Eastman Kodak Q1 2007 Earnings Call Transcript

May. 4.07 | About: Eastman Kodak (KODK)
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Eastman Kodak Company (EK)

Q1 2007 Earnings Call

May 4, 2007 11:00 am ET

Executives

Donald Flick - Director, Vice President, Investor Relations

Ann McCorvey - Director, Investor Relations

Antonio M. Perez - Chairman of the Board, President, Chief Executive Officer, Chief Operating Officer

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

Analysts

Jay Vleeschhouwer - Merrill Lynch

Matt Troy - Citigroup

Sam Doctor - J. P. Morgan

Shannon Cross - Cross Research

Chris Whitmore - Deutsche Bank

Eli Lapp - UBS

Jack Kelly - Goldman Sachs

Presentation

Operator

Good day, everyone and welcome to the Eastman Kodak first quarter sales and earnings conference call. Today’s conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to the Director and Vice President of Investor Relations, Mr. Don Flick. Please go ahead.

Donald Flick

Good morning and welcome to our discussion of first quarter earnings. Before we get started, I would like to make a few brief comments about some changes in the Kodak investor relations function.

As many of you know, after 15 years in investor relations and 33 years at Kodak, I will be retiring at the end of June. It has been a real pleasure to work with the investment community for so long and to have had the opportunity to get to know so many of you. I will certainly miss the dialog and the debate that we’ve had over the years.

More importantly, I would now like to introduce Ann McCorvey, who is succeeding me as Director of Investor Relations.

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Ann McCorvey

Thanks, Don. Good morning. I look forward to getting to know as many of you as possible in the weeks and months to come and to make sure that we continue to meet your needs from an investor relations point of view.

Now, turning to this morning’s business, we are here with Antonio Perez, Kodak's Chairman and CEO, as well as our Chief Financial Officer, Frank Sklarsky. Antonio will begin this morning with his observations of the quarter and then Frank will provide a review of the quarterly financial performance.

Let me start with the usual conference call cautionary statement first. Certain statements during this conference call may be forward-looking in nature, or forward-looking statements as defined in the United States Private Securities Litigation Reform Act of 1995. For example, references to the company’s expectations for growth, digital earnings from operations, digital revenue growth, net cash generation, cash, restructuring, SGA reductions, product launches, inkjet sales and inkjet investment, segment performance, digital camera results and use of cash are forward-looking statements.

Actual results may differ from those expressed or implied in forward-looking statements. These forward-looking statements are subject to a number of important risk factors and uncertainty, which are fully enumerated in our press release 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.

Also, Kodak has significantly reduced its reference to non-GAAP measures. In those instances where they are used, they are fully reconciled to the nearest GAAP equivalent in the documentation released this morning, which can also be found on the website.

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

Antonio M. Perez

Thank you, Ann and Don. As Don said, this is the last time we will hear his familiar voice getting our quarterly calls started. Don, on behalf of your colleagues, both internally and in the investment community, I would like to thank you for the exemplary work you have performed in this role and wish you all the best to you and to your wife, Barbara.

I am pleased to say that since I talked to you on February 8th in New York, we have continued to make good progress toward this year’s key strategic objectives. Before we get into the details, I would characterize the quarter as essentially on our plan for revenue and ahead of our plan for earnings. There were the usual pluses and minuses across the various businesses, but most importantly we made progress toward our key strategic objectives.

Therefore, I’m very comfortable with how the results position us for the year. On Monday, we closed the Health Group sale. Because of the available tax loss carry-forward, we will retain the vast majority of the $2.35 billion in cash proceeds. Yesterday, we repaid the remaining portion of the $1.15 billion of secure term debt. Now that this is done, we are comfortable with our debt level. Beyond that, we will continue to evaluate various options for the remaining proceeds.

Our entire focus will be on deploying the cash in a way that creates profitable growth and maximizes value for our shareholders. I can tell you that at the very bottom of the list of likely actions are a dividend increase or special dividend. We have a long list of attractive, value-creating opportunities and dividend actions look relatively unattractive in comparison. We will take our time working with our Board of Directors, evaluating the different options and will act with great thought and deliberation.

As we discussed during our February 8th review, one of our key strategic objectives for 2007 is to achieve market success with our new products, both in the consumer space as well as in the graphic communications business.

On the consumer digital side, I’m extremely pleased with the reception of our new line of consumer inkjet printers. We are selling everything we can make, which reflects both strong demand and the usual realities of ramping up production. It is clear that our targeted consumers really understand the value of Kodak quality, ease of use and ink for as little as half the cost.

Best Buy has proven to be a very effective launch partner. We are now adding other channel partners to our distribution network and are moving into additional geographies. To date, we have announced deals with MediaMarkt and Dixons in Europe, and soon we will be announcing deals already agreed upon with all the major retailers in the U.S.

We are very happy with the retailers’ response to this new business model that clearly benefits the consumers and will continue to make new retail announcements as we get closer to each introduction.

Our goal continues to be to sell at least 500,000 units in 2007. Given the enthusiastic response, we plan to increase our 2007 inkjet investment by as much as $50 million in order to accelerate our ramp-up, boost new product development, and position ourselves to better supply current and future demand. Let me tell you this was the easiest and the happiest decision that I had to make this quarter. Our new consumer inkjet business model has created a very attractive opportunity for Kodak and I intend to aggressively pursue it.

The graphic communications group, as promised, unveiled several new products at the recent AIIM/ON DEMAND Trade Show, including two new NexPress digital color presses, which expands the price points covered by our product platform on both the high and low end.

