Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Antonio Perez – Chairman and CEO

Frank Sklarsky – CFO

Ann McCorvey – VP of IR

Analysts

Chris Whitmore – Deutsche Bank

Richard Gardner – Citigroup

Sonny [Sagron] - J.P. Morgan

Joan Lappin - Gramercy Capital

Arun Seshadri - Credit Suisse

Shannon Cross - Cross Research

Eastman Kodak (EK) Q4 2008 Earnings Call January 29, 2009 11:00 AM ET

Operator

(Operator Instructions)

Ladies and gentlemen, please stand by we are about to begin. Good day everyone, and welcome to the Eastman Kodak Fourth Quarter Sales and Earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions, I'd like to turn the conference over to the director and Vice President of Investor Relations, Ms. Ann McCorvey. Ms. McCorvey, please go ahead now.

Ann McCorvey – Vice President of Investor Relations

Thank you. Good morning and welcome to our discussion of the fourth quarter sales and earnings. I am 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 activities to complete. Certain statements in this press release may be forward looking in nature or forward looking statements. As defined by the United States Security Litigation Reform Act of 1995, for example, references to the company's expectations regarding the following are forward looking statements. It's ability to address the impact of the economic downturn, its employment reduction, cost cash payments, and savings under restructuring programs and other rationalization activities, new intellectual properties licensing arrangement, the seasonality of its earnings. If expectations regarding the completion of its good will and long live assets impairment requirements analysis. New product introduction to a secure credit facility. 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 statements may need to be evaluated in light of these important factors and uncertainties. Now I'd like to turn the call over to Antonio Perez.

Antonio Perez - Chairman and CEO

Thanks Ann and good morning everyone. The second half of 2008 will go down in the history books as one of the most challenging periods we have seen in decades. The rapid deterioration of the global economy has impacted all industries. Like many companies, the fourth quarter results were negatively impacted. Despite the turmoil in the economy, we were able to generate a considerable amount of cash during the fourth quarter.

Following our transformation, we have created significant momentum in our digital portfolio and until that momentum returns, we are taking the necessary steps to respond aggressively to current conditions. Maintaining a large portfolio of digital business opportunities was the right thing to do when Kodak digital portfolio was in growth mode, which began in the second quarter of 2007. In fact, our digital revenues grew by double digits for four consecutive quarters, from the third quarter of 2007 through the second quarter of 2008.

The unprecedented rapid decline in the global economy still isn't showing signs of improvement, so we must now revise our approach. We must limit our investments to only those core ones that are at the heart of our strategy. We are convinced these investments will provide access to a very large market with sustainable, profitable growth. Our current investments include products at the intersection of material science and digital imaging science where we have a strong intellection property and know-how in a large market opportunity where we can leverage our strong brand. We are committed to these core investments and understand that we have to make pragmatic decisions about all other opportunities.

Quite simply, we have to rationalize our product portfolio and focus our resources on the core opportunities while looking for other business models and other alternatives for the rest. We'll describe all of this in much more detail on February 4th in New York.

In the third quarter, we recognized already the need to lower our cost structure and more tightly focus our portfolio to align with the new economic realities. This alignment will require additional cost reduction. When the 2009 restructuring program announced today is combined with the rationalization actions we took late in 2008, we expect this will result in the reduction of worldwide employment by between 3,500 and 4,500 positions during 2009. These reductions are already underway and we expect the majority to be implemented in the first half of this year.

In total, we expect these actions to generate annual savings in the range of $300 - $350 million dollars and will allow us to enter 2010 as a stronger, leaner company with a cost structure that will enable us to drive profitable growth when the external environment improves.

Our core investments, which are based on break-through technologies, have produced products that even in this environment continue to make significant progress in the market place based on their ability to deliver a unique value proposition to our customers, especially during tough economic times.

Now I would like to share some thoughts on the fourth quarter performance and then close by providing my perspective on the full year. Our concentrated effort to improve working capital was the primary driver of achieving the fourth quarter cash generation before dividends, of $472 million. I'm pleased with the team's focus on performance and working capital, especially in this economic environment. Conserving cash will remain a priority for 2009.

Let's start the segment with GCG, the Graphics Communications Group. GCG's full year revenue of $3.3 billion was down 2% from last year, reflecting a reduction in digital printing and prepared solutions in the last part of the year. However, within pre-press solutions, our large digital play product line actually grew in the high single digits for the total year. GCG's fourth quarter revenue decline of $132 million, or 14%, was a guided reflection of rapid reduction in global printing output and the associated negative impact on the demand for consumables, along with weak demand for capital equipment. GCG's fourth quarter revenues were also negatively impacted by foreign exchange. But even during tough economic times, commercial printers continue to recognize the value of adding color, invariable data capability to their product offering. The year-over-year increase and the unit placement of our next press color equipment and the installation of several of the newly introduced drop on demand [via] 2000 digital presses, was driven by the need for these capabilities.

As far as the document imaging businesses, earlier this month we are now in the acquisition of Bowe Bell + Howell Scanner Division. This acquisition is complementary to our product line in a business that we know well because we are the current field service provider for these products. Once the acquisition is complete, we will be able to provide a broader set of products and services to our channel partners and any use customers worldwide as well as create revenue and cost energies through leveraging our distribution channels and driving back office consolidation.

In the fourth quarter, GCG's segment loss of $4 million was down $34 million from last year's earnings of $30 million, driven by the rapid decline in global print demand, partially upset by actions taken to reduce ACGNA. For the full, year GCG segment earnings of $31 million was $73 million below last year, driven by negative price mix partially upset by lower ACNA.

