Antonio indicated, we are implementing a number of actions to mitigate the impact of each increased commodity pricing on our 2011 results.

Our pretax restructuring charges totaled $24 million for the quarter and $78 million for the full year.

Restructuring-related payments from cash, corporate cash were $17 million for the fourth quarter and $88 million for the full year, which is slightly lower than our previous guidance.

For the fourth quarter, GAAP earnings-per-share from continuing operations were $0.12 compared to GAAP earnings-per-share of $1.36 in the fourth quarter of 2009.

For the full year, GAAP loss from continuing operations was $58 million, an improvement of $174 million, largely due to improved earnings performance in our digital businesses, including higher IP.

Lower restructuring charges and a benefit due to the expected realization of certain tax assets.

This was partially offset by higher interest expense and the one-time non-cash charge associated with an early extinguishment of debt from the first-quarter financing transactions.

Now let's take a look at the results by segment.

For the quarter, Consumer Digital Imaging Group's revenue were $731 million, a decrease of 40%.

On the earnings side, CDG segment earnings from operations decreased by $437 million as compared to last year's fourth-quarter segment earnings from operations.

This decline in revenue and earnings is largely due to the timing of intellectual property licensing revenue, negative price mix in our Digital Capture and Devices businesses, reduced volumes for kiosk media, and unfavorable foreign exchange.

This decline was partially offset by improved sales of our pocket video cameras, higher volumes of consumer inkjet printers and ink, and continued cost improvements in consumer inkjet business.

CDG's full-year revenue increase by 5% to $2.7 billion, and segment earnings from operation improved by $295 million to $330 million, primarily due to higher intellectual property licensing revenue and increased revenue from our consumer inkjet business.

Moving on to Graphic Communications Group, GCG.

Fourth-quarter revenue was $757 million, a decrease of 3% versus the prior year quarter.

For the full year, GCG's revenue was $2.7 billion, a decrease of 2% versus the prior year's and essentially flat in local currency.

The revenue decline for the quarter and for the year was primarily caused by negative price mix for digital plate, resulting from current industry overcapacity.

However, it is important to note that for the year our digital plate volume increased by 4%, which is in line with the industry.

The revenue decline for the year was partially offset by increased sales from PROSPER product line, including consumables and services and document imaging production scanners.

GCG's fourth-quarter segment earnings from operations were $12 million compared to earnings of $36 million in the prior year quarter.

For the year, GCG's segment loss from operations was a $13 million improvement from the prior year.

This improvement in earnings is largely attributable to the significant cost improvement in our Electrophotographic Printing Solutions business and lower material costs, specifically aluminum, partially offset by negative price mix for digital plate, continuing investment in commercial inkjet, and workflow software and services businesses.

Taking a look at the Film, Photofinishing and Entertainment Imaging Group, FPEG, FPEG's revenue declined by 25% to $439 million for the fourth quarter and declined by 22% to $1.8 billion for the year.

FPEG posted a loss from operations of $3 million for the quarter and $62 million in earnings from operations for the year.

FPEG's revenues and earnings for the quarter and full year were impacted by industry-related volume declines across each of the businesses, as well as higher silver and petroleum-based raw material costs.

FPEG's operating margins were 4% for the full year, down 3 percentage points when compared to the prior year.

The decline was primarily the result of increased commodity costs.

The business continued to aggressively manage costs ahead of this revenue decline.

Taking a look at our balance sheet, we began 2010 with just over $2 billion in cash and ended the year with over $1.6 billion in cash, reflecting a decline of approximately $400 million.

The following factors contributed to this decline in cash.

Cash used in operating activities of $219 million reflects the continued investment in our growth initiatives, increased interest payments, and the previously discussed restructuring payments.

It is also important to note that cash from intellectual property transactions and the benefit payments were similar to last year.

The cash used in investing activity of $112 million reflects capital expenditures that were in line with last year and were partially offset by modest proceeds from asset sales.

Cash used in financing activities of $74 million reflects a payment of $62 million in debt maturities, along with some debt issuance costs.

Our cash balance provides us with the ability to continue to make the investments necessary to complete our transformation.

I also want to bring to your attention a couple of accounting matters as it relates to our 2011 financial reporting.

Effective January 1, 2011, we will implement a change in useful life estimates for certain assets associated with our traditional business.

This change updates the estimates we made in 2008 to our current operational plan, and we estimate that this change will result in a favorable impact on earnings for full-year 2011 of about $30 million.