In addition, we announced a new scanner for the desktop document imaging market and three new workflow products, which expands our leadership position in both of those markets.

The Kodak NexPress M700 received Best In Show honors in its category during the recent ON DEMAND conference and the Kodak i1860 scanner received the reader’s choice award during the AIIM conference.

Market success with our new products is integral to achieving our planned growth for the second half.

The other major objective we announced on our February 8th investor meeting was to wrap up our restructuring program this year. To that end, the recently announced sale of the Xiamen, China facility to the local government is the last major step in our traditional manufacturing restructuring program. The other part of our restructuring objective this year is a significant reduction in SG&A expenses. We showed great progress in that area in the first quarter. Year over year, SG&A is down $112 million, or 3% of revenue.

This gives me confidence that we will reach our goal of reducing SG&A as a percentage of revenue by 2% to 3% for the year, and therefore successfully complete the SG&A restructuring this year as well -- all according to our plan.

Let me turn now to other elements of the first quarter performance. As I indicated previously, there were pluses and minuses. Revenue for the quarter was essentially on plan, with earnings from operation slightly ahead of plan.

Traditional revenues were better than planned, declining 13% year over year, which is lower than recent historical trends and is lower than expected. This was led by a stronger-than-expected performance in our entertainment imaging films, which grew high single digits year over year.

The film products group’s success in getting costs down faster than revenues decline proves that it will continue to be a very valuable business for Kodak moving forward.

CDG’s Digital revenues, although down from last year, were essentially on plan. Digital cameras and kiosks were better than expected. The gallery had solid 23% year-over-year improvement in revenues, while its Snapshot Printing was lower than anticipated.

Digital cameras declined year over year, as stronger-than-expected industry growth was more than offset by a difficult year-over-year comparison. The tough compare resulted from our move to de-emphasize the low-end, starting in Q2 2006, and by shifting the new model launches towards the second half.

This change is in line with our decision to focus our product portfolio where we can best achieve our margin expansion goals. These product portfolio changes, combined with the actions we took last year to improve our go-to-market and supply chain management, are showing up in our results. This quarter begins what we expect will be a trend of year-over-year improvement in our digital camera operating results.

Kiosk’s year-over-year growth was driven by a significant increase in the media burn rate at key retailers and new kiosk placements with retailers who have demonstrated higher-than-average burn rates.

The gallery also had good year-over-year growth, resulting from new customer acquisitions as well as increased average order size, as customers purchased higher margin custom output products.

By contrast, the industry and Kodak saw a significantly higher-than-anticipated decline in the snapshot printer category. Consumers are choosing to use snapshot printers for fewer of their printing needs, in favor of more retail, online and general purpose printing. This shift in consumer preference is not concerning to Kodak because we have a complete array of output choices to support what customers want, including our leading kiosks, our leading Kodak Gallery, and our new line of all-in-one consumer inkjet printers.

Graphic communications digital revenue growth of 2% was slightly below plan as a result of lower-than-expected sales of digital printing equipment in enterprise solution businesses. The exact timing of the sales of large capital equipment is difficult to predict quarter to quarter, but we are very comfortable with our current sales channel. Remember, we report by quarter but we manage for the full year. Our plan for the year assumes accelerating growth as the year progresses, fueled by our recently announced new product introductions and a generally improving product portfolio price and mix environment.

Our expectation for full year digital revenue growth for GCG in the mid to high single digits remains on track. GCG’s bottom line was impacted by the affected increase in aluminum costs versus last year, but is on track for our EFO goal for the full year.

I am happy to say that both FPG and CDG were well ahead of plan from an earnings perspective, with all segments benefiting from the momentum in SG&A reduction.

In addition, we had improved product mix in CDG and strong earnings from FPG as they continue to maintain strong gross profits on declining sales.

We also had a significant improvement in our year-over-year cash performance, as a result of our improved earnings and a constant focus on working capital.

Relative to our full year financial metrics, our more aggressive investment in inkjet printers will reduce our targeted full year digital EFO by $60 million to a range of $150 million to $250 million. We continue to believe that our net cash generation for the full year will be greater than $100 million and that we will achieve digital revenue growth of 3% to 5%.

As I said before, I am very pleased with our first quarter start and what that means for the year. I will turn it over to Frank now who will provide you with more details on the financials. Frank.

Frank S. Sklarsky

Thanks, Antonio and good morning, everyone. Before I get started, I would also like to extend my sincere thanks to Don Flick. Don’s efforts on behalf of the company and investor relations have been invaluable, and he has certainly helped me get up to speed with the Kodak investment community and for that, I’m very appreciative. So again, thank you, Don, for your 33 years of service and I wish you and your family all the best.

Now, I will provide a little bit more information around the first quarter financial results and then Antonio and I will be happy to take your questions. Also, I want to remind everyone that our year-over-year comparisons are impacted by the movement of Health Group to discontinued operations, as well as the previously announced movement of various products between segments.

As Antonio indicated, our first quarter performance was in line with our expectations, positioning us well for the balance of the year. GAAP loss per share from continuing operations for the first quarter was $0.61, compared to a GAAP loss per share of $1.21 in the first quarter of 2006, an improvement of $0.60. First quarter results include items impacting comparability totaling $0.26 per share in net expense after tax. This consists of restructuring charges of $0.49 per share, income of $0.20 per share due to a reversal of an international tax reserve, and income of $0.03 per share from a property sale.

The prior year’s first quarter included comparability items of expense totaling $0.66 per share after tax. Our effective tax rate for continuing operations for the first quarter, about 8.5%, representing a benefit against total reported losses was somewhat lower than the U.S. statutory rate. While we did have the previously mentioned benefit for the reversal of a tax reserve, we also had tax expense for certain entities around the world and we also had expense for valuation allowances associated with various entities that could not immediately benefit from net operating losses generated during the quarter.

