Eastman Kodak Q1 2009 Earnings Call Transcript

| About: Eastman Kodak (KODK)

Eastman Kodak Co. (EK) Q1 2009 Earnings Call April 30, 2009 11:00 AM ET


Antoinette McCorvey - Investor Relations

Antonio M. Perez - Chairman and Chief Executive Officer

Frank S. Sklarsky - Executive Vice President and Chief Financial Officer


Shannon Cross - Cross Research

Arun Seshadri - Credit Suisse

Ulysses Yannas - Buckman, Buckman & Reid

Chris Whitmore - Deutsche Bank

Richard Gardner - Citigroup


Good day everyone. And welcome to the Eastman Kodak First Quarter Sales and Earnings Conference Call. Today's call is being recorded.

At this time for opening remarks, I'd like to turn the conference over to the Director and Vice President of Investor Relations, Ms. Ann McCorvey. Please go ahead Ma'am.

Antoinette McCorvey

Good morning and welcome our discussion of the 2009 first quarter sales and earnings. I am here this morning with Antonio M. Perez, Kodak's Chairman and CEO, 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 during this conference call may be forward-looking in nature or forward-looking statements as defined in the United States Private Security Litigation Reform Act of 1995.

For example, references to the company's expectations regarding the following are forward-looking statements.

It's ability to address the impact of the economic downturn, including transformation of certain of its businesses, its employment reductions and savings under its restructuring program and other rationalization activities, revenues and earnings goal, the ability to generate cash and cash needs, liquidity, its ability to achieve its intellectual property licensing targets, new product commercialization schedule and product line manufacturing productivity and simplification objectives.

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 this forward-looking statements need to be evaluated in light of these important factors and uncertainties.

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

Antonio M. Perez

Thanks Ann and good morning everyone. Since we presented our investor meeting in February, the level of economic uncertainty has not changed. Credit availability continues to be an issue for the industry and as we expected, the historically low consumer confidence has curtailed discretionary spending in general, which lead to retailer inventory resets.

The decline in global print demand has continued, which naturally lead to distributors inventory resets as well. And Kodak, like most global companies, has been negatively impacted by the volatile currency environment. During this uncertain time, we continued to concentrate on the things that we can control. We are focusing on our customers, investing in our core digital businesses, aligning our costs with a new top-line reality, conserving cash and looking for ways to transform parts of our portfolio, while maintaining or growing our market share in key businesses.

Cash generation and cash conservation remain our top priorities. It was cash conservation that prompted me to recommend and the Board of Directors to approve the suspension of the dividend payment. Like other technology companies, we are suspending the dividend to ensure we have the cash to fulfill the promise of our core investments, which will generate greater value for our shareholders over the long-term.

It is important to note, that we were able to limit our first quarter cash usage to our typical seasonal range in this extremely weak economic environment. And we held or increased market share in our key businesses. While we continued to monitor all aspects of our cash plan and we are holding our previously announced cash generation goal of 75 to $325 million before dividend and restructuring.

We continue to make progress and focusing our R&D spend on our core digital investments and aligning our cost structure with a new top-line. When combined, the first quarter SG&A and R&D cost, declined by $107 million or 20% from the first quarter of 2008. We remain committed to implement the majority of the previously announced cost reductions in the first half of this year.

Today, we announced additional action to adjust our cost structure. This cost reduction will be achieved through temporary senior executive pay cuts and one week unpaid leave for U.S. employees. This action will reduce our 2009 cost and conserve cash. When we developed the 2009 plan that we shared with you in February, we assumed that the first half of 2009 will look very similar to the fourth quarter of 2008. And that the economy will stabilize in to later part of the year, we continue to believe that that will be the case.

Just look at the segments and some key progress within those segments now.

First the Graphics Communications Group, GCG. GCG revenue declined 26% from the first quarter of 2008, including approximately 6% of unfavorable foreign exchange, a steeper year-over-year decline than what we experienced in the fourth quarter of 2008. This revenue decline was largely driven by a 30% reduction in pre-press solutions and associated work flow, where the combination of higher than anticipated market declines in commercial printing, plus distributor's inventory resets reduced the demand for digital printing plates and associated equipment and work flow. However, we maintain our market position in this very important product category.

We saw a smaller decline in our digital printing revenues, which were down 12% in the first quarter compared to the first quarter of 2008, including the unfavorable foreign exchange as commercial customers continue to invest in Kodak's color digital printing capabilities.

As our pre-press solutions business adjusts to the market decline, I am confident we are focused on the right things. We are effectively serving our customers so that we can continue to maintain overall market share. We are developing new innovated products for the right printing segments, such as packaging which is a fast growing segment for Kodak.

We are enhancing our manufacturing productivity in our digital plates and digital output devices businesses and reducing the number of apparatus (ph) used to simplifying the product line. We are streamlining our supply chain, improving speed and generating cash by reducing inventory.

This business's model changes in our sustained leading market share position gives me the confidence that pre-press will emerge from the recession as a stronger cash generator.