Next CDG, the Consumer Digital Group - CDG's full year revenue declined 5% to $3.1 billion, driven by the 7% decline in digital capture and devices, which was negatively impacted by significantly lower consumer discretionary spending late in the year. More than 50% of the reduction in digital capture and devices was driven by the continued industry decline in its [snap shot] printers. This was partially upset by growth and retail printing solutions and consumer ingest.

The fourth quarter is seasonally the largest quarter for CDG. As a point of reference in 2007, the fourth quarter was 42% of the full year's revenues versus 31% for the fourth quarter in 2008. When you take the seasonality into account, you can see why from both a revenue and earning's perspective, the fourth quarter economic downturn has such a major impact on CDG. After growing more than 14% in the first three quarters of 2008 as compared to 2007, CDG's revenue declined 30% in the fourth quarter. Meanwhile, our innovative line of digital still and digital cameras and consumer ink jet printers gained market share in the fourth quarter. It was not enough to upset the dramatic reduction and consumer discretionary spent.

This holiday season was weaker than anyone expected, at mid-year. Revenues were also negatively impacted by lower price of makes of digital cameras and digital picture frame sales in lower intellectual property licensing revenue. During the fourth quarter, consumer revenues were impacted by the weak industry demand, and as a result, declined 6%. Even in that environment, our consumer inkjet sale through was extremely strong in the fourth quarter, significantly outpacing the industry in year over year growth.

The overall printer market suffered, as consumers were cautious in their spending and not willing to upgrade printers without a compelling reason. Our value proposition gave the consumers a reason to purchase. Our market share continued to grow in the fourth quarter as it did for the whole year.

Moving us along, the business model we are pursuing, we achieved significant progress in both sell in and sell through for the year for consumer Inkjet. In 2008, we sold 78,000 consumer Inkjet printers to the channel compared to 520,000 in 2007. More importantly though, is we more than doubled the sale through with end users purchasing 730,000 units compared to the 320,000 units in 2007. We entered 2009 with more than a million units installed, all of which will be generated in revenue from higher margin consumables.

Sale through and sale rate are the two key metrics in this business and in both we have great performance. As I said, we more than doubled sale through year and ended the year with a cartridge burn rate of 8 cartridges per year that is significantly higher than the industry average. We have an attractive value proposition that resonates very well with end users and especially in a tough economic environment.

We also continued to receive a positive response from retailers to our [Apex] dry mini labs which require less labor, floor space, energy usage and technical support when compared to traditional mini labs. We now have close to 100,000 kiosks and dry mini labs installed around the world.

For the fourth quarter, CDG's segment loss was $40 million compared to earnings of $91 million in the fourth quarter of last year. The decrease was driven by weak consumer demand in digital capture and devices and lower price mix along with reducing the intellectual property royalties and unfavorable foreign exchange. These decreases were upset by reductions in AGNA, R&D and improvements of consumer Inkjets, driven by the new lower cost platform. For the full year, CDG segment loss of $177 million, compared to a loss of $70 million dollars in the year before. This reduction was largely driven by negative price mix including lower intellectual property royalties and partially upset by improved manufacturing cost in lower AGNA and R&D.

And finally, FPG photofinishing and entertainment group - FPG full year revenue declined 18% to $3 billion primarily reflecting the industry driven decline in film capture of 40% moderated by at 19% decline in traditional photo finishing and a 5% decline in entertainment imaging. In the fourth quarter, the weak economy has accelerated the reduction and revenue of film capture and traditional photo finishing. Entertainment imaging was negatively impacted by foreign exchange, the threat of labor actions in the industry, and to a lesser extent, the weak economy.

All combined, FPG's economy declined 27% for the fourth quarter a much steeper deterioration than 15% decline through the first three quarters. For the fourth quarter FPG segment earnings of $39 million improved $22 million from last year, driven by operational improvements, in traditional photo finishing, dramatic reductions in AGNA along with the benefit of lower depreciation and expense associated with changes in … and reduced variable compensation and employee benefits cost partially upset by continuing industry volume decline in film capture.

With the changes in the global market approach and improved productivity, this quarter's results reflect the significant progress towards our goal of improving the profitability of traditional photo finishing. For the full year the FPG segment earnings of $196 million shows a decline of $85 million from prior year due to continue industry decline in film capture along with negative price mix.

This decline was partially upset by the significant reduction in AGNA as well as the benefit of lower depreciation expense associated with change in useful life and reduction in employee benefits.

Now, when you step back and look at the total company for the full year, despite the external challenges, there were many positive signs. Detail printing solution revenues grew modestly for the year. We have significant market share gains in consumer Inkjet while the industry contracted and our revenue grew 32% year over year. MPD's consumer tracking service was collecting first place for 2008 digital camera market share in the U.S, a position that we have helped this since 2005.

All this for the VL 2000 digital printing presses were strong. Their introduction is tracking to the new schedule with the gas on the second quarter call. The Stream print head will be in the market late this year, and the printing presses will be in the market early 2010. Even with the disappointing Q4 results driven by the economic environment, our competitive position has significantly improved and I feel stronger than ever with our portfolio in our core businesses.

And it is this improved product position, our people, the strength of our brand and our financial position, that give me the confidence that we will emerge from this challenging period as a leaner, stronger competitor.

Now I will turn this back.