First quarter consolidated revenue declined 8% and included a 3% favorable exchange impact. Our first quarter gross profit margin was 20.2%, essentially flat with last year’s 20.5%. There were the usual puts and takes to the gross profit margin from the following factors: favorable impacts from manufacturing cost reductions; favorable exchange, which is offset by lower volumes and pricing; and approximately $30 million of adverse silver and aluminum costs.

SG&A decreased $112 million, or 22%, and declined as a percentage of sales from about 22% in the year-ago quarter to under 19% in the current quarter. This represents excellent progress in our push to achieve a run-rate for SG&A as a percent of revenue of 16% by year end.

R&D costs totaled $137 million for the quarter, or about 6.5% of revenue, and in line with our plans.

First quarter pretax restructuring charges on continuing operations totaled $151 million versus $216 million in the year-ago quarter. These charges included severance, accelerated depreciation, and exit costs, as well as asset and inventory write-downs.

First quarter cash restructuring payments were approximately $115 million. We eliminated approximately 1,100 positions during the quarter, bringing the program to date total to approximately 24,500 positions.

First quarter restructuring costs were proportionately lower than what you would expect based on what we are anticipating for the full year. This is due to the precise timing associated with individual actions in the various entities around the world. One major action we announced a few days ago that will impact second quarter results is the anticipated sale of our Xiamen, China manufacturing plant, which will result in cash proceeds of $40 million and a non-cash restructuring charge of about $220 million once completed.

As Antonio indicated, this is the last major step in our traditional manufacturing restructuring program we announced in January, 2004. Clearly we are making excellent progress in the areas of both SG&A reduction and manufacturing restructuring efforts.

We had consolidated first quarter GAAP pretax losses from continuing operations of $190 million versus $338 million in the year-ago quarter, an improvement of $148 million, attributable to the significant reduction in SG&A costs and lower year-over-year restructuring charges.

First quarter digital EFO improved by $48 million from a loss of $91 million in the year-ago quarter to a loss of $43 million this year. Additionally, for the second consecutive quarter, we saw a year-over-year improvement in our traditional earnings performance, reporting $18 million in EFO compared to a $1 million loss in the year-ago quarter.

Results from the consumer digital imaging group improved by $53 million from a $167 million loss in last year’s first quarter to a $114 million loss this year. The year-over-year comparison reflects the favorable impact of SG&A reductions, improved gross profit margins in digital capture, and favorable media and hardware mix in kiosks, partially offset by pricing in various product lines and increased costs associated with the investment and ramp-up of our new consumer inkjet products.

The graphic communications group posted $16 million of EFO in the first quarter, a decline of $8 million from the year-ago quarter, attributable to lower-priced sales mix in workflow solutions portfolio, lower volumes in digital printing hardware and the negative impact of aluminum and silver costs. This was partially offset by favorable foreign exchange.

We continue to see strong operating margins from the film products group, as a result of restructuring savings and growth in entertainment imaging color print films. As a result, FPG posted earnings from operations of $74 million, or 16% of revenue for the first quarter, versus $51 million or 10% in the year-ago quarter, despite overall revenue declines of 8%.

Interest expense was $25 million in the current quarter, a decrease of $16 million from the $41 million in the year-ago quarter, largely as a result of lower debt balances.

Other income, which includes interest income, income and losses from equity investments, gains and losses on the sale of investments, and foreign exchange gains and losses were $23 million in the current quarter versus $27 million in the year-ago quarter, a modest decrease of $4 million due to a variety of factors, including slightly lower interest income.

As we just closed the sale of the Health Group, we do not yet have a final balance sheet or cash flow statement for continuing operations. These will be provided when we file our first quarter 10-Q next week. In the interim, we will provide you with some preliminary direction of our estimated results.

Net cash generation for the first quarter is expected to improve by approximately $175 million to $200 million from the prior year’s first quarter performance. With respect to working capital, inventories were up a little bit more than $150 million versus the end of 2006 calendar year, partially as a result of building some stock in advance of the shut-down of the Xiamen, China sensitizing operations.

Inventories were, however, down by over $275 million as compared to the end of last year’s first quarter. This demonstrates our continued commitment around improving supply chain efficiency and a leaner, go-to-market model.

In addition, we also had excellent performance in trade receivables, with a decrease of over $125 million versus the prior year, an over $250 million improvement versus year end. These figures all exclude the divested Health Group and are preliminary. Final figures, once again, will be available in next week’s 10-Q filing.

Capital expenditures for the quarter were $66 million, down $12 million from the year-ago figure of $78 million, and depreciation and amortization was $248 million in the current quarter versus $336 million in the year-ago quarter, as a result of completion of certain plant closures under the traditional manufacturing restructuring program.

We ended the first quarter at $1.026 billion of cash and cash equivalents, consistent with our desire to keep at least $1 billion of cash on hand. We closed the Health Group divestiture, receiving cash proceeds of $2.35 billion, and yesterday we fully repaid $1.15 billion of the outstanding secured term debt.

As Antonio indicated, we are assessing all options for deployment of the remaining proceeds. Our goal is to generate the greatest amount of value for our shareholders. This will involve a disciplined process of evaluation, and we will carefully study the risks and rewards of any proposed actions.

It is important to note that the Health Group divestiture was a worldwide asset sale and a substantial portion of the cash was received outside the U.S., so any options we do pursue involving the need to repatriate cash to the U.S. will require some time to ensure we do this in the most tax efficient manner.