Now let's look at Consumer Digital Imaging Group, CDG. The 2008 first quarter year-over-year revenue decline of 33% was driven by lower consumer discretionary spend for higher priced consumer electronics. Competitive price mix market conditions combined with aggressive inventory reductions by retailers for digital cameras, for digital picture frames and for kiosk media.

I am encouraged by this strong sale-through of our digital cameras in the U.S. which was consistent with last year, as we continue to grow market share. I will talk later about the strong revenue performance from consumer in general.

CDG, current quarter revenue also reflects a decline in intellectual property royalty revenues. This decline was in our plan and it was related to agreements where we completed our obligations last year less (ph) the lower demand for digital capture devices. Despite this first quarter decline, we are maintaining our forecast of $250 to $350 million for the year on average and income from intellectual property licenses agreements for 2009 and for the next few years.

Now, for Photofinishing and Entertainment Imaging Group, FPEG. FPEG revenue was down 31% for the first quarter when compared to the first quarter of 2008. The first quarter decline was driven largely by the ongoing industry volume decline for film capture and traditional Photofinishing and unfavorable foreign exchange, primarily in Entertainment Imaging. I will not provide an update on our core investments.

As we discussed in February, our core investments are aimed at delivering better customer solutions through superior technology to large market segments that are either undergoing change or will benefit from a new business model or a unique value proposition. In this very challenging economic environment our consumer inkjet value proposition continues to resonate strongly with customers.

In the first quarter, Kodak's customer inkjet hard work earnings (ph) revenue grew more 100% in the market that was down.

When we combined product share growth, a higher unit installed base and improved revenue mix from a greater proportion of win sales along with the lower cost ESP platform. We have a working recipe for a continually improving earnings performance.

Consumer inkjet first quarter performance demonstrates that the additional investments we made in 2008 are paying off. We are making very substantial progress toward our target business model. Additional investment in our new Stream technology with GCG is also delivering results. We now have a total of five global data sites for the Stream Inkjet Technology Print Head. Additional engineering resources we apply in 2008 have allowed us to make significant improvements in the print head performance, keeping us on track to achieve the accelerated schedule of having full Stream presses in the marketplace by early 2010.

Combining our printing technology with our broad portfolio of workflow solutions enables our customers towards new applications, expand into adjacent markets and improve their bottom-line. The first quarter decline in our workflow business was primarily driven by weak global print demand. However, product continues to maintain its leading market share position and is growing rapidly in the enterprise states.

As we look at the digital businesses that are been transformed, overall their first quarter revenue declined by 20% when compared to the first quarter of 2008. The operational results for those businesses however, was essentially flat with last year's first quarter loss. As all product lines benefited from the overall corporate restructuring and is specific targeted action is taken to improve their operational performance. We have committed to achieve in the full potential of our digital transformation of businesses and continue to actively work toward achieving that objective.

Taking into account our first quarter results in our typical seasonality where the first quarters are lowest revenue quarters, we are maintaining our 2009 financial goals. We will continue to deals to innovating (ph) business where we are holding a growing market share for our key products. We're gaining a foothold in the marketplace with our core investments and consumer inkjet is growing dramatically and continuing to improve on its journey to its target business model.

The Stream print heads are performing well and we are on schedule for the launch of the full Stream press in early 2010. We are making significant progress in adjusting our cost structure and I have confidence that we will enter 2010 as a leaner and a stronger company, ready to grow when the market recovers.

Now, we'll turn over to Frank to discuss the detail of our financial performance. Frank.

Frank S. Sklarsky

Thanks Antonio and good morning everyone. As we shared with you at our investor meeting in February, the company's main priorities for 2009 are to align our cost structure with external economic realities, fund our core investments, transform portions of our product portfolio, and drive positive cash flow before restructuring.

Overall, during the first quarter, the global economic downturn continued to have a substantial impact on the company's revenue and gross margins. Despite these impacts, the Kodak team made significant progress in reducing costs. This is enabling us to protect our investments in core digital technologies and to funnel appropriate investments into marketing, advertising and commercial capital, to enhance awareness and growth in key product categories. We are achieving a high level of customer acceptance for the products associated with our core investments.

The best example is Kodak's consumer Inkjet products whose unique value proposition continues to resonate strongly with our target customer base. As for our transformational businesses, we continue to work toward optimizing the performance of these businesses while pursuing the various alternatives we outlined at the investor meeting. As it relates to cash, we had a use of $808 million for the quarter, this corresponds with cash used from continuing operations, from operating activities of $784 million similar to the 767 million used in the prior year. This is in line with our anticipated seasonal use and reflects efforts to remain disciplined over working capital, CapEx and overall cost during the pretty significant challenge as it relates to revenue and gross margins.

I will share more details on the cash usage in a few minutes.

In light of the continuing uncertain business environment and as Antonio discussed, we believe it's prudent to take additional measures to further conserve cash and reduce costs. To that end, today's announcement of the compensation related reductions for 2009 and a suspension of our dividend will result in significant cash savings this year.