Frank Sklarsky – CFO

Thanks Antonio, and good morning everyone. Before I get into the details of our financial performance, I wanted share with you a few thoughts about the quarter, and how we are addressing the impact of the external economic environment. The credit crisis that dominated much of the third quarter developed into a wide-ranging global recession in the fourth quarter. In addition, we experienced a level of economic activity that continued to slow as we proceeded through the quarter as November and most notably December were clearly the weakest months of the year on a seasonally adjusted basis.

During these difficult economic times, it's critical for us to not lose focus on the things we can control. As we entered the fourth quarter, there were already a number of internal and external indicators that signaled we would experience significant negative impacts in most of our businesses. Consequently, we accelerated our planning on some very aggressive actions lining our cost structure with external economic realities. We redoubled our focus on cash including working capital and capital expenditures and around SGNA costs all on a global basis. We also carefully assessed how we deploy our capital analyzing where we will target our resources to drive sustainable, profitable growth in the most effective manner.

As you heard from Antonio's remarks, and saw in today's announcements, we are acting swiftly, decisively, and aggressively to address the current situation. We strongly believe that the value propositions embedded in our unique product portfolio, combined with a lean sufficient supply chain and a stream lined administrative cost structure, will enable us to not only weather these difficult times, but also set the stage for enhanced growth and profitability once the economy recovers.

Now on to our fourth quarter results. Consolidated revenues for the fourth quarter declined 24% to $2.433 billion dollars. Foreign exchange represented about three percentage points of the decline due to strengthening of the U.S. dollar.

Digital revenue declined 23% to $1.779 billion for the full year revenue declined 9% to $9.416 billion and foreign exchange represented a benefit of about 2 percentage points per year. Digital revenue declined a modest 4% for the year, the companies digital revenues experienced double digit growth in the first half of the year, and this was offset by the impact of the external economic environment and the back half in particular the fourth quarter.

Now let's take a look at revenue on a segment basis. CDG, the Consumer Digiting Group experienced a fourth quarter revenue decline of 30%, driven by a significant contraction in discretionary spend resulting in reduced consumer confidence, along with accelerated job losses, tightening of credit, reduced wealth effect from the precipitate decline in the equity markets.

For Kodak, this translated into lower revenues from digital cameras and digital picture frames. The absence of meaningful revenues from snapshot printers as that category rapidly declined and reduced media earn from kiosks as consumer's travel and leisure use was reduced. Intellectual property licensing revenue, while strong, also declined as compared to the prior year quarter. For all of 2008, CDG revenue was down a modest 5% reflecting the double-digit growth in the first half of the year.

GCG, the Graphic Communications Group experienced a revenue decline of 14% in the fourth quarter. This resulted from a weakening of global print demand, reflecting a decline in the number of commercially printed pages. This in turn translated into reduced demand into consumables and the lowering of capacity utilization for commercial printers, thereby reducing their need to replace or add to capital equipment.

We experienced some cancellations of previous orders and some installations and other orders were indefinitely delayed. In addition, in some cases, we believe that due to the tightening of credit markets, it became more difficult for those choosing to expand to obtain the necessary capital. That said, the company had a successful quarter selling and installing several new Veal 2000 drop on demand digital printing presses as this product has been well received in the market place.

You also heard Antonio comment that Stream was on track and there has been continuing interest in this breakthrough technology. While difficult to predict, we are hopeful that next year's introduction will coincide with some recovery in the external economic environment, thereby yielding a successful ramp up of that product.

For all of 2008, GCG revenue was down only 2% reflecting strength in digital plates and a continued strong market position in that business. FPEG, the Film, Photofinishing and Entertainment Group experienced a revenue decline of 27% in the fourth quarter, reflecting volume declines in film capture and traditional photo finishing. In film capture, the category decline continues to accelerate. The entertainment imaging business was down 10% and was negatively impacted by both the overall economic environment, continued concerns over screen actors' guild contract issues, and unfavorable foreign exchange.

For all of 2008, FPEG revenue declined 18%. Most notably entertainment imaging was down almost 5% for the year, due mainly to labor issues and overall economy in the fourth quarter. In general, the EI business has continued show strength and resilience. The fourth quarter gross profit margin was 20.5% versus 24.7% last year, a decline of 4.2 percentage points. This decrease in gross margins was largely attributable to unfavorable price mix across a number of product lines, lower intellectual property licensing revenues, unfavorable foreign exchange, and a negative impact from silver cost.

These factors were partially offset by the change in depreciation useful lives for traditional manufacturing assets and reductions in employee benefit costs, including other post-employment benefits [OPED], along with reduced component and manufacturing costs in several digital and traditional businesses.

Also, for the fourth quarter, SGNA costs decreased by 23% or $122 million, as compared to the prior year. SGNA costs were 16.6% of revenue, roughly in line with the prior year, despite the significant decline in revenue during the quarter.

R&D costs declined by about 14%, to $120 million, reflecting the mix of spend across product categories and a tighter focus on core priorities. Fourth quarter GAAP loss from continuing operating was $133 million or $.50 per share, reflecting the significant impact on revenue from difficult economic conditions, lower gross profit margins, and higher restructuring and rationalization costs. These factors were partially offset by substantial reductions in SGNA and more focused R&D spend.

Let's take a look at earnings, by segment. The Consumer Digital Imaging Group loss was $40 million in the quarter, as compared to $91 million earnings from operations in the year ago period, a decline of $131 million. This decrease was due, largely, to lower volume and negative price mix, particularly in digital capture in devices, including lower intellectual property royalties, and unfavorable foreign exchange.

These impacts were partially offset by cost improvements in digital capture and devices, consumer ink jet, and other products, along with reduced and more efficient advertising spend and lower research costs.