That said, the most important point is that we want to have a sustainable, profitable growth model for our company while maintaining healthy liquidity, financial flexibility, and a strong balance sheet and, as Antonio indicated, it will take some time for us to determine the optimal path.

In summary, based upon current conditions and our best internal assessment, we are on track to achieve our previously stated 2007 goals for digital revenue growth of 3% to 5%, and net cash generation in excess of $100 million. With the accelerated investment in our consumer inkjet program of $50 million, our digital earnings goal is now in the range of $150 million to $250 million.

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

Question-and-Answer Session

Operator

(Operator Instructions)

We’ll go first to Jay Vleeschhouwer at Merrill Lynch.

Jay Vleeschhouwer - Merrill Lynch

Good morning. Antonio, a couple of questions, first regarding consumer digital. What are your expectations for the return on investment for the added $50 million spending related to home inkjet in terms of how or when that will convert to revenue?

Secondly, you talked about the 0.5 million unit sales for this year. What do you think the installed base needs to be for the home inkjets in order for you to achieve break-even for that business, assuming also that you get the burn rate for the cartridges that you’re counting on?

Antonio M. Perez

The first question is that the investment that we are making now is something that we have thought before we started the program, but we would not do it until we had some feedback from the market that our assumptions about the value of the business model were true, were positive.

Obviously this is very early in the program, but now after selling tens of thousands of units and seeing the reception from end users and the reception from our retailers all over the world, and as well the reviews that we have from many entities around the world, we have a very good indication that this is a success. Therefore, we launch something that we were thinking -- you know, if we were lucky, we would and that is why I said it was the happiest decision of this quarter for me.

The effect of this $50 million investment, it will be at the very end of this year, and then basically for next year, and that includes manufacturing capacity as well as new products, and a harder push in marketing for next year, since we are going to have many more retailers around the world and they are going to need support.

That is what the plan is. Why we are making it now, originally I thought that this decision had to be made more towards the end of the year. The signs that we have, and I’ve been doing this for 25 years, are very clear. I have introduced many inkjet printers in my life and I know this is a great introduction. I have seen the reaction. This is a great opportunity for the company and we should plan aggressively to take advantage of it.

The second question is a little more complicated because the ideal situation, what we are driving towards is to get to that point where our revenue is about half coming from hardware and half coming from supplies. Once you get to that point, you are in paradise in this business, so we are trying to get to that point as soon as we can.

What we said originally is that it was going to take us third year, and during the third year we will become, at some point in the third year we will become break-even. Obviously if the installed base grows faster, if the burn rate goes a little better, those are very big variables that can change and improve that, but that’s what’s in our plans now.

Jay Vleeschhouwer - Merrill Lynch

Okay, as a follow-up, you didn’t mention in your remarks anything about IP licensing activity, either in the quarter or any of your expectations for the year. That was a large part of the conversation in the fourth quarter call. Could you update us on what you see now?

Antonio M. Perez

We have not signed any new, non-recurring deals this quarter. We had an increase. We had an increase over last year but that is part of the ongoing payments that we received from licenses, and so we got a better results than the first quarter of last year but due to the ongoing program -- at this point, we have not signed any new license yet this year.

Frank S. Sklarsky

We did say in February that we expected in excess of $250 million for IP this year and we are on track for that.

Jay Vleeschhouwer - Merrill Lynch

Finally, back to CDG, as you say, you are broadly exposed to multiple consumer print venues at home and at retail, do you have any way of gauging what your share is or what your share trend is for the entirety of consumer digital printing?

Antonio M. Perez

No, I don’t have that number. We have individual numbers by -- we know that, for instance, our share in kiosks is around 60%, I believe. Ann can confirm these numbers to you. It is very high.

There is a big difference when you talk about kiosks about burn rate, one side versus another side, but we know that the kiosks are getting a bigger part of the printing needs. People are using more and more kiosks.

We know as well by the growth in Kodak Gallery that more and more people are going into online services because they tend to order more complex products that they used to get from the one-hour mini-lab, so we know that those two areas are growing. We know that the home is still a very big part of the image printing but it is kind of stable now, but it is still such a large part that we think we are going to get a lot of benefit from our inkjet.

We have never taken over a lot of -- it is changing constantly but we are going to make sure that we have the options where customers are going to for print.

Jay Vleeschhouwer - Merrill Lynch

Thank you.

Operator

We’ll move next to Matt Troy at Citigroup.

Matt Troy - Citigroup

Thanks. I just wanted to echo the earlier sentiments -- Don, you’ve been an invaluable resource, if not a Rosetta stone to what is a complex story and I’ve always appreciated your patience and insight, so thank you and I wish you well.

Antonio, I wanted to talk about the cash infusion from the sale of health. You mentioned interestingly that some of it needs to be repatriated. I was wondering if you could give us a sense directionally how much of the total $1.2 billion is outside of the U.S.? What are the terms in terms of timing for that $200 million option, the performance base option? When I think about potential uses, you certainly have given some detail there. One avenue would be acquisitions and in the past, you have ruled out consumer as a segment where you do acquisitions. I was wondering if you could just update us in terms of the portfolio where you see you might make an acquisition, if that’s the choice and path you go down, and I’ve got one follow-up. Thanks.

Antonio M. Perez

Matt, the first thing I have to say, this report that you gave about Don is the best report that you have written so far about the company -- and the most accurate.

Matt Troy - Citigroup

At least you’re reading them.