Turning to our first quarter results. We have previously indicated our first half results which show negative comparisons to the prior year. This is accentuated by the fact that digital revenues were growing by double-digits in the first half of 2008 and to-date 2009 revenue trends, are more in line with those of a dramatically lower fourth quarter of 2008.

Consolidated revenues for the quarter declined 29% to $1.477 billion. Foreign exchange represented approximately six percentage points of the decline versus the prior year.

Revenue was negatively impacted by the continued contraction in discretionary consumer spend, weak global print demand and inventory resets by retailers and distributors. In the quarter, the company's (inaudible) margin was 13.1% versus 24.3% last year, a decline of 7.2 percentage points. The decrease in gross profit margins was largely attributable to unfavorable price mix across most product categories, lower intellectual property licensing revenues and unfavorable foreign exchange.

These factors were partially offset by the favorable impact of improved consumer inkjet productivity, driven by more than doubling consumer inkjet hardware and ink revenue and the shift to lower cost platform. The net silver and aluminum commodity impact to the company for the quarter was essentially flat with the prior year quarter.

As I stated earlier, the company continues to focus on aligning our cost structure with the external economic realities. In the quarter, SG&A costs decreased by $77 million and our R&D spend decreased by $30 million as compared with prior year. It's important to know that while overall R&D spend is down and we continue to utilize R&D resources wherever they were having the most impact. So it's a matter of focusing the spend on those areas like Stream Technology, where the company has the highest potential for product commercialization and sustainable profitable growth. As we said at the investors meeting, this is about a strong focus and discipline on our core strategy.

During the first quarter, we incurred approximately $116 million in restructuring charges and made restructuring-related payments from corporate cash of $48 million. The company eliminated approximately 1600 positions during the first quarter. And as we complete our planned restructuring actions, we fully expect to accrue additional savings as the year progresses.

First quarter GAAP loss from continuing operations was $360 million or $1.34 per share, reflecting a significant impact on revenue due to the difficult economic environment, lower gross profit margins, higher restructuring costs and lower interest income due to lower cash balances and interest rates. Unfavorable foreign exchange also had a significant impact on first quarter earnings as compared to the prior year as FX represented roughly one quarter of the year-over-year decline in GAAP EFO. These factors were partially offset by the substantial reductions in SG&A and a more focused R&D spend.

Now let's take a look at results by segment. Graphic Communications Group's revenue declined by 26%, from $812 million to $603 million for the quarter, a decrease of 209 million. On the earnings side GCG posted a $60 million loss in the first quarter as compared to a loss of one million in the year ago quarter. The revenue and earnings decrease is largely reflective of the continued industry weakness and buying declines in pre-press and associated workflow software, along with foreign exchange.

These factors were partially offset by cost reductions in SG&A and R&D.

Taking a look at the Consumer Digital Imaging Group, CDG revenue declined by 185 million or 33% for the first quarter. The revenue declines were largely due to lower intellectual property licensing revenues, lower volumes and negative price mix for digital cameras and digital picture frames, reduced media volumes from kiosk as major U.S. retailers reset inventory levels and unfavorable foreign exchange. The lower sales volume in digital cameras is also largely related to inventory reductions by retailers.

We believe sell through for digital cameras was roughly in line with the prior year's first quarter as Antonio indicated. The segment loss from operations increased by $46 million from 111 million in last year's first quarter to $157 million loss this year. The earnings decrease was primarily due to the lower IP revenues. This decline, which was in our plan, is largely related to arrangements where obligations were fulfilled as of the end of 2008, as well as overall volume declines in the digital capture device market.

That said, we're still maintaining our guidance of between 250 million and $350 million in IP revenue on average in 2009 and for the next few years. CDG's earnings loss was partially offset by shifting to the lower cost platform for consumer inkjet printers, more than doubling the inkjet printer hardware and ink revenue and cost reduction efforts across all businesses.

With respect to FDEG revenue declined by 31% to $503 million, year-over-year earnings from operations declined by 18 million to eight million for the quarter. This reduction in revenue and earnings was reflective of the industry wide volume declines in film capture and traditional photofinishing.

The Entertainment Imaging business volume was negatively impacted by the overall economic environment, continued uncertainty over the Screen Actors Guild contract negotiations and negative price mix resulting from lower origination film volume in the quarter. Entertainment Imaging print film was up slightly for the first quarter, also all the FPEG businesses but particularly entertainment imaging were impacted by unfavorable foreign exchange, partially offset by the reductions in other post-employment benefits, SG&A and other cost reductions.

Now on to cash. Despite a difficult economic environment and the impact that has had on our operations, the company's cash position remains solid. The company's cash and cash equivalents, for the end of first quarter was approximately $1.3 billion. It's important to note that we have well in excess of $1 billion of cash on hand coming out of what is our seasonally lowest cash generating quarter, and following what have probably been two of the most challenging quarters in the modern history of the company and the overall economy.