Graph Communication Group fourth quarter segment loss was $4 million, as compared to $30 million earnings from operations in the year ago period, a decline of $34 million. This was primarily attributable to market softness for consumables and equipment across numerous product lines, price mix impacts related to newly introduced digital printers and scanners, and unfavorable foreign exchange, partially offset by significant SGNA cost reductions.

Fourth quarter segment earnings for FPEG were $39 million or a $22 million improvement from the prior year quarter. This increase in earnings was largely related to significant cost improvements and lower distribution costs for our traditional photo finishing business, benefits from the change in depreciation useful lives assumptions, and [OPED] costs, partially offset by the accelerated volume declines in film capture, price mix impacts, unfavorable foreign exchange, and a negative impact in silver versus the prior year.

Despite a difficult economic environment, and the impact it has had on operations, the company's cash position remains strong. For the fourth quarter, the company achieved cash generation before dividends of $472 million. We are particularly pleased with the results of our efforts to improve working capital. These efforts included a dramatic reduction in past due accounts receivable, noteworthy in this environment, further progress in aligning supplier payment terms to our technology peer group, and effectively managing inventories. We remain committed to treating cash as a very high priority and are dedicated to maintaining a solid balance sheet.

During the fourth quarter, the company repurchased approximately six million of its shares, at a cost of $82 million. While the previously disclosed share repurchase authorization remains in effect through the end of 2009, we are not currently in the market repurchasing any of our shares. We will continue to provide updates on the program, at the end of each quarter.

Overall, we ended 2008 with over $2.1 billion in cash, while total debt stood at a manageable $1.3 billion. We are pleased with the flexibility that our solid balance sheet provides us, in this economic environment.

We previously communicated that due to external market conditions, we would be intensifying our efforts to align the company's cost structure with external economic realities. We are operating in an extremely challenging environment and we need to be agile, and adjust quickly.

During the fourth quarter of 2008, we incurred $103 million in corporate restructuring and rationalization charges, and made restructuring related payments, from corporate cash, of $32 million.

As Antonio indicated, this morning we announced a corporate restructuring program for 2009. In connection with this program, the company expects to incur total restructuring charges in the range of $250 million to $300 million. Corporate cash payments for 2009 will be in the range of $225 million to $275 million.

This range of payments includes those actions associated with the 2009 program, along with carryover actions associated with rationalization decisions from 2008. It's important to note that there are a number of initiatives already underway to quickly reduce our cost structure further.

Overall, annual savings is associated with the 2009 program, combined with annual savings associated with charges taken in the fourth quarter of 2008, are in total, expected to be in the range of $300 million to $350 million per year.

Next week, at our conference with the investment community, in New York City, I will provide more detail around charges, payments, reductions and positions, and projected savings associated with the actions taken in 2008, and those projected for 2009.

I would now like to discuss two additional items. Today, the company reported its fourth quarter earnings, on a preliminary basis, because of the impairment testing it is performing in its long-lived assets and good will. Given the uncertainty surrounding the present economic conditions, and the volatility of the market capitalization, in comparison to book value, the company is performing impairment testing as of the end of 2008.

It's likely that a non-cash impairment charge, which could be material, will be recorded in the fourth quarter of 2008, based on these analyses. This exercise will be completed prior to filing of the company's 10K, in late February.

The second item relates to our financial covenants. At the end of 2008, the company maintained a substantial cash balance, and was in full compliance with all of its financial covenants associated with its revolving credit agreement.

The company maintains this credit arrangement in order to provide additional financial flexibility. At the present time, Kodak has no funds drawn in connection with this arrangement, although we do have a modest amount of outstanding letters of credit issued onto the revolver.

In the current environment, the company continues to experience an earnings impact, as a result of the economic downturn and also expects its earnings to be seasonal in nature, as is typical. We also expect to incur significant restructuring charges in the first half of 2009.

The combination of these factors will have an impact on the metrics used to determine financial covenant compliance. For this reason, management is engaged in dialog with our agent and other key banks to ensure that the company continues to have access to a revolving credit arrangement.

There is a high degree of uncertainty surrounding the depth, breadth, and duration of the global economic recession we are currently experiencing. In this type of environment, we must focus on the things under our control. We believe the core strategy we have established is sound and the actions we are taking will allow us to emerge from this difficult period as an even leaner, stronger company.

We have a solid balance sheet, a dedicated team, an aggressive plan to reduce our cost structure, and a commitment to refocus our resources on those areas that will yield the best prospects for sustainable, profitable growth.

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

Question and Answer Session

Operator

(Operator Instructions)

Thank you, sir. Ladies and gentlemen, our question and answer session will be conducted electronically. If you would like to ask a question, please firmly press the * key, followed by the digit 1 on your touchtone telephone. We will take you in the order that you signal, and if you find that your question has been asked and answered before you could ask it, and if you would like to remove yourself from the question roster, please firmly press the # key. Also, if you are on a speakerphone, please make sure your mute button is disengaged so your signal can reach our equipment. Again, that is *1 to ask a question. We will pause, for just a moment, to assemble the question roster.

For our first question, we go to Chris Whitmore, with Deutsche Bank.

Chris Whitmore – Deutsche Bank

Thanks very much, my first question is for Frank, on free cash flow and your outlook for cash generation in 2009. Just looking at 2008, if we exclude the $580 million tax benefit from cash from operations, it looks like you used about $400 million in cash flow. Given the restructuring charges, and the deterioration you're seeing in the business, it looks like you're on pace to have a significant usage of cash this year, perhaps in the $600 million, $700 million range. What are your thoughts around that, around those numbers? What are your expectations, etcetera?