Antonio M. Perez

Okay, okay. I’ve never excluded anything about consumer but I am very cautious about acquisitions because it is very difficult to buy for the right price these days. But we do have a lot of technologies in-house. You may or may not have noticed that in my comments, I made a reference to new products coming, new product categories coming that we have been working, not just in inkjet, as you can imagine. We are working on other things. This influx of money can help us to accelerate our internal investment, in which I have a lot of faith because we do have a lot of know-how in this company that has not been commercialized yet.

Obviously we have not said no to purchasing back share because I do believe that the shares are under-valued, and so therefore there is -- that could be an interesting investment.

The question about where the money is, I’m going to let Frank answer.

Frank S. Sklarsky

Matt, we don’t want to get into specific jurisdictions where we have cash. We have a significant amount of cash both in the U.S. and overseas. The only point we were trying to make is that if we were to explore any options that required a very, very significant amount of cash to pursue that option, we would clearly have several months involved in making sure we repatriate that cash to the U.S. in the most tax efficient manner.

So obviously with more than half of our revenues overseas, we have a lot of cash in a lot of different kinds of places.

As for the timeline on the potential $200 million upside, there is no specific timeline. It really is just based on Onex’s ability to generate the internal rate of return target that was specified in the press release and our share of that, but no specific timeline on that.

Matt Troy - Citigroup

My follow-up relates, Antonio, to some of the internal technologies that you’ve alluded to in the past. One, are we still on track through 2008? I think there’s some building expectations to see a high-end inkjet product extension from Kodak. Are we still on track there?

And two, it was certainly nice to see the introduction of the 70 page-per-minute devices on demand a few weeks ago. You book-end the market nicely now. Is there opportunity to further flesh out the portfolio in between those two book-ends, and is partnership the continued preferred strategy? Thanks.

Antonio M. Perez

I won’t answer the second question, but yes, there is an opportunity between those two ends for sure. There is a big opportunity between those two, whether that is partnerships or its our own technology, we won’t disclose at this point in time.

Matt Troy - Citigroup

But more to come?

Antonio M. Perez

But more is coming, yes.

Matt Troy - Citigroup

Okay, and then on the inkjet side, just an update, are we still on track?

Antonio M. Perez

We are very much on track, both for the home and for the -- for the -- the continuous inkjet, we have a very large investment in getting continuous inkjet to introducing Drupa in 2008. It’s a key program for the future of DCG and that is on track too.

Matt Troy - Citigroup

Thank you, and Don, thank you again.

Operator

Our next question comes from Sam Doctor at J. P. Morgan.

Sam Doctor - J. P. Morgan

Thank you. I had a question actually on CMOS sensors. Can you give us an update on how many handsets you are in the market with right now? At what point would you expect to reach $100 million run-rate for ICs?

Antonio M. Perez

This is a long process, as you know, Sam. We do have a reach at least of design wins. The only thing I can tell you for sure, as sure as it can be a few months in advance in this business, is that we will have some of our cameras with our own CMOS sensors inside before the end of this year. We have as well projects to equip cell phone manufacturers with their own CMOS and we are working very hard on that. The deals are done -- it is just a matter of coming out with the products. You will see them coming. I will not say when at this point in time, but the program is working nicely.

This is a long process. The bad news is that this is a long sales process. The good news is once you are in, you stay for a long time. This is how the business is going now.

Sam Doctor - J. P. Morgan

On the inkjet, I just had a question; most of the -- for some time, you said that you were looking for about 500,000 units this year, but that really hasn’t changed in the last month or two.

Antonio M. Perez

No, that hasn’t changed.

Sam Doctor - J. P. Morgan

Yes, so as you spend the extra $50 million, you said some of it was for product development. What else are you looking for and how has that changed in terms of what you are seeing in the market, and what is really the spend for?

Antonio M. Perez

Well, it is basically to speed up the whole program, Sam. Obviously we had all the products coming out and we never say when or how or what products, but you can imagine that they are, and those products had certain investment levels in tools for manufacturing, and given the response, we know our best knowledge now is that we are going to need more volume than we planned originally, therefore we have to plan now, buy the tools now and then get them ready when they come out.

It is possible that some of that investment will show the benefit of units before the end of the year but we are not counting on it. But it is basically the same program that we had, except that we have learned of our own success maybe three or four months earlier than I thought I would feel comfortable doing this. I was thinking that it would be more towards the end of the year and I am very excited with this progress. I think the response of the customers, I get hundreds of e-mails from end users that are very excited and uplifting -- emotional, in many cases. The response of the retailers, all they call me is to complain why I didn’t give them the product earlier, so things are going well.

Sam Doctor - J. P. Morgan

Great. Can I just ask quickly, as for a bit on the health care stranded costs? What are the actions that you have taken so far and how is that proceeding?

Antonio M. Perez

I’m going to let Frank go that. It’s a little better than we though.

Frank S. Sklarsky

We got after the SG&A very early in the year, in fact late last year in terms of trying to look at both opportunities to reduce the overall SG&A costs for the company while taking into account that we really had to accelerate that effort as a result of, at least in January, once we announced Health Group, we had to accelerate that.

So I would say that when you look across the spectrum, it is in obviously positions, which we have talked about a little bit. If we can keep on that track for the remainder of the year, consistent with our prior guidance. It is also in the area of non-labor spend, and from the area of also making sure that we are proportionately reducing the fixed cost load on the company and the G&A costs on the company consistent with where we are sized now in post Health Group environment. And it is identifying every single opportunity we can and it is based on a zero-based approach of what we really need to drive value for the shareholder, drive value for our customers. So really taking a fresh look at every individual area of the company to get the leanest cost structure we can while not jeopardizing anything we are doing to introduce new product and drive the top line.