The company's first quarter cash used of about $800 million was essentially in line with our seasonal trends and the prior year. The first quarter cash consumption was primarily due to lower earnings related to the global recession, seasonal working capital usage and restructuring payments, partially offset by cash received from an intellectual property licensing arrangement for which the company recognized earnings in 2008.

We continue to focus on working capital efficiency initiatives across all elements of the cash conversion cycle and we are committed to delivering $100 million in working capital improvements for the year. As for CapEx, we reduced expenditures by 50%, from 52 million to $26 million for the quarter, and we'll continue our focused discipline in this area while protecting core investments and by providing commercial capital for selected credit worthy customers.

We will continue to pursue the sale of excess real estate and will execute those transactions in a way that will maximize value versus being driven by any artificial timeline.

As Antonio indicated, our Board has approved suspension of the dividend in the interest of conserving cash and protecting our core investments. This is the right thing to do for the company and is being done in order to protect our ability, to pursue profitable growth and long-term value creation for our shareholders. Cash generation and cash conversation is our highest priority and we are dedicated to maintaining a solid balance sheet.

Earlier this month, we announced that in this very difficult credit environment, we were successful in achieving our objective of amending our credit agreement by the end of the first quarter. This amendment removes the uncertainty around the need to comply with short-term EBITDA based covenant requirements. Second, we were able to extend the credit facility by one and 1.5 years. The agreement which is asset based, provides up to $500 million in lending capacity.

In addition, lenders represented approximately 75% of the total amount, have agreed to an extension through March 2012 and we have the ability to add new lenders to be extension overtime.

We're pleased with the both the liquidity and the improved financial flexibility, the new amended and restated agreement provides.

Overall, we're committed to achieving that financial goals outlined in our February Investor Meeting and we will continue to focus on the things under our control. We have a maniacal focus on cash flow and cash conservation. We are taking necessary steps to further reduce our cost structure to address current economic realities and enhance our flexibility in this dynamic environment.

We believe a core strategy we've established is sound and the actions we're taking will allow us to emerge from this difficult period an even leaner stronger company.

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

Question-and-Answer Session


Thank you (Operator Instructions) We'll take our first question with Shannon Cross with Cross Research. Please go ahead.

Shannon Cross - Cross Research

Thank you very much. Good morning. To start with, can I just ask a question on IP licensing? What I am just curious about is that you're holding to your numbers sort of on average going forward, but I am curious is to whether or not the current economic environment is making it harder for the negotiations or if you can just sort of characterize how we should think about timing because obviously getting that money in is the very key to your cash generation.

Antonio Perez

Yeah, Shannon, I don't think the economic conditions are going to help with those negotiations we're sure but as it has happened in the last four years, we always concluded those negotiations in the tail (ph) of the fourth quarter. So I don't see any difference from that point of view.

The reason for the lower royalties in the first quarter was multi-year agreements that we had in the past that basically ended and those weren't in our plan. But we do have deals that we're working on and that we believe will allow us to achieve the 250 to 350 that we've been aiming at for a long time and we've been achieving every year.

I don't disagree that the economic conditions makes everybody being more cautious with cash but the tracks are that we have extremely strong IP portfolio with lots of fundamental patterns. There are very hard to design around and that's what has led to this program to be very successful in the past and I don't see any reason why it won't be this year and the next few years.

Shannon Cross - Cross Research

Okay. And then a Frank a question for you on cash side, just with regard to working capital and as your revenues are coming down, you're focusing on your core businesses. Sort of what levels do you think you need to have of inventory and AR in that, as you have the revenue pressure in the overall business contracts? Just can you give us some idea of targets you have or how we should sort of gauge goals over the year?

Frank Sklarsky

Yeah. As opposed to giving a specific dollar targets by Allan. Let me see if I can help in this respect. In accounts receivables for instance, we've been very successful in working on our past due months. So, really, receivables overall and the float up and down in terms of the total balance along with revenue, the lever we can pull is around pass dues. We ended the first quarter with less than $10 million of total past due over 60 days. So there is a terrific level of collaboration amongst all the functions in the company to really manage this very tightly in the current environment, so we're very pleased with that. So that's really the initiative there.

So if you look at me, if you look at our typical trend on DSOs, and that hasn't changed that much and probably won't change significantly. It's really about managing past dues. And inventories, the opportunity there is to continue to improve as a result of continuing to reduce the complexity of the businesses. So as we and as Antonio talked about SKU reduction, particularly as it relates in our Graphic Communications business, that's going to allow us to reduce the level of inventories and lean up supply chain. We've been very successful in achieving our targets each year and we think we will be continuing to do so.

I can't give you an exact number but I can assure you we have some very aggressive internal targets for inventories across the board and I have every reason to believe that the teams will be able to achieve those if they have in the past.