Frank Sklarsky – CFO

Thanks Chris, we're going to give a lot more transparency around 2009 income statement, earnings from operations from cash flow, when we meet with the investment community, next week, in New York City. I don't want to go too much in depth with that. While we do have a significant restructuring charges and payments that we are going to be incurring the first half of the year, our aim would be to end up with a cash flow that is significantly better than the numbers you were just outlining, there. We have a lot of cost reductions underway. Our aim is to improve our earnings from operations. We hope to do better than that, but we're going to provide a lot more transparency around the specific numbers, next year.

What I would say is there are a lot of moving pieces, here. We know the down draft in revenue that we experienced in the fourth quarter is likely to continue for at least the first half of the year. As we said this morning, we are aligning the cost structure aggressively to take a substantial amount of cost out. I don't think you can straight-line the run rate of cash usage from 2008 into 2009 because we are making so many structural changes to the income statement.

We are looking to have a substantially better performance on cash flow than the numbers you had computed.

Chris Whitmore – Deutsche Bank

Help me understand the payback on the cash charges, then. It looks like you've taken about $250 million of cash charges in the first half of the year. What is the timing of the payback of those charges?

Frank Sklarsky – CFO

What we said is $300 million to $350 million on an annualized basis, and so, as we are trying to get the majority of the actions done in the first half of the year, as quickly as we possibly can. We took a number of charges in the fourth quarter. We're taking more in the first half of the year, a lot of that in the first quarter. We're going to try to get to that running-rate cost level, far below where we are now, as quickly as possible, during the year.

Some of the actions, particularly outside of the U.S., take a little bit longer, but we will be getting that cost to go down substantially. We think the payback is very quick. Again, it's $300 million to $350 million in annual savings, against charges in the $250 million to $300 million range, a pretty quick payback.

Chris Whitmore – Deutsche Bank

Are you committed to the dividend?

Frank Sklarsky – CFO

Our Board of Directors makes the decisions on the dividend. There have been no decisions to change those dividends, at this time.

Chris Whitmore – Deutsche Bank

Last question for me, Frank, other long-term assets were down significantly. My assumption is that reflects the performance of the pension. Can you give us an update as to where the pension stands, from a funding basis, and expected expense around the pension, this year? Thanks a lot.

Frank Sklarsky – CFO

The pension – when you look at the change, I assume you're looking at the [MD&A] document we published this morning, and the change in other long-term assets. There was a change between the end of last year and the end of the third quarter, which represented a reduction of a receivable associated with a long-term intellectual property licensing arrangement that was restructured. We reported on that in the third quarter.

From the third quarter to the end of the fourth quarter, the majority of the change was the reduction in the net-over-funded position for over funded pension portfolios. That said; we feel pretty good about the fact that the return in our pension portfolio was better than most other companies, and that the U.S. Pension Plan is not only fully funded, but continues to have excess funding. We're very comfortable with that. Overall, around the world, there are still some funds that are under – some plans that are underfunded, but the U.S. plan is still well funded, and in fact, excess funded. I

In terms of the pension expense projection, we typically disclose that in the 10K. Again, we are going to get more transparency around the 2009 Income Statement metrics, next week, in New York.

Operator

For our next question, we go to Richard Gardner, with Citigroup.

Richard Gardner - Citigroup

Thank you, it's just a follow-up to Chris's question. I was hoping, Frank, that you could give us a little bit of – you could help us understand some of the line items on the balance sheet. First of all, can you talk about why post-retirement liabilities were up? I had thought they might be actually down, given the rise in corporate bond yields during the past year.

Secondly, can you talk about the sharp decline, sequentially, in other income, other comprehensive income in the shareholders equity line? I then have a follow-up.

Frank Sklarsky – CFO

Okay, the first question was around – I assume you are talking about a sequential change?

Richard Gardner - Citigroup

Yes, the sequential increase in post-retirement liability.

Frank Sklarsky – CFO

Those were mainly on the pension side. That was some adjustments for some pension plans outside the U.S. FEZ-158 adjustments to the pension plans outside of the United States. The other question around OCI? Any specific item you are referring to, there?

Richard Gardner - Citigroup

Within the shareholders equity line of the balance sheet, the accumulated other comprehensive income line went from $1.6 billion, at the end of September 2008, to a negative $750 million, at the end of December 2008.

Frank Sklarsky – CFO

Okay, a lot of that is going to have to do with the change in the funding levels in the pension portfolios. We can get some more details on that and get back to you. A lot of that detail will be in the 10K. We're still working through some of that, but the general answer is that it relates, again, to the same issue, FEZ-158, in terms of the over/under funding in the various pension plans around the world. That really, represents what that is.

Richard Gardner - Citigroup

Okay, just the reason I asked is because the book value was cut, almost in half, sequentially, as a result of these swings in balance sheet items.

I also was hoping you might be able to give us a little bit more color on the short fall in IP royalties during the quarter. Maybe give us some sense of magnitude and whether this is a temporary thing or a permanent change?

Antonio Perez – Chairman and CEO

There is no short fall. There was no short fall in the quarter. You mean that this was lower than last year's?

Richard Gardner - Citigroup

Yes, just to be clear; it was in line with your expectations during the quarter, then?

Antonio Perez – Chairman and CEO

Yes, it was in line.

Richard Gardner - Citigroup

Okay, and you remain comfortable with the 250 to 350 that you talked about, annually?

Antonio Perez – Chairman and CEO

Yes, very much, for next year and for the next few years.