Sam Doctor - J. P. Morgan

So in the first quarter, how much expense was there in the healthcare group which you would expect to see reclassified into or reallocated to the other divisions in the second quarter?

Frank S. Sklarsky

You will see that more in our upcoming disclosures in terms of specific amounts associated with the Health Group, but the numbers that you are seeing today and that you will see in the 10-Q next week, do reflect all the remaining costs that will remain in continuing operations for Kodak, so there is no additional overhang that you will incremental to what has been and will be disclosed next week, no other hidden costs. We’ve been very careful to segregate that according to the accounting rules and also been very careful to take as much of that out as we possibly can as early as we can.

Sam Doctor - J. P. Morgan

Good. Thank you.

Antonio M. Perez

The other thing I would say, Sam, is that I repeatedly said at the end of last year, beginning of this year, that I felt that the SG&A program, which couldn’t be executed fully until we had the conclusion of the sale of Health, was going to be one of our biggest tasks, and the fact is that things are done, a pretty good job and I feel much better and I see the results of SG&A already and I feel very confident that we will get to the cost structure that we wanted before the magic 2008.

Sam Doctor - J. P. Morgan

Thank you.

Operator

We’ll move next to Shannon Cross at Cross Research.

Shannon Cross - Cross Research

Just a few questions; first, in terms of your inkjet strategy, can you talk a little bit about your mix of sales so far in the U.S.? And then, I don’t know if this is going to last, but it seems to me that according to your announcement, you are going to be selling just the two higher-end inkjets in Europe, at least to the channel partners you’ve announced. So is that correct and anything you can give us there?

Antonio M. Perez

This all has to do with the amount of product that we can create, that we can build. Our plan is to have the full portfolio in the regions in which we are participating. But we are going to start with what we think is most appropriate, discussing with our partners. So there is no reason to eliminate the low-end in any particular place. It is just the ramp-up, production, number of units that you have. We have already commitments. Since we are making deals with many retailers at the same time, we are making commitments to them about how many units or how many times we are going to give them. We have to balance all those things while we don’t have enough product. That is the only thing behind.

I forgot your other question. If you could --

Shannon Cross - Cross Research

I was curious about the mix of sales in the U.S. so far, the 149 versus 199.

Antonio M. Perez

I think the $200 product is doing very well. I can’t tell you exactly. It seems to be doing very well, and maybe better than the -- we are selling everything we build of both, but we have been -- the latest signs is that the one with the screen gets more attraction to people, so they are willing to pay more for the printer, so that is what we -- so we are driving manufacturing to those units because it looks like the first impression is that is the one that we will be selling the most.

Shannon Cross - Cross Research

Okay, and then if you can give a little more detail, just in terms of your manufacturing capacity, because you mentioned part of the $50 million was to go to fund some of that. I am curious as to what specifically is that, because since you are using Flex and a number of others, is that more on the ink cartridge side, to put them together, or where does that expense go?

Also, can you just talk about what is the limiting factors in terms of your ability to ramp up production of these printers, since you are using Flex and others who obviously have a lot of experience?

Antonio M. Perez

We are using Flex and others. Some have more experience than others, but you still, whenever you put a new line, this is a new platform so nobody has ever built this product before, whether it’s Flex of anybody else. So whenever you put a new platform and before you get to volumes, you’ve got a lot of check-ups that you have to do in the lines, in the supplies. It is not just the lines, it’s the suppliers. The suppliers have to raise all their number of components -- this is a very, very, very difficult. Anyone that has been in manufacturing knows that it is not about throwing money. There is a limit. You can put as much money as you want. You won’t get faster.

We have very experienced people doing this. They have done this many times before, so we are doing it as fast as we can. The only limit that we put, the only limit was our own -- we had to be convinced that we had a business model that was accepted. At this point in time, I already declared that it is very well-accepted and therefore, there is no limit in any part of the organization as much as how much can we invest to get faster. The order is go as fast as you can.

Shannon Cross - Cross Research

Just curious though on the $50 million in manufacturing. Specifically what would your -- again, since your whole model is outsource, which makes a lot of sense, I’m just curious what you are actually manufacturing. Or is it just helping to fund the start-up of lines for your partners?

Antonio M. Perez

It’s three things. It’s the lines. We are buying more lines. That’s the first thing. So we placed orders to get the tools that we put on the lines. We will train people to run those lines. That costs money.

We have accelerated the development of the new products. We want them earlier, so you will see new products coming from us earlier than we were planning to originally, although we never told you when they were coming, but you have to believe me. We are accelerating the rate with which we can build new products.

And as well, we know that the more volume we put there, the more money we have to have to support those volumes because of marketing, training, things of that nature.

Those three buckets.

Shannon Cross - Cross Research

Okay, that was helpful. Just one final question, Antonio. Could you revisit your comments on share repurchase that you made, in terms of your thoughts about the use of the cash. I just want to make sure we got it correctly in terms of your thoughts on share repurchase.

Antonio M. Perez

What I am trying to tell you is nothing. So this is -- I’m trying to tell you my best thinking, but with the idea that you have to realize that this is a decision of the Board. It is not ours. What I did feel comfortable to say is that really at the bottom of our thinking is dividends, but the rest is all for grabs. I think there is value in any of those options and we have to get the money from overseas and we have to look at these options and we need some time.

Shannon Cross - Cross Research

Thank you very much.

Operator

We’ll take our next question from Chris Whitmore at Deutsche Bank.

Chris Whitmore - Deutsche Bank

Thanks. Just to follow-up on the inkjet, I was curious if you could quantify the amount of total investment of inkjet in the quarter, and how much you expect to invest for the full year 2007?