On the payables, we said last year that we were trying to move our payables to terms that are more in line with our technology peer group. We have been very successful in moving the majority of our suppliers to 60-day terms. Now, there are some suppliers who were unable to do that because of regulatory issues and by practices in certain industries. We might have less leverage, but we've been very-very successful on our digital businesses in getting that number over 50 days, a little bit less so in the FPEG businesses so that would serve as a general guide on four on three elements.

Shannon Cross - Cross Research

Okay. That was very helpful. The final question I have is just Antonio, can you talk about sort of linearity during the quarter, any early indications from April any -- whether it's geographic or by product? I mean, I think everybody right now is sort of grasping for anything positive. So -- give some kind of direction but...

Antonio Perez

I do that everyday Shannon. I do that every week. It really makes, I couldn't say I wish I could, I couldn't say that I've seen the light at the end of the tunnel or anything like that. But there are certain positive things. Let me give you some the negatives that I've seen, some of them I can quantify some others there are anecdotal. But we've seen the sell through of digital cam, we sold the same of digital cameras this quarter than last year's quarter, which is kind of strange, very strange, within the specter.

Now what did happen is that we sold a lot more low-end cameras, which obviously we don't have the same margins. Then what we have seen as well is the retailers they haven't being replacing their inventories at the same level. And the reason for that is they don't know. They're not sure what the market is going to be like yet. So that was, that is not a bad time. That means there is enough number of people going into the store, still going for the purchase, so that is positive.

Some of the resource in our first quarter for instance in our media is not that people are not printing, are not printing photographs in kiosks but the retailers they have been obviously looking at their cash management and they're trying to work with lower level of inventories.

Again, the sell through is decent and we are not unhappy with it but the sell through is poor. Now, I could go -- Digital Plates is very similar. We believe we kept share or we gained share, we have about 36% market share worldwide. But what happens is, because the overall demand has gone down, all the distributors and we have, we use a lot of distributors in the middle, they are cautious with their inventories. So, there is an unbalance between, the sell through is not as bad as our results are but the sell through has been affected by everybody trying to manage cash in a prudent way.

Now, if there is one ... one positive thing about that is that the demand is not as bad as the number shows. And then second if as soon there is a sign of recovery, we'll going to have double benefit here, one will be the sell through. But overall, I still think that the second quarter will be a tough quarter like the first quarter and if I see sign ... if I see any signs of any recovery there will be more towards the third quarter.

Shannon Cross - Cross Research

Thank you very much. It was very helpful.


And will take our next question with Arun Seshadri with Credit Suisse. Please go ahead.

Arun Seshadri - Credit Suisse

Good morning. Thank you for taking my question. Just wanted to start off with, with your guidance or I guess your goals for the year. On CDG, if I remember right, your revenue guidance was roughly for revenue to be in that three billion ballpark which is, just almost flat sequentially. I mean sorry, almost flat for 2009 versus 2008 and gross margin's flattish as well. As you ... based on your first quarter results, do you see anything to change that or you generally still comfortable with that? And then basically what does that imply for the back half of the year in terms of assumptions?

Frank Sklarsky

Yeah. I think that we are not, we are not walking away from our goals. At this point here our goals and our targets remain as they were, as we laid out in February. I think what it implies, goes back to a comment Antonio made and that is, typically in that business it tends to be heavily seasonally weighted toward the back half of year and particularly the last four months of the year.

In addition to that, the intellectual property licensing revenues tend to come in the back half of the year. The combination of those two factors mean that both the revenue and earnings and the cash flow associated with that business, are much more weighted towards the back half and really the back third of the year. And so, there is no reason for us to walk away from our goals right now because the dynamics are similar.

Antonio Perez

Yeah I will add something else. First the seasonality but as well. As you probably know, the deals for the big season, many of the deals of what products are going to be promoted in certain places there are already done. So, we know what deals we have won already with what products for what retailers at what time. So, now we don't know what the economy is going to be like. We still play with the idea that is not going to be as bad as the first and the second quarter.

And we know that it compares obviously in the third and the fourth quarter are going to be a lot easier. If you remember last year first and second quarter, our digital business was grown by 10% so this is a very hard compare we have now in the first and the second quarter. The third and the fourth, it will be very easy compares and again, in our planning, in our funnel, we already know that we have been selected for a number of deals that will generate certain units and certain profits.

Arun Seshadri - Credit Suisse

Appreciate that.

Antonio Perez

Based on all on that, we don't have any reason to change either way neither up nor down the goals we had at the beginning of the year.

Arun Seshadri - Credit Suisse

Okay. I appreciate that. And also on your IP revenue, is your IP revenue to be negotiated based on volume, i.e. is there a pretty fairly significant component that depends on a number of units so in a period of time?

Antonio Perez

Yeah. These, they get associated with volumes yes. The normally royalties there is a percentage of the value of the equipment that is attached to the number of units. So, for the dues that we have in which they are ongoing deals, if the industry is low and those people that pay royalties they are selling less products. They give us less royalties yeah. And when we negotiate, when this is a new negotiation, what happens is that there is a period in which those companies that we notice that includes a lot of volumes already so it doesn't make such bigger difference, if there is a period of time in which the volumes are lower.