Richard Gardner - Citigroup

All right, and if I could just squeeze one more question in. Frank, I was hoping to ask you about commodities prices. When the hedges are going to start to come off on silver and aluminum, and if we were to assume that commodity prices were to stay where they are today, at spot levels, once those hedges come off in 2009, what type of benefit could we see on the cost side, related to commodities?

Frank Sklarsky – CFO

We don't want to get into too much detail around how much hedge we have in individual commodities, or when they might roll off because the businesses they apply to are very competitive. For competitive reasons, we want to protect that information. We do have some hedging on our key, major commodities. We don't hedge oil; we've mentioned that in the past.

As we go through the year, we will continue, as you can imagine, we will continue to benefit from the change in commodity prices. We disclosed that we got hit by about $14 million in this Q4, versus Q4 of the prior year. You can see that if you look at the commodity prices in our major items, silver was a little higher in Q4, in a weighted average basis, than it was in the prior year. It has pretty much stabilized. It's in the $11.50 to $12 range, right now. That one has leveled out. I think on that one, if silver stays where it is, it will be roughly in line with our planning horizon.

Aluminum has come down, precipitously, and I don't want to get into how much we might or might not have hedged on that commodity, for competitive reasons. I think, as we go through time, we will continue to benefit from the reduction in the price of aluminum.

Richard Gardner - Citigroup

Okay, thank you.

Operator

For our next question, we go to Sonny [Sagron], with J.P. Morgan

Sonny [Sagron] - J.P. Morgan

Thank you, Frank. I had a quick question on the amendments that you are seeking on financial covenants. According to my calculations, you are on 2.5 and they’ve leveraged. A required ratio is 3.5. You have a fair bit of headroom there. Why go out, right now, and seek that covenant amendment?

Frank Sklarsky – CFO

The way the covenants were, there are two primary covenants. One is debt to EBITDA and one is EBITDA to interest, as you know. Like you said, at the end of the fourth quarter, very comfortably, within the covenants, these covenants both operate on a four-quarter average. The debt is taken as of a point in time, but EBITDA interest are computed on a four-quarter average.

What we're trying to do is look out into 2009 and recognize the fact that, again, we have a significant economic downturn, number one. We have our typical seasonality in the first half, number two. And number three; we have a significant amount of restructuring charges. Because we had a lot of restructuring charge in Q4 and are expecting a big chunk in the first half of the year, that puts stress on that calculation.

We were trying to just plan ahead and get ahead of the game. In the event that we were to trigger anything, in the first half of the year, we are approaching our bank group now, which by the way, they're very appreciative of; in making sure we have continued access to a credit agreement. We are not drawing on cash, other than the letters of credit I referred to. We're not drawing on cash. This is to provide financial flexibility. We just want to maintain access to that flexibility. We think this is a prudent thing to do. We are getting a lot of kudos from our bank group for approaching it in this manner.

Sonny [Sagron] - J.P. Morgan

The restructuring charges are probably backed out, anyways, from the EBITDA calculation.

Frank Sklarsky – CFO

No, actually, under the way that the covenants are currently written, they are not, due to the fact that a lot of those do result in cash payments. They are not backed out. Any impairment charges are, but restructuring is not.

Sonny [Sagron] - J.P. Morgan

So are you seeking an amendment of the definition of the EBITDA or are you seeking a meaningful improvement from three and a half, to let's say four and a half…?

Frank Sklarsky – CFO

I don't want to get into too many of the negotiating details, right now, in terms of what we are having in our bank group and how we might structure the whole thing. Obviously, our goal is just to maintain access to a revolving agreement. We should probably leave it at that, for now.

Sonny [Sagron] - J.P. Morgan

On the cash front, how much of your cash is overseas and how much is in the U.S.?

Frank Sklarsky – CFO

We do not disclose the allocation of our cash in various jurisdictions. That said, as we've pointed out in the past, we have a number of – to the extent that we have cash overseas, we have had a number of successful strategies and will continue to have successful strategies, in the event that we need to repatriate cash from one jurisdiction to another.

Sonny [Sagron] - J.P. Morgan

Is it right to say that most of the cash is accessible, immediately?

Frank Sklarsky – CFO

We are - the vast majority of the cash is unencumbered, so if that's the question, we have ample cash, right now, in the jurisdictions where it's required.

Sonny [Sagron] - J.P. Morgan

Okay, on the working capital front, how should we think about it, going forward?

Frank Sklarsky – CFO

Working capital, we had tremendous progress in 2007. We made additional, tremendous progress in 2008. Antonio and I obviously want to thank our team for the tremendous progress, particularly in this environment, to dramatically bring down past due receivables, and make the progress we have made, we think it's a great accomplishment.

Looking forward, we believe there are always incremental opportunities to improve working capital. We think that crosses all three categories, receivables, payables, and inventories. We will continue to push on that because it is a source of funds. We will show guidance, next week, in terms of what we're thinking about changing working capital improvement for 2009. You will see it at that time.

Sonny [Sagron] - J.P. Morgan

Okay. Is there a possibility of asset sales in the future, as well?

Frank Sklarsky – CFO

We have in the past, obviously, had proceeds from miscellaneous sales, and we've had divestitures in the past. We will talk more about the portfolio, next week, certainly for 2009; we will be looking at some incremental real estate sales around the circuit, where we think we can make value-creating deals. We will talk about the portfolio and our projection for proceeds for 2009, on the 4th.

Sonny [Sagron] - J.P. Morgan

Okay, last question. What was the EBITDA for the quarter?