Frank S. Sklarsky

Well, we said there would be an “investment” or losses for the total inkjet program this year that were in the line, our previous guidance was it the line with what we experienced in 2006, and now it would be $50 million more than that. I don’t want to get into specific details on how much is investment versus gross profit loss or things like that. But we had said last year, it was in excess of $100 million. It was certainly in our plans to be well in excess of $100 million this year and we are adding $50 million to that.

Chris Whitmore - Deutsche Bank

So is it north of $200 million loss on inkjet for this year? Is that the target now?

Frank S. Sklarsky

If you take everything all in, in terms of operations, additional investments, R&D, new tooling investment, everything else, yes, you’d probably be north of 200.

Chris Whitmore - Deutsche Bank

Okay, and secondly, I’m a little confused as to why you are not raising your unit forecasts for this year, given the incremental investment in marketing and manufacturing capacity. What changed over the past several months that requires additional spend relative to that 0.5 million unit target?

Antonio M. Perez

It doesn’t require additional spend. We could have stayed with the plan we had. We think that it’s an opportunity to speed up the program we have. As I said before, if we get lucky, we made the decision basically last week, if we get lucky with everything, we will get extra capacity before the end of the year. I cannot promise that that will happen. That is why we are not changing those numbers.

But we are going to spend our money and get it back as soon as we can. It takes time to do these things, but yes, that is a possibility that we will get a slightly higher capacity before the end of the year, and then I can assure you that we will use it fully. It will be a great time to use it because it is the peak season.

Chris Whitmore - Deutsche Bank

Of that $50 million, how much is being spent on marketing versus capacity expansion?

Antonio M. Perez

We’re not going to disclose that. We don’t want to tell anybody how many lines we have or -- that wouldn’t be helpful for us.

Chris Whitmore - Deutsche Bank

Any quantification in terms of units shipped into the channel and what shipped through the channel and into customers’ hands?

Antonio M. Perez

It is really not relevant, but I will tell you. It’s tens of thousands. I mean, they keep changing it every day, but it is tens of thousands. Given the size of this market, I don’t think it’s very relevant.

The moment we become significant, you are going to get all this data from third parties anyway. That’s the data that you want the most.

All we have is our internal data that is very valuable, obviously because it is through our communications with our customers, with our retailers. I know, for example, that Best Buy has told us that one of our SKUs was one of the top three SKUs in Best Buy, so that means a lot to us. That means this is really working really well. But it is too early and I hate to make assumptions just based on things like this. We have a lot of data from customers. They have bought and they write to us, which is not normal in this industry, by the way. This is a pretty old industry, so people don’t write back to the manufacturer about their printers anymore. They used to do it 15 years ago. They don’t do it anymore.

But we get a lot of those because people are incredibly happy with the quality they produce and more than anything else, the cost of prints. So all those combinations, and I don’t want to go into a lot more detail, gave us enough visibility to the point that we have a business model that is very well-received. The retailers as well, they tell us, so we need to accelerate this as much as we can.

If we can accelerate it into this year, believe me, we will do that.

Chris Whitmore - Deutsche Bank

Any update as to your thoughts on OEM-ing the technology to a third-party manufacturer?

Antonio M. Perez

We will, as long as we can make money. We don’t have any credo here that will stop us to do that. As long as we have a way to distribute product technology, [support the] brand, and make money while doing so, we don’t have any limit.

Chris Whitmore - Deutsche Bank

Lastly, just housekeeping on inventory write-down. You mentioned it in your comments. I was wondering if you could quantify what you wrote down, how much and what it was you wrote down. Thanks a lot.

Frank S. Sklarsky

I don’t want to quantify exactly the write-downs. That was a relatively minor part of our total restructuring charges, to be honest. Most of it has to do with exit and severance costs. Inventory was very minor.

Antonio M. Perez

The next quarter will be --

Frank S. Sklarsky

Right. In Q2, we will have the significant write-down, as a write-down, the $220 million for the Xiamen, China facility, but again inventory as a piece, that would be relatively small. It’s also in the fixed asset piece.

Operator

We will move to our next question from Eli [Lapp] at UBS.

Eli Lapp - UBS

Thanks. Two questions; one is, could you give us the remaining cost per severance for the remaining portion of the year?

The second question is, I just hate to beat that same subject to death, you essentially know exactly where your balance sheet is today, you know where your stock price is. You have a good sense of the M&A environment. Could you give us a sense of your philosophy towards where you would prioritize your cash position, your capital structure, et cetera? You did actually say that the one-time dividend is at the bottom, so I guess you do have a sense about your priorities there.

Antonio M. Perez

Yes, and I thought I was doing well by going that far. Apparently, I’m not. But really, we are not ready to go any further. Sorry about that, but this is where we are. We do have internal growth opportunities and there is buying back shares, we are examining that too. We are looking if there is something that can be bought that will be a very low cost and give us a lot of growth and a lot of technology.

We keep looking, and in the meantime, we are trying to get a hold of the money, which as Frank told you, it’s all over the place and we are not going to do anything stupid bringing it back and losing a bunch of it just because of it, so it is all of those things together.

Eli Lapp - UBS

What about the --

Frank S. Sklarsky

Yes, let me address the restructuring. We had 151 in restructuring in the first quarter. We said that the year would be approximately $900 million to $1 billion in total. A lot of that is non-cash charges, which the $220 million for China is a big piece of that.

If I think about severance, we don’t really separate severance from exit costs, but I would say there is another $400 million to $500 million, probably, in what we would call payments for severance and exit for the year. Some portion of the $151 million for the first quarter of that.