Arun Seshadri - Credit Suisse

Okay. I appreciate that as well. And than on restructuring, you've basically outlined previously your goals on cash restructuring expenses through the year. How much was roughly spent in the first quarter and how should we be thinking about distribution of those cash restructuring expenses for the rest of the year?

Frank Sklarsky

In the first quarter the charges to the P&L were 116 million and the cash payments associated with restructuring from corporate cash were 48 million. There is always this component that we talked about in the past related that came from ... for some of the U.S. employees from U.S. pension as a special termination plan. As we go through the year, we are still holding to the ranges we've provided at the beginning of February which were total charges of 250 to 300 and total cash payments from corporate cash of 225 to 275.

I don't have an exact rate down for you by quarter but we expect to have the majority of the charges incurred by the end of the first half of the year and then there is always a lag time between the charges and the payments because of deferred ... either deferred lump-sums or deferred annuities to certain employees for severance costs so the cash payments will be more evenly distributed throughout the year.

Arun Seshadri - Credit Suisse

Okay. I appreciate that as well. My last question; just a couple of things actually. First asset sale proceeds, again you talked about 150 million in sort of broad real estate oriented asset sale proceeds. I presume you're assuming maintaining that guidance. And the second thing, your lending facility, is the right way to think about it that you have 500 million in capacity basically in your facility through 2012 and that 75% of that is basically available from lenders as of now? That's it. Thank you.

Frank Sklarsky

Yeah, let me take those one at a time. On the real estate, what we're saying is, our goal continues to be 150 in proceeds. That said, considering the current credit environment, we want to make sure that when we monetize these assets, we do so in a way that's going to be the most economically beneficial, financially beneficial for the shareholders. So we're not going to lock into any particular artificial timeline, so the timing can move around a little bit. But our goal continues to be 150.

And that said, when we look at the cash flow statement, we look at a lot of different levers that we can pull. We have CapEx. We have working capital. We have earnings. We have restructuring cost. We have proceeds and so on. And so our goal is to get to that breakeven or better on cash flow before restructuring in dividend. Proceeds, is but one piece and we don't want changing our goals but we have to be agile as we realize based on the current economic environment.

On the second item, on the lending facility, it provides up to $500 million in financing. It is asset based so obviously as the asset base goes up and down, that changes the, technically the amount of the availability and that's a really receivables inventories and certain properties. We have the full capacity obviously regulated by the asset base, available through October 2010, and lenders representing 75% of that capacity, have already agreed to the extension out through March 2012. And overtime we have the ability to bring more lenders into that.

So, it's 500. We have full 500 of according to the amended agreement through October 2012 and commitments of 75% of that out through -- 2010 I should say and 75% of that through March 2012.

Arun Seshadri - Credit Suisse

Thank you, I'll get back in line.


We go next to Ulysses Yannas with Buckman, Buckman & Reid.

Ulysses Yannas - Buckman, Buckman & Reid

I am glad about to ... decided not force from shareholders a dividend they didn't expect. Can I go back to your inkjet and ask last year, if my memory serves me right, you had a strong first half and a weak second half in inkjet placements. Essentially than the 100% increase is on a strong placement situation in the first half or in the first quarter of last year, is that correct?

Antonio Perez

Yeah. We have a ... actually this is not the last quarter and the last few quarters we've been experiencing a huge increase in sell through. So, but this quarter is been more than a 100%, the increase in revenue that comes from ink, from the installed base and as well, very importantly from printer hardware revenue. The sell through is higher than a 100%. The sell through, I mean I could give you data of the month of March, the sell through in March was actually 200%.

Now, it coincided with the campaign that we launched and we don't expect that to continue at 200% but even before the campaign, we have seen a constant increase on the natural demand of this product which is the expectation we had. We knew that it will be difficult to break through the business model that has been established in this industry for 20 years, but with time people will realize that this is a true, very valuable business model and if you print enough, do you going to get a tremendous amount of benefit by choosing a Kodak printer and than the more people we have the more they talk to their friends and then obviously right now once we went through start up phase that we talked about last year, we feel empowered to do more advertising and to increase the awareness that was very low before. It is beginning to come up. So we are very excited. We are very -- we feel very well with this program.

Ulysses Yannas - Buckman, Buckman & Reid

So it sounds really good suggesting that your targets of doubling the number of printers in people's hands by year end will be at least achieved?

Antonio Perez

That is the goal and we think we can achieve that even in this market conditions when the overall market is going down.

Ulysses Yannas - Buckman, Buckman & Reid

In this market conditions, have you noticed any kind of effect on the use of ink?

Antonio Perez

No. It still is between ... it still is for our installed base its still is close to eight cartridges per year, 7.9 or I think is the last time I saw it, and the average of the industry is 4.2 I believe, so we obviously are attracting people that print more.