This is not a change -- this change does not impact corporate cash.

Also effective January 1, a recently announced issued accounting pronouncement will require the Company to perform a goodwill impairment test for FPEG.

The results of this analysis are not yet known.

We will provide further disclosure of the status of the Company analysis in the Form 10-K to be filed in February.

While 2010 proved to be a challenging year, we are pleased with the positive results of our growth initiatives, our earnings performance and the momentum that provides us as we enter 2011.

We look forward to providing you with more details on the Company's plans for 2011 and beyond next week at our conference with the investment community in New York City.

Thank you very much.

Now Antonio and I will take your questions.

(Operator Instructions).

Ananda Baruah, Brean Murray.

Antonio, I appreciate that you don't want to go into the process too deeply with the ITC.

But I was just wondering could you comment if you guys were given any particular reason for the ruling?

I guess I have been looking at the ITC white paper.

It did not appear that any was given from the judge, so I'm wondering if you guys got any feedback?

No, if you ask the lawyers on the process, they will tell you that while in the following days, there will be a disclosure of why the ruling was done that way, and there is a process obviously to go after that, and everybody will have something to say.

This is a complex process.

We issue a PR statement, and I stick to what was said in the PR statement.

I guess just to that end, I'm sure you will talk to your IP guidance next week.

But if you can help us out at all here, would this impact since you have been exceeding the $250 million to $350 million guidance the last couple of years, would this in any way impact your thinking around $250 million to $350 million for 2011?

We will talk about all of that in February, but let me say one thing.

I'm not concerned about the cash impact of this decision.

We have the ability to generate sufficient cash to continue the strategies that we have, and we will look for what the decision says, and we will cooperate accordingly, and we will give you more details in February.

Great.

And I guess maybe Antonio one for you and maybe Ann as well.

I guess on the camera business, it feels like the camera market was a little bit softer than expected for everybody in the December quarter.

I mean can you just talk to strategically your thinking about the camera business?

Has it changed at all since as we moved through 2010?

And then even if strategically what you want to do with go to market has not changed a whole lot, are there any things that you guys think you can do to improve the profitability of the business?

I think we can.

And what you will see, as I said in my notes, you will see a very aggressive strategy in abandoning segments that are not profitable and just staying on the segments that we know we can make money.

And that will, of course, we are going to sacrifice topline, but we are not interested in that.

We are interested in the bottom line.

So you will see a big difference in the way we operate that business in 2011.

Of course, we will continue to take advantage of my success in video cameras and in the other parts of the business that are doing well, but we will take a very aggressive approach to the placement of digital still cameras both in segments and in geographies that has proven that they are not going to be profitable.

Arun Seshadri, Credit Suisse.

I wanted to ask you about first on GCG business, during --

You had better check your call.

You cut off on and off so --

Can you hear me now?

Yes, much better.

Thank you.

In your GCG business versus your outlook that you gave us in the third-quarter call, were you explicitly stated that you expect GCG to grow in the fourth quarter, can you talk about what changed between that time and when you reported this quarter?

Yes, we were expecting the -- the number of units continued very much where we thought it was going to be, and we have about 36% market share worldwide, and we kept that number approximately.

The issue was that we were expecting the pricing pressures, especially in Europe, to get lower, to get smaller, softer, and it did not happen.

And that is the cause of the revenue performing the way it did.

We continued to have very good performance in emerging markets, which is very, very important for the future, for next year.

Most of the growth is going to be there.

There is not going to be much growth either in Europe or in the US.

So the strategy is twofold.

It is to contain the pricing decline in the developed regions, and for that we have -- we came up last year with the plate that we called Trillian, which is important because the offers have very high productivity, much higher than the rest of the market, and therefore, it would allow us either to price it higher or at least to deal with a price decline, one of the two.

And then for the -- we continue with our plan for the emerging regions where we -- a lot of the success that we had in CTPs was in the emerging regions, and that bodes very well for our next year in digital plate volume in the emerging regions.

Now if you take actually our currency out, you will find that GCG was actually flat in the fourth quarter, and that is important, too.

So there was an improvement quarter over quarter although small, but it was an improvement in the overall market performance.

So there was slightly less pricing pressure, not significant, but enough that we were flat quarter with quarter.

We have a lot of faith in the new platform of Trillian.

We worked very hard at the beginning of last year to come out with something that will service as a tool for this situation, and we are going to scale it this year.

Okay.