Eli Lapp - UBS

Maybe more importantly, how much of that is cash?

Frank S. Sklarsky

Well, our cash, if you go back to our February 8th meeting, we were very careful to say that we would have approximately $600 million of corporate cash for restructuring payments for this year. That includes the cash required to follow through on the remaining restructuring that was done in ’06 and prior, as well as about 40% of that related to actions that we would take this year.

In addition to that 600, there would be somewhere between $100 million and $150 million in special termination benefits that would be taken out of our U.S. pension assets. So we are still holding to that general guidance from February 8th.

Eli Lapp - UBS

Thank you.

Operator

We have time for one more question. We will go to Jack Kelly at Goldman Sachs.

Jack Kelly - Goldman Sachs

Good morning. Antonio, I was going to say something complimentary about Don, but decided not to, given I might be setting myself up. Anyway, I did have a couple of questions. You had indicated that in the second quarter, you expected consumer digital camera growth to be positive and it sounded like you thought it would be in line with the industry, or maybe better, so can you share with us in terms of what you think the industry is going to do this year, in terms of consumer digital cameras?

Antonio M. Perez

We do expect -- you know, the tough compare that we had in the first quarter will disappear in the second quarter, so we won’t have much of an excuse then. We kept selling a lot of low-end cameras the first quarter of last year, some in the second quarter, but the compare will be better.

I know how well we are doing with digital cameras, so I could only expect to grow as the industry grows. I won’t go any further than that.

The second, the third, and the fourth quarter are the quarters that in our original plan, showed the digital growth both for CDG and for GCG, so I expect them both to start showing digital growth and get to the numbers that we set for the year, and that goes in line with the timing of the introduction of products and everything else. You can figure that out. We introduce a lot of products in GCG, as well the plate contracts, they will be renegotiated and they will have an effect more towards the second part of the year. All of that is positive.

I think growth, the digital growth that we promised for the company, that we expect for the company, will happen in the second, third, and fourth quarter.

Jack Kelly - Goldman Sachs

And then I had a question about overall digital profits for the company. Last year you earned $343 million in operating profits. That was composed of roughly $250 million in IP and then $93 from other. If we take the midpoint of the range that you gave us today, it would be a midpoint I guess of about $200 million, of which maybe we get another $250 million from IP.

I guess the question is last year, ex the IP, you earned about $93 million, the 343 less 250. This year, it looks like a swing to a minus 50, so a swing of about $143 million. Now, part of that might be the additional investment in inkjet, but I wonder if you could just generally characterize that swing of 143, where it might be coming from.

Frank S. Sklarsky

I think that you are right on your last point there. A major part of the swing is the investment in inkjet this year. We always hate to attribute IP as being the only or major contributing factor to digital earnings. There’s another very nice part of the portfolio called graphic communications, and we could just as easily attribute a substantial portion of digital earnings to that part of the portfolio.

So there are obviously some puts and takes. There’s a nice performance from GCG. There is nice performance from royalties, offset somewhat by the significant costs associated with the inkjet launch this year, and those are really the three major factors. That’s the way I would characterize it.

Jack Kelly - Goldman Sachs

Okay, and then --

Antonio M. Perez

The growth in digital earnings from CDG is about the amount of money that we need to cover for the investment in inkjet.

Jack Kelly - Goldman Sachs

So plus 50, roughly.

Antonio M. Perez

No, no, I don’t get to those numbers but you better sit down with one of my people and go through those numbers. I don’t get to that number.

Jack Kelly - Goldman Sachs

Okay, and then finally, Frank, on currency, you identified the positive impact of currency in terms of gross profit. Can you maybe quantify what it was on the bottom line, the EPS line?

Frank S. Sklarsky

Well, generally it does flow through as it goes to gross profit, that the same amount would generally flow through to the bottom line, because there’s -- there is some impact on G&A costs. In those same jurisdictions, there would be some offset to the gross profit number relatively in proportion of G&A to the gross profit, so G&A is 19% of revenue, rather, and gross profit was something in the order of 24% of revenue. Roughly in the proportion would be the offset for G&A savings in those jurisdictions.

Jack Kelly - Goldman Sachs

Thank you.

Operator

That does conclude the question-and-answer session. At this time, I will turn the conference back to Mr. Antonio Perez for closing remarks.

Antonio M. Perez

Thank you very much, everyone, for attending the call. I think it was -- you heard what I said. From my point of view, we had a very good first quarter. We have a great balance sheet with strong liquidity. We are enjoying very promising success in the marketplace with our new products, not just with inkjet but as well in GCG. And we have more important new products to follow, as we continue to commercialize the powerful internal know-how that we have in this company, both in digital imaging as well as in output technologies.

We have announced the last major step of our traditional manufacturing restructuring program, and you can’t believe how relieved I am that we are already at this point. Now, obviously, we are now poised to bring it to a conclusion this year, which was always our plan. This has been a very difficult job very well done by a very committed project team.

At the same time, I had certain fears at the beginning of the year about how well we were going do to SG&A, was it going to be well enough, and I feel a lot better. You have seen that it’s gaining a lot of momentum, so I think we can conclude that part, the last part of our restructuring as well before the end of this year.

All I want to tell you is a new Kodak is emerging, in my view, and this Kodak will deliver very sustainable value for our shareholders by focusing the company in those areas where we have a lot of strength, improving in our basic processes, and of course concluding this whole year restructuring plan.

Thank you very much for joining the call.

Operator

And that does conclude today’s conference. Again, thank you for your participation.

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