Ulysses Yannas - Buckman, Buckman & Reid

Thanks Antonio. May I ask you another question to Frank?

Antonio Perez


Ulysses Yannas - Buckman, Buckman & Reid

Frank can you give us the effect of currency on SG&A?

Frank Sklarsky

I don't have exactly effect on SG&A. Obviously, there is clearly an impact. And I guess what I would say is, 6% points on the revenue line, a little bit less than that on the gross margin line and because of the way we incur SG&A around the world, last year went slightly in our favor but if you look at the euro for instance, when the dollar to the euro went from 1.60 to 1.30, which is hovering around right now, we took a major hit on revenue and it helped us a little bit on SG&A.

At the end of the quarter, when things went back the other way a little bit, it helped us very, very, very slightly at the very end of the quarter and it hurt our SG&A. So while we don't attract specifically SG&A, we consider revenue gross profit is a full line. I guess I'll stick to the comment that, about one quarter of the $250 million or so of the change in GAAP EFO. So the GAAP EFO last year of 81, was the GAAP EFO this year of minus 336. That difference of 255, about a quarter of that was FX impact which was a combination of gross margin and SG&A.

Ulysses Yannas - Buckman, Buckman & Reid

And finally your payables, there was a very sharp decline, 800 million in that particular category. Your payables at the year end were 1.288 million. What were the actual payables end of the first quarter, do have any kind of figure on that?

Ulysses Yannas - Buckman, Buckman & Reid

Let's remember that on the -- there are two categories that are shown in overall summary amount of payables. There is, trade accounts payables and other current liabilities.

Ulysses Yannas - Buckman, Buckman & Reid

That's what I was talking about; trade account payables which you identifying your 10-K.

Frank Sklarsky

Trade accounts payable went down by about $500 million and that was really related to the dynamic that we see every first quarter where our highest level of economic and financial activity, sales activity, is in the fourth quarter and this is a pay down of payable. So if you look, there is an explanation. It's a little table on page 10 of the 10-Q, which shows the specific figures broken out between trade payables and other liabilities. And that's really the dynamic is paying down payables from Q4 as we do every year.

Ulysses Yannas - Buckman, Buckman & Reid

Thank you very much.

Frank Sklarsky



And we take our next question with Chris Whitmore with Deutsche Bank. Please go ahead.

Chris Whitmore - Deutsche Bank

Thanks very much. It seems like your guidance implies a significant improvement in your business in the back half of the year both from the top line and the margin standpoint. Can you maybe highlight the top two or three reasons for that expected improvement?

Antonio Perez

Yeah, well the first one is the seasonality of our sales. There are ... actually it's in the month of October, somewhere in the month of October it's actually 50% of our volumes in the consumer and the consumers space are sold between sometimes, sometime in October and the end of the year and the other 50%, they go out before January and that time in October. I mean, that's not an exact day that is about that time. So, there you say a huge concentration of volume that happens in the last part of the year.

The second our IP deals, they have happened in the last four years since we've been doing this always in the third mostly in the fourth quarter. And the reasons be ... the reason for that is, this is a negotiating process and both parties they normally try to use all the time they come to get to the best resolution. As far as the service, it's not just retail. Our commercial sales actually they get affected as well because a lot of printing is done, a lot of commercial printing is done when there is a lot of economic activity in the market. It happens to be towards the end of the year. That is the most ... those are the three most important reasons.

Chris Whitmore - Deutsche Bank

Can you comment on where you think channel inventories are at currently versus what you had considered normal channel inventories?

Antonio Perez

We actually have done a pretty good job. We feel pretty well. I mentioned before I think it was Shannon asked me the question about ... I know the question that for us I cannot talk about the rest of the companies. For us, our sell through and the majority of our products and I will put one exception which will be digital frames. But with the majority of with the rest of our products we've been having a much higher sell through then sales.

This is one of the reasons were the number are they way they are, so the customers are buying more products that we are selling to the retailers. And this is because retailers are taking precaution with their inventories. And I think they are doing that with everybody. I cannot assure you that because the data I have is with me with our products. But we feel very well with our inventories in the channel. Actually we think that this cannot continue for very long and retailers, they're going to have to buy more products because they're going to be without inventories if they don't.

And with the exception of digital frames, which is a deferent case the whole industry has, has really collapsed significantly so that would be different. So and then, and the same thing applies for digital plates. So the two largest businesses where inventory plays a very significant role for us, which is pre-press that has the digital plates and this is a $2 billion business and digital cameras and accessories, which again is almost a $2 billion business. Those two we feel very well with inventory, inventory situation in the channel.

Chris Whitmore - Deutsche Bank

Okay. One question for Frank. Frank, its looks like you had $100 million benefit in cash flow from realization of past IP income. How do you think about sequentially cash from operations in Q2 versus Q1 or even perhaps on a year-on-year basis? Do you expect in Q1 cash flow down year-over-year, do you expect Q2 cash flow to be down year-over-year or any color on Q2 would be great?