Frank Sklarsky – CFO

EBITDA for the quarter – hold on one second and let me see if I can't put my finger right on it. We'll get back to you there. It's right in the numbers. Let me get back to you on that because I have some operational and some GAAP numbers. I want to give you the right GAAP number. We will call you back on that.

Sonny [Sagron] - J.P. Morgan

Got it, thank you, Frank.

Operator

For our next question we go to Joan Lappin, with Gramercy Capital

Joan Lappin - Gramercy Capital

Good morning, everybody. Antonio, you said in your opening comments that you will invest where you should invest and you are going to pull back where you think that's the better idea. As I understand it, what's on your plate are all these new printing press-type things and also the cell phone cameras that were hopefully going to become a significant factor in the second half of 2009. Unfortunately, you teamed with the company that's now slipped to fifth. Can you talk about that and OLED? Are you going to not invest in OLED, now, or what?

Antonio Perez – Chairman and CEO

Really, that is the conversation for the fourth. Let me answer it this way. Our portfolio has three elements. We have $6 billion of revenue from businesses that are cash-innovating businesses. Obviously, we will continue with those very much, managing them the way we are now. We have about $1 billion of revenue in what we call the core investments, the ones that are more at the heart of our strategy. Those are things like consumer ink jet, continuous ink jet, workflow.

Then, we have $2 billion of all the investments. They are obviously good investments but we have to qualify how many of those we can continue to invest, and how many we have to transform. When I say transform, it might be in the shape or form of partnerships or something like that. That is a discussion, really, for the fourth. I really don't want to go further than that.

When you look at our portfolio, you can do this by yourself; you will find $6 billion of businesses that are doing very well. They produce cash year-on-year. We feel very good about those. They have low single-digit growth, but very solid, very solid position. We have a leading marketing position in those. That is the base of the company, obviously, at this time. They are all digital except VI, there.

The second is that those three big investments, that we believe they have a very significant return. Obviously, we are going to continue to push as hard as we are now; we are not going to slow down. We are making a tremendous amount of progress, even in a contraction in the market. That gives us even more confidence in that.

Then, obviously, we have to think hard. Out of the other $2 billion, which one we can do by ourselves, and which one we might have to do with someone else. With the markets like this, we just can't do it all by ourselves. We'll talk more, on the fourth

Joan Lappin - Gramercy Capital

Let me state the other question in a different way. Should we still be expecting that camera phones are going to help us in the second half of the year?

Antonio Perez – Chairman and CEO

Camera phones – I'm going to tell you information that you have, from some of our colleagues, with which we have excellent relationships, not just with Motorola by the way. We have excellent relationship with Nokia, and many others. They are obviously projecting a difficult year, for next year. Obviously we're going to take that into account, as well as what is the right business plan for that business, at this time.

Joan Lappin - Gramercy Capital

But if you haven't been selling any of those, and you start selling some, it's incremental.

Antonio Perez – Chairman and CEO

We are very happy with that. The question is the level of investment. The whole question, here, is if the market is contracting and we don't have the 10% growth that we enjoy in the digital portfolio for more than a year, obviously we're not going to have the revenues, cash, and earnings that we had before. We are going to have less. We have to make sure that we realize that and peak where we are going to put that money. That's the exercise, portfolio management.

Joan Lappin - Gramercy Capital

I guess you'll talk more about that, next week?

Antonio Perez – Chairman and CEO

Yes, Joan.

Joan Lappin - Gramercy Capital

Okay, thank you.

Operator

For our next question, we go to Arun Seshadri, with Credit Suisse.

Arun Seshadri - Credit Suisse

Hello, gentlemen. I appreciate you taking my question. Just the first one, I wanted to go back to the covenants. Against the 3.5 times test, what are you at, as of the end of the fourth quarter?

Frank Sklarsky – CFO

We are well within the covenants of the end of the fourth quarter, so the 3.5 – we're under 3 and the EBITDA to interest, which has to be at least 3.0, we're well over 4.

Arun Seshadri - Credit Suisse

Can you tell us what the ratio computes to, at the end of the fourth quarter?

Frank Sklarsky – CFO

Let me call you back on that.

Arun Seshadri - Credit Suisse

Okay, and just to follow-up on the restricting charges, I presume that the restructuring charge, as of the income statement – that you don't get credit for. Or, is that cash restructuring?

Frank Sklarsky – CFO

It's typically cash restructuring. You don't get … for.

Arun Seshadri - Credit Suisse

Okay, and then on the covenants, I just wanted to clarify; they apply even regardless, or only during the time that you have something drawn against the revolver, or LC's?

Frank Sklarsky – CFO

The covenants apply to access to the revolver. If you trip a covenant, you no longer have access to the revolver. Whether we have it – if you're drawn, it triggers a repayment, which of course, is not necessarily in our case, because we don't have any drawn nor do we anticipate having to draw any this year. It really, relates to the access to the revolver.

Arun Seshadri - Credit Suisse

Okay, and then your revolver matures in a year and a half, or a little bit over that. Is that on the table to extend that maturity, as well?

Frank Sklarsky – CFO

We're looking at a variety of options to give us maximum flexibility over the next few years.

Arun Seshadri - Credit Suisse

Okay, one last question, if I could sneak it in. Interest expense to calculate your fixed charge coverage, test of three times, is that generally the same as the interest expense reported on your income statement?

Frank Sklarsky – CFO

Generally.

Arun Seshadri - Credit Suisse

Okay, generally close. I appreciate it, thanks.

Frank Sklarsky – CFO

Remember that is not one of our covenants. Our covenants are really debt to EBITDA and EBITDA to interest. Yes, it's interest expense.

