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Executives

Ann McCorvey – Director, IR

Antonio Perez – Chairman and CEO

Frank Sklarsky – EVP and CFO

Analysts

Richard Gardner – Citigroup

Ananda Baruah – Brean Murray

Shannon Cross – Cross Research

Ulysses Janice – Buckman, Buckman & Reed

Chris Whitmore – Deutsche Bank

Jake Kemeny – Morgan Stanley

Mark Kaufman – Rafferty Capital Markets

Elim See [ph] – Curious Capital Management [ph]

Anupum Khaitan – Scarsdale Equities

Eastman Kodak Company (EK) Q4 2009 Earnings Call Transcript January 28, 2010 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Eastman Kodak Company’s fourth quarter 2009 sales and earnings conference call. (Operator instructions) This conference is being recorded today, Thursday, January 28, 2010, and I would now like to turn the conference over to Ann McCorvey, Director of Investor Relations. Please go ahead, Madam.

Ann McCorvey

Good morning and welcome to our discussion of the 2009 fourth 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 Securities Litigation Act of 1995.

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

revenue, revenue growth, earnings, cash generation, increased demand for Kodak’s products, and commercial printing equipment and consumables, consumer inkjet products, motion picture films; potential revenue; cash and earnings from intellectual property licensing, and potential economic growth.

These forward-looking statements are subject to a number of important risk factors and uncertainties, which are fully enumerated in our press release, issued this morning. Listeners are advised to read these important cautionary statements in their entirety as any forward-looking statement needs to be evaluated in light of these important factors and uncertainties.

Now I’ll turn the conference call over to Antonio M. Perez.

Antonio Perez

Thank you, Ann. Good morning, everyone. I am pleased to report that our strategy is working. While the global economy has not fully recovered, the level of business activity increased in the fourth quarter, and the momentum that began in the economy and for Kodak in the third quarter continued during the fourth quarter.

We gained market share with our core digital businesses, and we enter 2010 with our most competitive digital product portfolio ever and a leaner cost structure that will leverage to drive profitable growth. During the fourth quarter, we saw substantially improved operating results arising from our traction in new markets, a quarterly sequential improvement in demand, and the benefits derived from improved productivity.

In fact, if you exclude non-recurring intellectual property royalties from both 2008 and 2009 results, our gross margin improved by 6 percentage points year-over-year yielding about $100 million in increased profitability. This margin improvement was primarily driven by productivity gains in consumer inkjet and in digital camera end devices, as well as improved demand for kiosk media within Retail Systems Solutions, and digital plates.

Retail Systems Solution was especially strong outside United States, where revenue grew 12% at local currency rates. We continue to gain strong traction with investments we are making for future growth in consumer inkjet, commercial inkjet, enterprise software and digital plates. We are very pleased with the market share trends we are seeing for these businesses, and these positive trends are especially rewarding in this very tough economy.

In 2009, consumer inkjet doubled its installed base, maintained its enterprise premium, and sustained an ink burn rate that continues to be significantly higher than the industry average. For us it is about eight cartridges a year. We continue to offer consumers a compelling value proposition, and we are expanding the portfolio. We recently introduced the Kodak ESP Office printer, designed for the small office segment. We believe our value proposition of a lower cost print per page combined with a high-quality, high permanence inks is ideal for this market.

Our pressure [ph] in commercial inkjet continued to grow as well. During the fourth quarter, in a tough environment, our VL2000 digital press installations grew 33% over the fourth quarter of 2008. We continue to launch our screen printing technology with the installations of additional PROSPER S10 Imprinting Systems in all regions of the world, and we will soon install the first PROSPER 1000XL digital press as per plan.

The demand for enterprise software improved in the fourth quarter, and was especially strong in December. We saw also a positive trend in digital plates with modest year-over-year growth. This increase in demand across most businesses combined with new and improved cost structure position us well to drive earnings improvement as the top line returns as shown in the fourth quarter.

As a result of the strength of our key businesses, the focusing of R&D spend on our core investments, the improved productivity in our streamlined administrative cost structure, we delivered full-year segment earnings of $139 million, achieving our target of between breakeven and $200 million.

I'm also pleased that we ended the year with over $2 billion in cash and had positive cash generation before restructuring for the full year consistent with our goals. Now, let me turn to the segment discussion.

I will start with FPEG, Film, Photofinishing and Entertainment Group. The fourth quarter moderation of FPEG’s decline rate was primarily driven by quarterly sequential increase in the demand for entertainment imaging films. Entertainment imaging was down 4% when compared to the fourth quarter of 2008 versus 18% for the full year. This indicates that the demand for entertainment imaging films has stabilized after a difficult start in 2009. FPEG’s fourth quarter year-over-year earnings improvement of $14 million was primarily driven by continued value realization of cost, especially within traditional photo finishing, where the business delivered another quarter of positive earnings and cash.

Turning to the Consumer Digital Imaging Group, CDG, CDG’s revenue was up 27% when compared to the fourth quarter of 2008. This increase was driven by the combination of high and nonrecurring intellectual property royalties, market share gains in consumer inkjet, and growth in the demand for kiosk media, partially offset by the lower industry demand for digital picture frames, and a modest decline in digital cameras.

We received very positive retailer reaction and technical reviews for the new products we introduced at the Consumer Electronics Show earlier this month. And we now have a consumer digital portfolio that is poised for growth and higher margins in 2010. I am pleased, as well that we achieved the goals we set for our intellectual property portfolio by reaching mutually beneficial arrangements that advance the interests of all parties involved.

These arrangements are in line with the three key objectives we have for our intellectual property program. These are, first, achieving design freedom; second, gaining access to new markets and partnerships; and third, the continued generation of cash and income. Our IP portfolio is well positioned for continued success.

The $421 million increase in CDG fourth-quarter segment earnings versus the fourth quarter of 2008 is a result of a combination of a year-over-year improvement in nonrecurring intellectual property royalties, significant productivity gains in both consumer inkjet and digital cameras and devices, as well as increased demand for kiosk media.

Now I will focus on GCG, Graphic Communications Group. GCG‘s fourth quarter revenue performance represents a 16% quarter sequential improvement. This is a good sign that the industry is recovering. The improvement was across all product lines, with enterprise software, electrophotographic printing solution in commercial inkjet each having quarterly sequential growth of more than 30%.

The $40 million year-over-year improvement in GCG’s fourth-quarter segment earnings was primarily driven by productivity gains in electrophotographic printing solutions, lower effective commodity costs, and an increased demand for digital plates and enterprise software.

I am very pleased with our performance in the fourth quarter, with our product portfolio, with our cost structure, and with the positive momentum with which we are entering 2010. Now let me turn it to Frank, who will provide you with more details.

Frank Sklarsky

Thanks Antonio, and good morning everyone. I like to spend some time discussing our fourth quarter financial results, summarizing our total year 2009 performance, and then Antonio and I will be happy to take your questions.

As Antonio indicated, we're pleased with the company’s improved performance in the fourth quarter and for the full year. Our strategy is working, and we are gaining momentum. The turbulent market and economic events that began in 2008 and continued through much of 2009 impacted most companies. While the decline in economic activity has abated, and our businesses are showing signs of stabilizing, the economy still has a way to go until the level of activity returns to pre-recession levels.

As we stated previously, we continue to focus on the areas under our control. We have improved the competitiveness of our product portfolio, and have maintained investments in our core strategic categories, including consumer and commercial inkjet and workflow software. We have also aligned our cost to be consistent with top line realities and created a lean cost structure.

This positions us well to accelerate our profitable growth initiatives and take full advantage of the economic recovery that is beginning to materialize. We continue to see signs of stabilization for our large key businesses, and we continue to gain traction in our core investment categories. We doubled our installed base of consumer inkjet printers and our growth outpaced the market, and it is clear that our value proposition continues to resonate with consumers.

We grew market share in our commercial inkjet business through increased hardware placements for our VL2000 digital printing presses and PROSPER S10 Imprinting Systems. With the actions we put into place beginning in the fourth quarter of 2008, the company has improved its cost structure and we enter 2010 with significantly improved operating leverage.

In addition, we’ve amended and extended our revolving credit agreement, successfully rescheduled the company's debt maturities and have no significant debt due until 2013. This gives us the financial flexibility to focus on our core investments and aggressively pursue profitable growth. Most importantly for 2009, while revenues declined largely as a result of difficult recessionary conditions, we attained our goals of achieving improved segment earnings from operations along with positive cash generation before restructuring. We also ended the year with over $2 billion in cash, which was achieved during an extremely tough economic environment.

Now let us turn to fourth quarter results. Consolidated revenues for the quarter were $2.582 billion, an increase of 6% versus the prior year. Foreign exchange provided 4 percentage points of benefit to the revenue line. Our digital revenues for the quarter grew by 12 percentage points to $1.991 billion from the prior quarter.

This growth is the result of a combination of higher nonrecurring intellectual property licensing revenues, which were reflected in our plans and increased demand for our consumer inkjet printer systems, kiosk media and digital plates. Revenues for FPEG were $589 million, a 10% decline from the prior year quarter, representing a significant moderation in the decline rate across most of these businesses, when compared to the first three quarters of the year.

For the full year 2009, total consolidated revenues were $7.606 billion, a decrease of 19% from the prior year with foreign exchange representing a two percentage point total negative year impact.

Fourth quarter gross profit margin increased from 20.4% to 34.4%. This improvement was the result of a combination of factors, including operational improvements in our digital camera and devices, consumer inkjet and prepress businesses, and a significant contribution related to the completion of a non-recurring intellectual property licensing transaction as previously mentioned.

Excluding non-recurring IP licensing from the results, gross profit margin improved by approximately 6 percentage points year-over-year for the quarter. In addition, aside from the operational improvements, which included platform and supply chain efficiencies, we saw a benefit of about $28 million from commodity costs, along with benefits associated with favorable foreign exchange.

For the full year, gross profit margin improved slightly to 23.2% from the prior year’s gross profit margin of 23%. During the fourth quarter, the company reduced SG&A costs by $61 million or 15% and by $304 million or 19% for the full year. In addition, the company has intensely focused its R&D spend on core investment categories key to our future success. This has allowed us to reduce total R&D spend by $28 million or 25% in the fourth quarter versus the prior year, and $122 million or 26% for the full year.