Appreciate that.

Then next could you talk about how big revenue-wise your four growth businesses are?

They are about slightly over 10% of the Company, growing rapidly obviously.

So they will become a lot more this year, and they will be significant -- very significant in 2013.

Those four businesses are the basis for the future of the Company, so they are very important.

Okay.

And I think you said in the quarter that the growth in those four businesses was, again, double-digits.

But did you give a number, a percentage?

Yes, it is 23% in the fourth quarter and 18% for the full year.

Okay.

Great.

And then finally, I wanted to ask you a question on your cash flow generation, excluding IP.

And if I back out roughly $500 million in IP cash flow incoming in the fourth quarter of 2009 and backing out the $78 million that you got in IP in 4Q 2010, I noticed that the cash flow generation excluding IP was still much weaker than 4Q 2010 versus 4Q 2009.

Can you give us a little bit more color around why that was?

So, as we talked through the cash flow for 2010 and if you look at the full year, the IP cash was essentially in line for full year with prior years.

We did have for the full year higher interest expense than previous years.

We continue to invest in our core growth initiatives.

So I think the year-over-year quarter differences are driven largely by the lower earnings and working capital.

Okay.

Thanks for that.

Just a clarification on your answer there.

What was -- I mean I get roughly $830 million of inflows from IP in 2010 in cash.

So was 2009 similar then to other numbers?

So, the net cash, you are doing just the nonrecurring IP, but the net cash from IP was similar year over year.

Okay.

So the net cash is -- when you say net cash, how is that different from like nonrecurring cash?

The difference would be the taxes, the withholding taxes that are associated with some of the IP settlements.

So the only difference between those numbers -- (multiple speakers)

Other things like that -- cost of litigation, those things.

Okay.

Great.

And then finally, in your cost of goods sold, have you quantified or can you quantify the $13 million impact that you gave us this quarter, the commodity cost negative?

Is that predominately silver, and can you talk to us -- can you tell us a little bit more about silver as a percentage of overall cost of goods sold?

Yes, the negative impact in the fourth quarter is predominately silver, and the way we talk about silver to think about it is, that for every dollar change per troy ounce is about $10 million to $12 million impact as it flows through costs.

There is a slight delay on from when the price increases until it flows through, but you can think of that as the impact.

Shannon Cross, Cross Research.

I just had a couple of questions.

My first one is on the film business.

Can you talk a bit about how we should think about that business trending from a margin standpoint?

Any potential restructuring that would need to happen as volumes decline?

I'm sure you will talk about a lot of this in February, but if you could give us just some ideas on your thoughts on the film business?

Well, I mentioned a few thing, I said that we will have obviously aggressive restructuring costs associated with that business given the decline.

I think the most important thing for us is to find a way to deal with the silver variability.

We managed this business for cash, and we have to moderate the impact of silver, and we have to choose to do that fundamentally.

There are other small ones, but fundamentally is that to go for index pricing for new contracts indexed to the silver price and as well doing hedging where it is appropriate for the contracts that are already done that you cannot change, and those two things are in place plus the cost controls.

Okay.

And then on the kiosk business, which is clearly facing tough headwinds because of the contract that ended, can you just remind us was that sort of an October end, and so we will face that for the next few quarters, or I don't know, Ann, maybe you could provide some color on just how we should think about that, and how you have been able to offset it with perhaps additional new placements?

No, you have to -- the Q4 to Q4 comparison is very negative for the business because of the transition from the one retailer.

The most important thing is that during this year we actually increase the number of locations where we have now kiosks.

So we have gained a very large number of deals that put us again at the same level or higher than the locations that we had before that loss.

When there is a transition from one retailer to another, there is a concrete gain that you have in the few months in which we are leaving that retailer because the prices of the consumables get to be higher because the volumes are lower.

When the volumes of the retailer are lower, it has to be paying higher for the consumables, and that obviously helped with the results of the businesses.

Even though we were losing that deal, the bottom line was very good because we were pricing consumables a lot higher.

You will see that starting in Q1 and Q2, you will see that effect gone away, and I expect this business to go back to the levels that it was before that.

Because we have achieved during the year the number of positions, the number of locations, that we have before.

Okay.

Thanks.

And then Ann, if you could talk a little bit on the cash flow side for first quarter.

Just as your business has evolved so much over the last couple of years.

From a seasonality standpoint, can you talk a little bit about that puts and takes on working capital?

Things we should keep in mind as we model first quarter cash flow?