Frank Sklarsky

Yeah, we're not providing a specific guidance by quarter right now. We do manage it for the year. We are, as we typically do, expect significantly improved cash performance sequentially Q2 versus Q1. So we're definitely coming out of our trough in terms of cash usage coming out of Q1. We don't have that same payables dynamic coming out of Q4. We haven't paid the Q4 bill so our payables are kind of running at the rate of Q4 COGS activity. You mentioned $100 million.

$100 million is a combination of payment received from the prior year as well as the absence of some payments going the other way from the prior year. So, we didn't get 100 million of receipt. A part of that was a receipt, part of that was absence of a payment from the prior year, more it was receipt. But that's why I can tell you that what we're expecting significant improvement Q2 over Q1. I don't have a good call for you, we're not giving any guidance in terms of how Q will shape up versus prior year Q2.

Chris Whitmore - Deutsche Bank

Thank you.


And we'll take our next question with Richard Gardner with Citigroup. Please go ahead.

Richard Gardner - Citigroup

Thank you for taking the question and good morning. Frank you mentioned that commodities were neutral year-over-year and if we take a look at the main commodity prices that effect you, aluminum is down about 50% year-over-year, silver is down 25 to 30 and oil is down 55%. Is the lack of impact is that because hedges are still in place and you should we still expect some benefit from commodities in coming quarters if these hedges expire?

Frank Sklarsky

Yeah, Let take them a little bit at a time. We said that silver and aluminum combined were flat a year-over-year which is the case. And we have some level of hedging activity on each of those. There has been little less volatility over past nine months as it relates to silver. So, we think we are in pretty decent shape on that line.

On aluminum, we put some hedging in place over the past years. There has been obviously extreme volatility. The prices went from the mid 2000s up to low 3000s per metric ton and they backed down into the low teens. And so what we've said, is as the year goes on and as prior activity rolls off, we will continue to benefit.

Now as it relates to oil, we didn't make any comment associated with that, but we are seeing and we believe we'll continue to see favorable performance on things that oil impacts and that's plastics as well as transportation and utilities costs. So we will as that benefit continues to roll through carts (ph) we saw a little bit of benefit in Q1 I think will continue to see benefits on that going forward.

Antonio Perez

But still have a negative impact from FX this quarter though.

Frank Sklarsky

From FX, yeah from currency but we're strictly commodities its flat for silver, aluminum and some benefit from oil.

Richard Gardner - Citigroup

And Frank is there any assistance you can provide regarding the linearity of the hedge expirations throughout the year?

Frank Sklarsky

Given the competitive sensitivity around hedging and potential impact on pricing and so, we choose not to give any particular guidance, any specific guidance on the hedging.

Richard Gardner - Citigroup

Okay. And then just one other question from me and that's regarding Entertainment Imaging, you mentioned a number of different factors that contributed to the accelerated decline in Entertainment Imaging during the quarter including FX and contract negotiations within the industry. Could you give us a sense of how big FX versus contract negotiations were and what your expectations are for that business for the remainder of the year? Should we expect a recovery or should we be now thinking that the business is down 15 to 20% for the year?

Frank Sklarsky

Well, one by one. The FX impact we talked about a seven percentage point FX impact on FPG in total and obviously Entertainment Imaging is a quite a big piece of that. So there's a pretty good size impact there. As it relates to the other impacts on revenue, it's really the origination film. Print film is up a bit. Origination film is down because some of this uncertainty around ... studios have around the contract negotiation issues and not wanting to start a lot of features, a lot of television and so on, having stop start cost.

We think that's going to recovery. We don't know when but that was a dynamic in the first quarter.

Antonio Perez

We do know though that when this happens, there is no purchase of origination film for a significant amount of time which means they're not creating new movies. Soon the portfolio of movies that may that they have in the back office to release, becomes very, very, very small. And we believe we are going to reach soon that point. So, we expect a recovery. We ... notwithstanding the issue of the Guild, of the contract. Obviously we don't know what's going to happen with that. We don't when the resolution will come but we do know that the studios they're going to be pressured to go and make movies because they're not going have any movies to publish if they don't do that soon.

Richard Gardner - Citigroup

Okay. Great, thanks Antonio and Frank.


This does conclude the question and answer session. I'd like to turn it back over to Antonio Perez for any additional or closing remarks.

Antonio Perez

Thank you very much for attending this session. This global recession is truly unprecedented. I know that you know that none of us have seen anything like that in our business carrier. As we managed through these we're just going to keep focusing on our customers and generating and conserving cash. The bottom line for me is that we have the financial resources that we need to fully execute our business strategy. I'm very happy with the traction of our new businesses. They show a tremendous amount of potential for the future. And we know few things that would happen at the end of the year that allow us to maintain the full year goals that we set for us in February.

So, thank you again and we'll talk to you soon.


Once again ladies and gentlemen, this does conclude today's conference. We thank you for your participation.

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