For the quarter, our pre-tax restructuring charges totaled $61 million as compared to $103 million in the year ago quarter. For the total year 2009, pre-tax restructuring charges totaled $258 million compared with $149 million last year. Restructuring related payments from corporate cash were approximately $34 million for the quarter and $177 million for the full year. This was slightly lower than the previous guidance due to the efficiency with which we were able to achieve our cost reduction targets, and also reflects certain amounts that will now be paid during 2010.

We will provide an update of 2010 financial estimates at our investor meeting in New York City next week.

For the fourth quarter, GAAP earnings per share from continuing operations were $1.36 compared to a GAAP loss per share of $3.40 in the fourth quarter of 2008. This increase in earnings of $1.4 billion or $4.76 per share from the prior year quarter is primarily due to the absence in 2009 of the non-cash goodwill impairment charge of $785 million recorded in the fourth quarter of 2008. Along with all of the operational improvements and higher IP royalties achieved this year. For the full year, GAAP loss from continuing operations was $232 million, an improvement of $495 million.

Now let us take a look at results by segment. The FPEG group had segment earnings of $53 million in the current quarter versus $39 million in the year ago quarter. These improved results reflect continued operational progress in the traditional photo finishing business, including paper and output systems along with favorable foreign exchange, partially offset by the continued industrywide volume declines in consumer film and paper businesses.

In the quarter, the revenue declined rate for Entertainment Imaging moderated to low single digits due to sequential improvement in demand for various EI film products. Full year segment earnings were 7% of revenue, a rate consistent with the prior year and better than our original forecast. During the fourth quarter, our consumer digital imaging group improved their overall segment earnings by $421 million to $380 million.

CDG segment earnings for the full year improved by $212 million to $35 million. In the fourth quarter, CDG experienced benefits from numerous operational improvements. These took place primarily in digital cameras and devices, consumer inkjet, and retail system solutions. And we benefited from the completion of a nonrecurring IP transaction. CDG also saw margin improvements related to newer, more profitable products based on fewer more efficient product platforms introduced in the third quarter of 2009.

In addition, the segment made progress in reducing inventory levels as compared to the year ago period. These factors placed the Consumer Digital Group in a good position as we enter 2010.

Segment earnings in the Graphic Communications Group for the current quarter were $36 million, a $40 million increase from the year ago quarter. This was due primarily to significant operational improvements and a successful transformation in the electrophotographic printing solutions, increased demand for digital plates, improved performance in enterprise solutions, lower aluminum and other costs, reductions in G&A, and more focused R&D spend with an emphasis on bringing to market our new line of PROSPER products, which are based on Kodak’s Stream Continuous Inkjet Technology.

For the full year, GCG earnings declined from $30 million of earnings in the prior year to a loss of $40 million this year. This decline, which is attributable to business results in the first of the year, was driven by volume declines in prepress and the associated workflow software, along with lower equipment sales across the segment, due to industry weakness in commercial print demand.

The significant improvement in performance in the fourth quarter validates our view that markets are stabilizing and recovering.

Turning to cash, the company achieved cash generation before restructuring for the quarter of $909 million and $45 million for the full year, thereby allowing us to achieve our previously stated goal of positive cash generation before restructuring for all of 2009. We achieved this goal as a result of improvements across our operations and product lines, by maintaining a focus on capital spending efficiency, and achieving improvements in working capital in the back half of the year.

We are pleased that inventory levels are in much better shape than they were at the end of last year's fourth quarter, both within the company and in the channels. We also benefited from IP transactions and by further reducing our structural cost. Additionally, in December 2009, the company received a non-refundable payment in the amount of $100 million before applicable withholding taxes as a result of our royalty bearing cross- license agreement.

The license, which is subject to International Trade Commission approval, also calls for additional payments totaling $450 million to be received during 2010, which will also be reduced by applicable withholding taxes. Our 2009 cash taxes of $166 million included withholding taxes associated with nonrecurring IP licensing transactions.

With respect to liquidity, we entered the fourth quarter with over $2 billion in cash and the carrying value of our debt currently stands at just over $1.1 billion. This debt amount equates to total maturity values of $1.4 billion when combined with debt, which is classified as equity on the balance sheet for accounting purposes.

We're very pleased with our solid liquidity and strong cash balance as we exit a difficult economic period, and enter what we anticipate to be an improving operating environment. The company closed the year with solid revenue momentum in our key digital businesses and a more efficient cost structure. 2009 was a challenging year, we are pleased with the overall performance for the year, and where we are positioned as we look forward into 2010.

We will provide more details on the company's plans for 2010 and beyond next week at our conference with the investment community in New York City.

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

Question-and-Answer Session

Operator

(Operator instructions) And our first question is from the line of Richard Gardner with Citigroup. Please go ahead.

Richard Gardner - Citigroup

Okay, great. Thank you. You did a great job of completing the IP licensing negotiations. I did want I ask some questions on that though regarding 2010, first of all, are you changing your 250 to 350 guidance. I realize that was a multi-year target, but given the 450 that you are talking about receiving from Samsung alone in 2010, it seems like that number may be too low at this point, and then on LG, did they complete, entirely complete their obligation with the 414 million payment, IP licensing payment in Q4, or will there be ongoing payments related to that agreement as well in 2010, and then I have a quick follow up as well.

Antonio Perez

No, LG has been completed and Samsung is what you heard. As far as the average, that was an average. If you remember Richard, I kept saying that at least we are very confident in this program, but we know that many times and in this occasion too we are not looking only for cash, but we are looking for partnerships and other things.

And so our objective continues to be the same for the period, get at least 250 to 350 as an average for the year, but obviously, you know, 2010 is going to be higher than that.

Richard Gardner - Citigroup

Okay, great. And then the quick follow up, and Frank can answer this. What is the withholding tax rate on IP licensing revenue, and what was the payment from Samsung net of withholding taxes in the fourth quarter?

Frank Sklarsky

So, we received 100 before the withholding, and the withholding is approximately 16.5% rate.

Richard Gardner - Citigroup

And that is the same rate on a go forward basis Frank?

Frank Sklarsky

It is roughly the same rate. Yes, it is about 16.5.

Richard Gardner - Citigroup

Okay.

Frank Sklarsky

So, it would have been $83.5 million net of withholding tax in the fourth quarter, and it is again -- it is a Korean withholding tax.

Richard Gardner - Citigroup

Okay, great. All right, thank you so much.

Operator

Thank you. And our next question is from the line of Ananda Baruah with Brean Murray. Please go ahead.

Ananda Baruah - Brean Murray

Hi, thanks guys. Hi, just real quickly I guess on the plate business and then on Entertainment Imaging, I am sure you will go into this in great detail next week, but just get in your thoughts, it feels like things have been in the last couple of quarters a little more stable in both of these businesses, and is anything structurally I guess in place, because I know that businesses is split international, pretty representatively. It is going on there that, as you think that maybe there can be some stability or even some growth over the intermediate term. And I guess if you could just go over structurally your thoughts on the entertainment film business as well that would be helpful.

Antonio Perez

Yes, as far as plates, we believe that there is growth opportunity for us. We believe, good growth opportunity. Not only for the commercial digital plates, but specifically for one area of plates, which is about almost a third of the size of digital plates, which is packaging where we are basically only entered basically this year. So, we have a very unique solution that has been incredibly well accepted. We are incredibly happy with the way this -- our digital plates and packaging have been accepted. We believe, we have a low-cost architecture with a very, very high quality that compares with (inaudible), and we believe we are going to gain a lot of share from that market and that itself is the biggest, largest -- is the largest opportunity for growth in this space with digital plates.

But the digital plate market for commercial printing has stabilized. The signs of the fourth quarter are very encouraging. Our presence worldwide is very strong, and we just announced two or three days ago, where we opened a second line in China, because the demand is growing. So, we feel this is a very good momentum for the industry and for us in that space. EI had a very difficult year. You know the combination of lack of credit availability plus the strike that they had to deal with caused havoc with that industry.

And we felt that very much along the year, and only in the latest part of the year, we saw an improvement. We look into this year in a much more positive way. The only thing that has compensated for us is the fact that our paper business continued to do better than expected. So, that is how FPEG with the -- started in a very difficult year, then with the recovery of the EI films at the end of the year, plus the great performance in paper in photofinishing, they ended up with a very decent year. We look at the year with optimism.

Ananda Baruah - Brean Murray

Great. That is helpful, and then if I could just ask you a follow-up on the IT, on the Samsung, the 450 that you have disclosed, is there any help you can give us, Antonio, in terms of timing recognition of that income through 2010?

Antonio Perez

Yes, it will be disclosed completely. So yes, Frank will tell you exactly how this is going to come.

Frank Sklarsky

Once everything is approved by the International Trade Commission, the revenue associated with the entire deal, which is the 550, which includes the 100 from last year and the 450 from this year that entire amount will be recognized as revenue in the quarter of the approval. We're looking to see that in the first quarter, but it is all dependent upon the ITC’s timing. So, we do have to live with that.

And then on the cash side of things, that is expected to be received throughout the year, roughly ratably each quarter.

Ananda Baruah - Brean Murray

Yes, that is very helpful and then I guess just one last one, just a point of clarification, Frank the tax rate, the 16.5% that is a tax rate on this particular stream of IP income, and I guess that also coincidently was what your effective tax rate was for the entire company for the quarter. Is that correct?

Frank Sklarsky

Yes, that is coincidental in terms of the tax rate for the company, but that is a statuary Korean withholding rate.

Ananda Baruah - Brean Murray

Fantastic. Thanks a lot.

Operator

Thank you. And our next question is from the line of Shannon Cross with Cross Research. Please go ahead.

Shannon Cross - Cross Research

Thank you very much. I just had a few questions. My first one for Antonio, can you talk a bit about your comments, you liked to do partnerships in other things with some of those IP licensing contracts that you are signing. It doesn't sound like you necessarily have them for Samsung and LG, but please correct me if I am wrong on that. So, how are you thinking about the ability to do partnerships, you had one with Motorola that ended, but any clarification you can give would be helpful. Thanks.

Antonio Perez

No, I can’t do much Shannon. But all I can say is that at any time we have these discussions, we do -- there is always some kind of collaboration and you know time will tell how effective or how significant those collaborations are. But I have nothing to disclose now.

Shannon Cross - Cross Research

Okay, and then any thoughts on sort of restructuring programs, where you stand, where you might look to cut more going forward, perhaps you are just going to address this next Thursday, I'm not sure, but just any thoughts on restructuring?

Frank Sklarsky

Yes, Shannon, it is Frank. We certainly will give some outdated guidance for 2010 at the time. What I can say is going forward, 2010 will certainly be a number that is significantly lower than 2009. So we have a vast majority of the major restructuring behind us. We always have a carryover amount that carries into the ensuing year once we take actions in the current year, and ‘09 to ‘10 is no different. But in terms of new kinds of charges for ‘10, we will talk about that next week, but it will certainly be at a far lower level than 2009.

Shannon Cross - Cross Research

Okay, and then Antonio can you talk a little bit about, I know you can't talk a lot because of the ongoing litigation but can it sort of just address at least historically, you know, (inaudible) call litigation, but the Apple and RIM, what you put out there, and then specifically with Apple you have gone to the US district Court in New York. Can you talk a little historically about what went on with Sun and your settlement there, and then also just a little bit of thought process and what we should think about in terms of going after these IP streams?

Antonio Perez

Well, you know that I can't talk about litigations that are ongoing. So, I will not do that. All I can say is that, we have a great appreciation for invention. There is an IP system in the country then in the world, or most parts of the world, you know that protects innovation. We as a company spend billions of dollars over many, many years and all we want is people to respect our rights.

I can name one of the companies, and we have more than 30 now with which we’ve made these deals, in which we ended up in a better relationship. We have excellent relationship with all of them. Not that we don't have very complicated discussions this should be, but you know we're aiming to -- we say, we have these rights and we have to defend these rights for our shareholders.

Shannon Cross - Cross Research

Okay, and then just my final question is sort of a strategic one on the cash side. You are getting in, and you have received, and you will be receiving significant cash. Clearly unfortunate that you didn't know about this before you did the convert, but since you’ve done the convert and you have left the stock out there. So, how should we think about the use of cash? Would you consider sort of a one-time dividend payment back to your investors, since this was bigger than expected, would you think of share repurchase. I mean, I realize we're coming out of a really tough period of time, but just sort of how are you thinking about the cash, relative to some of the financings that you had to put in place earlier this year?

Antonio Perez

Let me restate from my preview some of your comments. We actually think it is very fortunate that we did what we did, not unfortunate. We look at the transaction as a very positive transaction for the company, and we had a lot of very good implications that you should not forget. As far as cash, we think we think we have the level of cash that we want to have. We don't have any intention to do anything else, but invest in the strategy that we’ve been touting again and again, and that is what we are going to do with cash.

Shannon Cross - Cross Research

Okay, thank you.

Operator

Thank you. And our next question is from the line of Ulysses Janice with Buckman, Buckman & Reed. Please go ahead.

Ulysses Janice - Buckman, Buckman & Reed

Good morning. There was some mention that you are dealing again with (inaudible) on Nexpress. Can you give us some idea as to what is going on?

Antonio Perez

I don't know where you hear these things. We talk to the whole industry all the time. Nexpress is a very specialized, very successful product in the very high-volume color printing, and there are a lot of companies that on and off have interest in distributing this product. We carefully choose with which one we have those relationships. That is all I should say about this.

Ulysses Janice - Buckman, Buckman & Reed

So, it is not a question of you are selling it back to them, just a question of distribution?

Antonio Perez

Oh, that is what you meant, absolutely.

Ulysses Janice - Buckman, Buckman & Reed

I meant…

Antonio Perez

No, no, no. We're very pleased with the results. So, let us grow photography [ph]. We restructured the business, if you remember…

Ulysses Janice - Buckman, Buckman & Reed

Yes.

Antonio Perez

We decided not to continue to invest in the mid-end and the mid volume, and the reason for that was twofold, one, we had our biggest opportunity in the very high-end, and we had to defend and improve on that. The second thing is we have other alternatives, other technology alternatives for the volumes that we need to explore, but we are very pleased with EPS.

Ulysses Janice - Buckman, Buckman & Reed

As far as video camera, your video camera relative to the Flip, how is that doing?

Antonio Perez

Well, we're gaining share. We're gaining share, I don't know -- I don't know, I really -- I am not aware of the numbers of the other companies. So, I can't tell you, but you know this category has been an incredible success for us. It has been touted as the best in the industry, the best price performance, the best quality.

We're coming with new models. We are very happy with the category, and we will continue to -- our plan is to continue to gain share.

Ulysses Janice - Buckman, Buckman & Reed

Is it safe to assume that your gross margin is better on the video camera than it is on the regular camera?

Antonio Perez

To do that you have to do an excruciating exercise of our locations that you could do that we don’t do. We looked at the business -- they are the same engineers, the same marketing guys, I mean, it is very hard to do these things, and that didn't make much sense. And it depends what digital cameras, they are models with higher margins than others. So, I can't really answer the question accurately. It is a very good contributor to the gross margin in the business.

Ulysses Janice - Buckman, Buckman & Reed

Finally, on inkjet profitability, improved profitability in consumer inkjet systems, page 3 of your press release. So you've got basically profitable now on consumer inkjet systems?

Antonio Perez

No, not yet. It is just an improvement, a significant improvement of the losses.

Ulysses Janice - Buckman, Buckman & Reed

Okay.

Antonio Perez

Which is exactly the plan? You know, remember we keep saying that sometime during 2011, we would be break even. We're going at a very high speed and very solidly towards that. By doubling this installed base, it will mean, and we will talk in February in New York about this. The effect of doubling that installed base is an accelerated exponential effect on the number of cartridges, and the revenue of ink that we are going to sell next year, especially with our business proposition that calls and attracts high burners.

So, we are very excited with that business. We think we have a tremendous solution, unique in the market. We see the customers are accepting this. We are expanding the portfolio, now that we settled with our platforms. We just introduced a product to the office, to the small office that is critically important for us. We think we are going to be very successful. We got a value proposition we believe is ideal for that. If is low-cost print-per-page, high-quality permanence that others do not have.

It is just an accumulation of very positive factors that make me feel very confident about the plan of breaking even into 2000 and somewhere in 2011, and very rapidly making very significant returns with the business after that.

Ulysses Janice - Buckman, Buckman & Reed

You still expect to double your placements this year compared to last year?

Antonio Perez

Are you going to attend the meeting in New York?

Ulysses Janice - Buckman, Buckman & Reed

Yes, sir.

Antonio Perez

Why don’t you…

Ulysses Janice - Buckman, Buckman & Reed

We will meet.

Antonio Perez

I will try to explain to you. I mean, we have to have a very aggressive plan for next year. What matters, was going to matter, once you get to certain volume is how to increase your ink revenue. That is the best proxy for a successful business model. And we would like to take you through that. We will have an aggressive plan for next year, for sure.

Ulysses Janice - Buckman, Buckman & Reed

Hence I understand with what you are essentially doing is replacing film sales with ink sales.

Antonio Perez

That is an interesting way of doing it, but I don't want to replace film sales. I want to continue to sell film as much as I can.

Ulysses Janice - Buckman, Buckman & Reed

Thank you very much, Antonio.

Operator

Thank you. And our next question is from the line of Chris Whitmore with Deutsche Bank. Please go ahead.

Chris Whitmore - Deutsche Bank

Thanks very much. Wanted to follow up on some of those inkjet questions. First, can you give us total unit shipments for the year in inkjets?

Antonio Perez

Can you do that?

Frank Sklarsky

We shipped approximately between 1 and 1.5 million units for the year.

Chris Whitmore - Deutsche Bank

And what do you think your total installed base is currently in terms of the number of units out in the field?

Antonio Perez

Well, you have to -- well, we don't disclose it. In our case with the rate of retirement and all that, we believe that those very competitive. So, you are going to have to add, what we did the first year the 500, and then the 1.5 million. So, it is around 2 million. So that is what we disclose.

Chris Whitmore - Deutsche Bank

Yes. And when we think about your unit growth heading into next year, what are you expecting from a competitive response or competitive environment in the inkjet, and do you think the inkjet market as a whole grows in 2010?

Frank Sklarsky

Well, you're asking all the questions that we are going to answer you know, next week, and I think I mean I don't want to not respond to you, but we will be -- you will be much better served when we talk about it next week. We will describe the whole industry. We will describe what our position is and what are our plans. I think it will be better. I don't want to upset you, but that will be the right time for those questions.

Chris Whitmore - Deutsche Bank

Okay. Can you try just one more and this kind of goes back to Shannon’s questions around uses of cash given the settlement and the increased cash balance. Should we expect you to get incrementally more aggressive driving inkjet? Are you willing to take or increase your level of investment in inkjet to drive units currently?

Frank Sklarsky

No, not really. We have already a very aggressive plan. We have an aggressive plan. I think having that amount of cash I think it's a prudent thing to have. We still don't know how the economy is going to behave this year. We will continue with our plans. We believe our plans are very aggressive anyway and you know, gaining share and getting that business to you know, to profitability rapidly. Not just the consumer inkjet, but you know, as well commercial inkjet you know, enterprise software in digital plates, especially in the packaging area. All those four areas are very important areas of growth for us and we will continue to drive them. We think this level of cash is a healthy level of cash, you know, for us to have, you know, especially in this economy.

Chris Whitmore - Deutsche Bank

Okay. Thank you very much.

Frank Sklarsky

You're welcome.

Operator

Thank you, and our next question is from the line of Jake Kemeny with Morgan Stanley. Please go ahead.

Jake Kemeny - Morgan Stanley

Hi, good morning. The last couple of years, the cash decline or the cash usage from 4Q to 1Q is normally around $800 million or so. Is there any reason why from 4Q to 1Q 2010 that would be meaningfully different?

Frank Sklarsky

Yes, it will be less, we are not disclosing right now how much less it will be, but it will be less and the reason is that when we saw the dip in last year's first quarter, with the revenue dropping off as precipitously as it did in the fourth quarter of 2008 and having procured all the goods and services and materials for what was originally thought to be a higher level of economic activity in that quarter, we were left with a significant amount of payables that had to be discharged in Q1 of ‘09, and it was a pretty sizable dip particularly from that payables category.

We do not see the same dynamic going from Q4 09 to Q1 2010. The business was much more stabilized in Q4 as you just heard, and in addition to that there was a much more modest level of planning for the supply chain throughout the business across all the segments beginning this past summer. So what we have now is a significantly reduced leaned out supply chain and inventory levels both within the company in the channel as we stated and a much lower payables flow over into 2010. So that usage will be down significantly. Again, I can't give you exact number right now, but it won't be in the $800 million range.

Jake Kemeny - Morgan Stanley

Okay, thanks. And then in terms of the IP license revenues that you recorded in the fourth quarter, was the majority of that from LG and did that kind of take care of them for 2010 or do you expect to get more in 2010?

Antonio Perez

No, we don't expect to get royalties from related to that particular deal in 2010.

Jake Kemeny - Morgan Stanley

Okay, and then just one last one. Can you just give us what the total cost reductions in 2010 will be like? What do you expect to achieve versus you know, year end 2009 kind of as a baseline?

Frank Sklarsky

Yes. We're going to disclose all that modeling next week at the investors meeting. We will show you the business model in terms of the structure of the income statement. We will show you what it means for the P&L and for the cash flow. Clearly, obviously we are looking to continue to exhibit a very strong discipline over the cost structure but we will lay out the numbers next week. You will see that.

Jake Kemeny - Morgan Stanley

Okay. I mean I guess I was just referring to page 10 of the MD&A because it says that you're going to get $47 million and then another $245 million. I guess I was just wondering how much of that was incremental to what's already reported or how much of that is already, you know, some of that might have been achieved already in ’09?

Frank Sklarsky

Yes, what we rather do is show you the overall model for next year. I think what you're going to see though is a very nice cost structure for the company going forward. So with the restructuring scaling up you'll see the continuation of a run rate that you saw in 2009, but we'd rather get to next week and show you the actual structure and the numbers and have everybody see that at the same time.

Jake Kemeny - Morgan Stanley

Okay, thank you.

Operator

Thank you, and our next question is from the line of Mark Kaufman with Rafferty Capital Markets. Please go ahead.

Mark Kaufman - Rafferty Capital Markets

Good morning. Nice job gentlemen. Frank, I have a question for you, if you could help me out with the long-term debt position. I know you raised money this past year and some of your bonds are still trading below par. So, a couple of questions, did you guys pay off the US and German senior notes this past year or is the number that appears to me below par reflective of just the market prices of the bonds?

Frank Sklarsky

Yes, I think we're seeing mostly the market price of the bonds. The bonds we paid out this year is amortizing $50 million per year. That's associated with the prior acquisition of KPG. It was about $200 million left of that debt being paid off, $50 million a year through 2013. Each September, we pay off $50 million, but aside from that what we're trying to get to in the script was the fact that what you see in the balance sheet, our debt does not include the number that is included in the equity section dictated by the accounting rules, and how the conversion in the KKR debt has to be recorded. So we have totally maturities involved, $1.4 billion, $200 million is the KPG debt, $500 million is 7.25% coupon debt that is due in 2013, and then the remainder is the debt from the converts in the KKR debt that is due in 2017.

Mark Kaufman - Rafferty Capital Markets

Okay, and so a portion of that is actually rolled over into the equities you are saying?

Frank Sklarsky

Yes, for accounting reasons because of the converts and the warrants, some of that is recorded to be classified as equity. That's correct.

Mark Kaufman - Rafferty Capital Markets

Okay. Thanks. See you next week.

Frank Sklarsky

Thank you.

Operator

Thank you and our next question is from the line of Elim See [ph] with Curious Capital Management [ph]. Please go ahead.

Elim See - Curious Capital Management

Hi, I have a few questions. The first one is why was there such a huge increase in printers and cartridges of 55% year-over-year increase, is that some of that timing or is that real improvement and…

Antonio Perez

You could -- maybe you get closer to the microphone. We couldn't hear the first part of the question.

Elim See - Curious Capital Management

Oh sorry, sorry. Regarding consumer inkjet, why was there such a huge increase, 55% from printers and cartridges. Is that a real improvement or just a timing issue?

Antonio Perez

No, this is -- this was the part of the plan. This is a real improvement, a very significant improvement and one that we actually predicted at the beginning of the year.

Frank Sklarsky

It was a combination of the increased installed base of the printers. So you're now getting cartridges for the previous installed base plus new installed base plus maintenance of the very high run rate of cartridges that Antonio talked about. In fact, there was about an 80% increase in just hardware and ink as a part of that total 55%

Elim See - Curious Capital Management

Okay, and second question, there is still $100 million of the credit facility that is due in October of 2010. Has that been renewed as well?

Frank Sklarsky

We have a $500 million revolving credit facility.

Elim See - Curious Capital Management

Yep.

Frank Sklarsky

And of that approximately three quarters of that is being -- vendors have agreed to extend through March of 2012.

Elim See - Curious Capital Management

How about the 25%?

Frank Sklarsky

25% do not extend at the time we renewed the revolving credit agreement, but we still have the opportunity for them to opt into the extension.

Elim See - Curious Capital Management

So, as of today that 25% is still due in October of 2010?

Frank Sklarsky

There is nothing due. We don't have any -- we do not have any debt drawn on that credit facility. The only thing that is covered right now under the facility is some letters of credit and some foreign exchange lines, but we have no cash drawn or debt due under the facility.

Elim See - Curious Capital Management

Right. I'm sorry. I understand there is nothing drawn, but is the expiration date still October 2010?

Frank Sklarsky

The facility, including extending lenders is extended through March of 2012. So three quarters of the lenders agreed to extend beyond --

Elim See - Curious Capital Management

That's right, that's right, and then the 25% that did not extend.

Frank Sklarsky

They just -- it just falls off, but keep in mind the amount -- it's a $500 million facility and it is always governed by the amount of assets underlying the facility.

Elim See - Curious Capital Management

Okay, okay and what can we expect for tax rate for 2010?

Frank Sklarsky

Yes, we're going to talk about that next week. I think what you'll see is -- what you have seen is our tax rates for P&L purposes tend to be a little lumpy, because of the different valuation allowances going on and coming off in different parts of the world. So we tend -- try not to focus on the tax rate. 2010 will be no different in that respect. When you think about cash taxes, we'll certainly be talking about our estimate for that number, but keep in mind the cash taxes for ‘10 will also include the withholding tax on the amounts to be received under the intellectual property licensing arrangement. So, the cash taxes will be you know, I'll say more consistent with 2009, then what is a normalized rate, which would not include the IP licensing withholding tax.

Elim See - Curious Capital Management

Okay, and in the fourth quarter you benefited from lower commodity costs, can you go into detail which commodities in particular and also your outlook for 2010 commodity costs, and whether you're hedging any of it?

Frank Sklarsky

Yes, we're going to talk about our outlook for 2010 next week. We typically have some hedges in place. We don't typically disclose how much. That is competitive information, but for 2009, we did benefit by $28 million in the fourth quarter and that was primarily silver and aluminum.

Elim See - Curious Capital Management

Yep. Thank you very much.

Frank Sklarsky

Thanks.

Operator

Thank you. And our next question is a follow up question from the line of Ulysses Janice with Buckman, Buckman & Reed. Please go ahead.

Ulysses Janice - Buckman, Buckman & Reed

It has been answered. Thank you very much.

Operator

All right, and our next question is a follow-up question from the line of Shannon Cross with Cross Research. Please go ahead.

Shannon Cross - Cross Research

Yes, just a quick question on the cash that you have received from settlements. Is that still in Korea or have you repatriated the cash?

Frank Sklarsky

Well, we have -- we keep cash where we need it, when we need it. We don’t have any issues with repatriation, but typically those settlements you know, will come in to the US.

Shannon Cross - Cross Research

Okay, so I just want to confirm the 16.5% tax, includes any applicable US tax?

Frank Sklarsky

There is really no US tax given our NOL position right now.

Shannon Cross - Cross Research

Okay, so you're just using NOL on that.

Frank Sklarsky

Yes, the withholding tax is a Korean tax.

Shannon Cross - Cross Research

Okay, thank you.

Operator

Thank you. And our next question is from the line of Anupum Khaitan with Scarsdale Equities. Please go ahead.

Anupum Khaitan - Scarsdale Equities

Hi. Congratulations on the quarter. Just had a quick question to make sure I understood this correctly now. You said that without the recurring IP revenue or money that you still would have had positive earnings during Q4, is that correct?

Frank Sklarsky

What we said is without the recurring, without the nonrecurring intellectual property licensing, we still had an improvement in gross margin, which contributed approximately 6 percentage points or $100 million.

Anupum Khaitan - Scarsdale Equities

Okay, and then do you perceive this improvement consistent with what you can probably predict for 2010 as well.

Antonio Perez

We believe the elements of that improvement, they are sustainable.

Frank Sklarsky

And let me correct that. We did have profitability in the fourth quarter, excluding our licensing arrangements.

Anupum Khaitan - Scarsdale Equities

Okay. Okay, thank you very much.

Operator

Thank you. There are no further questions at this time. I'd like to turn the call back to Mr. Perez for any closing comments.

Antonio Perez

Well, you know, thank you very much. I do have a closing remark somewhere. So, as you have seen the second half of last year, we began to see some improvement on the economy, and you know, really what that did was helping to highlight the strength of our digital portfolio. We believe, we entered 2010 with very positive momentum. We know we have the most competitive portfolio we ever had and we believe we are very well positioned for improved performance in 2010, and we look forward to go into a lot of more detail in all of this with you at our investor meeting in New York City. And thank you very much for joining the call.

Operator

Thank you. Ladies and gentlemen, this concludes the Eastman Kodak Company fourth quarter 2009 sales and engineering conference call. Thank you for your participation. You may now disconnect.

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