Obviously we will talk about full-year 2011 in February and go through as we normally do the detail of what we think the cash flow operating plan will be.

But I would not expect just for the first quarter of 2011 to be seasonally significantly different than it has been in the Company's history.

Ulysses Yannas, Buckman, Buckman & Reid.

Talking of goodwill for FPEG, if my memory serves me right, it is about $622 million.

That is principally associated, I think, with your purchase of labs in Europe.

Is that correct?

It is associated with all of the historical transactions that we have made, including the labs in Europe, [Cualicson] and other things.

So, in essence, we should be assuming that the bulk of it will be written off, correct?

Well, it is hard for us to make a judgment until we complete the analysis.

So we want to make sure that we give you the appropriate answer, and we should have that done in time to give it to you in the 10-K.

But we do want to remind you as with the one we have done previously, it is a non-cash impact.

Yes, of course.

Another question if I may.

You have some new business in FPEG that you talked about.

How is that doing, and what percentage of the total is that now?

It is --

I said in my notes in my comments that it grew about 7% in 2010.

It represents right now about 13% of the total revenue.

This is a very important activity that was started two years ago and is starting to bear fruit now.

And it is about thin-film technologies and special chemistry in others.

We think this business will continue to grow to the point that by 2013 we believe it will be 30% of the total revenue of FPEG, and it is cash accretive already because we are just repurposing the assets that we have.

We are not -- we don't have to make any significant investment of any kind.

It is repurposing the assets.

And what is important as well is this, by and large, is independent of silver.

So we are working very hard to make that as fast as we can because this is the best tool we have to moderate the decline and help with the cash generation in that business.

Antonio, it appears that consumer inkjet sales in the fourth quarter were very slow.

How do you explain or why did you increase the price of the 10C color cartridge by 25%?

I don't think it was -- we don't think it was low.

This is -- the market was slow for the whole year where the growth was -- we don't know exactly the numbers, but we know that it was lower than 5%.

What that means is that fewer people were willing either to buy a new printer or to replace the printer they have.

So they are changing their printers at a slower rate.

Our business is based on taking fundamentally replacing someone else's printer.

So the growth that we have in the fourth quarter I think is very impressive.

And we grew 40% in a market that did not grow maybe 3% or 4%.

I don't know the numbers exactly, but low single digits.

And when you look at the ink, we actually grew 77% for the full year, which is the most important metric of this business.

And because of our scale, actually the gross profit was actually double.

So we achieved the goals that we have with the gross profit, which was to double the gross profit for the year.

We are very satisfied with the growth.

Our objective all along this way with this business was to turn this business profitable during 2011.

We are tracking for that and to have positive earnings in 2012 for the whole year, and we are tracking for that.

Did your pocket video camera sales -- what percentage of the market are you up to right now?

Have you approached flat?

We are number two.

I think we are getting close to -- I cannot tell you the number exactly.

I think in another month they will be published, but we are in high double digits, and we are approaching, yes.

Mark Kaufman, Rafferty Capital Markets.

I've got a question.

It pertains to -- it starts with the last call when you mentioned that cash was still expected to be between $1.8 billion and $2 billion at year-end.

I guess the call was at the end of the quarter in October.

At this juncture you have come in a couple of hundred million dollars below the low end of that range, and I certainly understand it from the standpoint of lower cash flow from the items that you called out.

And looking at the changes in working capital, in my mind I see that the inventories and receivables are higher than where originally would have expected.

Now that may be part my fault not recognizing the impact of the rollout of the commercial printers -- (multiple speakers)

(multiple speakers) I'm going to answer your question.

At that time we were very close to settle on an IP deal that at the end that we did not was because we did not think it was appropriate.

Well, I do have a question, though, about where your inventories are with relationship to the commercial printer business, the high-speed commercial printer business, and related products.

Should I be thinking in the future that because of the investment in the business that they are going to be higher or that you had been building up inventory to meet the backlog that you had discussed previously for 2011?

I think you should be thinking about the fact that as we have been preparing to really get a number of these units in the marketplace, we have been building units up, and we intend to put them into the marketplace as we go throughout the year.

But we don't expect that increase in inventory to be there at year-end.

Okay.

And so my other question relates to receivables.

I know you had the Samsung receivable running throughout the year.

Is there anything in the two deals that you signed up third quarter, fourth quarter, that's impacting the receivables at year-end?

No.

So is there anything else in receivables that might be higher than normal?

No, we are actually really pleased with our receivables balance, and one of the things that the Company has been working on over the last year and a half or so is to really drive down past dues, and we have been really successful with that.

So there is not anything in receivables that should be odd.

You know with the fourth quarter as with in particular because of the holiday season and where it falls, we could have had some sales that were closer to the end of the month than normal that might have pushed your receivable balance up, but I don't think you should think of there being anything odd in receivables.

The other ting -- you were asking -- the other question you asked about receivables, we do want to mention that for digital cameras as we talked about, we did have a revenue shortfall than we expected, and some of that inventory -- some of that did end up in inventory.

Okay.

And Antonio, your comment was that your thinking at the time that there was another patent deal potentially in the works for the fourth quarter.

Yes, we always have more than one.

We have a variety of them, and they were -- it was a specific one that was almost consummated, and it went wrong at the end, and we did not take it.

Chris Whitmore, Deutsche Bank.

I wanted to follow up on some of the cash flow questions.

First, can you quantify the cash received from IP payments in 2010?

It is in the $600 million range.

I'm sorry, did you say in the $600 million range?

Uh --

So if I exclude that, the business burned about $1 billion in free cash flow for 2010?

Is that correct?

About $629 million.

I guess the underlying question I'm trying to get at here is, if you exclude the IP income, the operating businesses are burning about $1 billion in free cash flow annually, and you seem to have grown a independence on these IP deals.

Is that how you view it?

Do you think you need to continue to win these IP deals to maintain the levels of investment in the business?

And secondly and perhaps relatedly, are you considering any significant asset sales or other sales to raise cash to continue to fund the ongoing investments that you are making in these growth businesses?

No, the first question.

When the Company decided to create a new digital company, we only had really one source of cash to do that.

The cash generated by FPEG was fundamentally dedicated to the transformation, the restructuring of FPEG and to pay for the legacy liabilities of FPEG.

So the only way that the Company had to create a new digital portfolio was to monetize IP and use that IP to fund the new businesses that you know that we now have.

The dependence of that is smaller and smaller.

In fact, I have been on record saying that very much after 2012, we believe that our strategy with IP was we will continue to monetize IP.

It will be changing significantly to more of creating partnerships of other way of getting value for our shareholders for the IP portfolio we have rather than cash.

So the answer to your question is no.

We don't need to generate all of this amount of IP to continue with the program, not that it is a bad thing to have it.

We are very proud of the monetization that we have created, but no, the business, as I said, consumer inkjet will stand by its own.

It will be positive in 2012, and commercial inkjet will turn profitable during 2012 and be profitable and would generate positive earnings in 2013.

I give you the two examples of the two, by and large, largest investments that we have in the Company.

That gives you an idea that the need for that cash largely to continue to invest decreases exponentially as we get into 2012.

The second question, yes, with the decline of FPEG, there is an opportunity to have asset sales, and we will do that as it comes -- as the decline occurs.

So we will be doing that next year and in years to come, and that will be a source of cash as well.

Okay.

Thanks for that answer, Antonio.

One follow-up would be around just looking backward at the consumer inkjet and commercial inkjet businesses in terms of investment in 2010.

What kind of inflection are you anticipating from those businesses from 2010 to 2011 and 2012?

I think you gave us the outlook for 2011 and 2012.

I'm just wondering how much investment was made in those businesses in the trailing 12 months?

Why don't we wait until February, and we will talk in detail and we will talk in a lot of depth about consumer inkjet, and still for us we will talk at depth in commercial inkjet.

It is better to have the whole perspective of the business to answer those questions appropriately.

Thank you and at this time there are no further questions.

I would like to turn the conference back to Antonio Perez.

Well, thank you very much for attending.

Again, overall I'm pleased that we delivered the earnings that were within our targeted range despite the lower revenues.

In fact, our digital earnings of $301 million more than tripled our previous records that was in 2007 where we had positive $87 million.

I'm very pleased that we have a very strong positive momentum with our core growth initiatives, stronger than we ever had.

I'm very pleased as well with our presence in the growing geographies, which I think is extremely important moving into the next few years given the slow recovery of Europe and the US.

And we are looking forward to discussing this strategy and more details in New York with all of you.

Thank you very much.

Thank you.

Ladies and gentlemen, this concludes the fourth-quarter 2010 sales and earnings conference call.

If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325 followed by passcode of 439-5323.

Thank you for your participation.

You may now disconnect.