Operator

We go next to Shannon Cross, with Cross Research

Shannon Cross - Cross Research

Hi, thank you, my question is with regard to variable versus fixed costs. I don't know if Antonio, or Frank, you want to take this. I'm just curious as you look at your cost structure, where do you think you have the most flexibility? You made so many changes over the years, I'm curious as to where you're at, now.

Frank Sklarsky – CFO

It really varies by segment, Shannon. On the CDG side, as you know, we have virtually no manufacturing facilities. In CDG, it's easier, much easier to lower the cost structure as revenue comes down. I'm thinking of on the COG side. GNA, obviously, is "fixed" but we're obviously going after that very aggressively. On the COG side, it's more variable in CDG. In FPEG, a little less so because we still have a Kodak Park and Harrow, the paper facility and so on, and some other smaller facilities. Again, that business unit has been very successful in reducing costs consistent with revenue, particularly as evidenced in the fourth quarter. GCG is somewhere in between, as we have some categories of product – we have contract manufacturing, and we have some products like the large pre-press business, which is 2/3 of the revenue, where we largely have inside manufacturing. That doesn't take away from the fact that we still have ample opportunities to reduce our "fixed" costs.

Everything is variable, in the medium and long term, whether it's productivity, working with our supply base in which we've been very successful in recent years, skew rationalization, or whatever. We think there is ample opportunity to continue to reduce the cost structure. We're going to continue to do that, very aggressively so that when the environment improves, we have really good operating leverage.

Shannon Cross - Cross Research

Okay, I'm trying to figure out the 3,500 to 4,500 is obviously a pretty big amount of people. If you're going to go through the rationalization through the first half, it seems as if most must be in sort of the U.S. or easier geographies. I'm curious, if you want to discuss how long you've been looking at where to cut and how far you are along in the process, just to give us an idea of how much you have really worked through this, at this point in time, given that everything fell apart in fourth quarter for many companies.

Frank Sklarsky – CFO

Let me go back to the announcement this morning. 3,500 to 4,500, during 2009, including 2,000 to 3,000 of charges associated with the 2009 program, plus the difference where actions were taken in the fourth quarter, charges were taken in the fourth quarter of 2008, and will be implemented very early in 2009. So, the difference between the 3,500 to 4,500 and the 2,000 and 3,000, those plans are complete and will be executed very quickly. The remainder we will be executing as quickly as we possibly can, the vast majority in the first half of the year.

As I said in my remarks this morning, it was very clear as we got to the tail end of third quarter, and we messaged on last quarter's call, that we saw some clouds in the horizon and we were going to be intensifying our efforts around cost. We think we got after this very early. We were able to keep, for instance, SGNA's percent of revenue flat versus the prior year in the fourth quarter. We are very well along, significantly along on getting these plans in place and getting them executed as soon as we can.

Antonio Perez – Chairman and CEO

If you remember the third call, we already announced to investors that we were going to reduce by hundreds of millions of dollars our manufacturing volumes because we didn't see the fourth quarter the way we were planning before. We got ahead of this with time.

Another issue that nobody asked is how is the inventory in the channel. Since you don't ask, I'm going to give you the answer, anyway. We've done relatively well because we prepared ourselves for that, in the third quarter, as you probably remember, because of my comments at that time.

Shannon Cross - Cross Research

Okay, so you mean inventory, in general, or …

Antonio Perez – Chairman and CEO

Yes, of course, we don't know how bad the first quarter and the second quarter is going to be. In spite of that, I'm incredibly happy we took the $400 million of product out of manufacturing when we did that. We guessed that the fourth quarter was going to be very bad.

Shannon Cross - Cross Research

Okay and Frank, one last question on the revolver. Is it your intention to try to keep a similar amount in the revolver or how are you thinking about the amount of liquidity or … liquidity you're going to need as you go through what's probably going to be a choppy 2009, and who knows about 2010?

Frank Sklarsky – CFO

Let me start by saying it's a good question. We're really comfortable with the liquidity position, for at least 2009. When you see, next week, what our projections are for cash flow for 2009, I think you will see that we're in very good shape there and even well into 2010. No issues there, really, this is for financial flexibility.

I think, ironically, one of the factor that's going to come into consideration, in terms of the ultimate size of the revolver, is going to be the capability of the financial sector and what they're looking to do. It's all a balance in terms of the costs. The administrative costs in maintaining financial flexibility, and getting the right amount of revolver, given the size of our company.

As you know, the one that exists, today, is $1 billion. That's a really hefty size revolver. That said; we'd like to have as much flexibility as we possibly can. Again, we've never drawn on the revolver. We're not drawing on it now, other than the minor amount of LC's and we don't anticipate having to draw on it, in minimum, 2009.

Shannon Cross - Cross Research

Okay great, thank you.

Operator

Ladies and gentlemen, due to time constraints, that will be the last of our questions. Mr. Perez, I will turn the conference back over to you, for any closing remarks.

Antonio Perez – Chairman and CEO

Thank you again for joining us, today. 2009 will no doubt be a challenging year. We are taking the difficult actions we think area necessary to address this current environment, as I said before. Before the dramatic shift, during the last four months of 2008, we had created significant momentum in our digital product portfolio. We were in a very strong growth mode. I'm confident that when the economy recovers, although unfortunately, I can't tell you when, we will be able to create that momentum once again. We plan to do just that. Thank you very much.

Operator

Ladies and gentlemen, this does conclude the Eastman Kodak Fourth Quarter Sales and Earnings conference call. We do appreciate your participation and you may disconnect, at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Eastman Kodak Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts