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Executives

Ann McCorvey - Investor Relations

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

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

Analysts

Matt Troy - Citigroup

Woo Jin Ho - Merrill Lynch

Carol Sabbagha - Lehman Brothers

Shannon Cross - Cross Research

Ananda Baruah - Banc of America Securities

Eastman Kodak Company (EK) Q1 2008 Earnings Call May 1, 2008 11:00 AM ET

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, Ms. Ann McCorvey. Please go ahead.

Ann McCorvey

Good morning and welcome to our discussion of the first quarter sales and earnings. I am here this morning with Antonio 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 in this presentation 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 investment in consumer inkjet, distribution expansion, impact of commodity and raw material costs, newspaper production rationalization charges, depreciation, taxes, cash, segment and total company revenue, revenue growth, earnings and earnings growth are forward-looking statements.

These forward-looking statements are subject to a number of important risk factors and uncertainties 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 references 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 will turn the conference call over to Antonio Perez.

Antonio M. Perez

Thanks Ann and good morning everyone. 2008 is off to a good start and is a proof point that Kodak has returned to growth. Overall revenues grew 1% year over year and our digital businesses grew 10%. I am satisfied with our first quarter earnings and cash performance as they are right within our expectations given our seasonality and that gives me confidence for the full 2008.

Let me put the $119 million improvement in loss from continuing operations before taxes into perspective. The biggest driver of the improvement was lower restructuring charges of $161 million. Operationally, our losses increased as we had a full quarters’ investment in the placement of the consumer inkjet printer line and we experienced higher raw material cost. We were also negatively impacted by the Hollywood writers’ strike, which is over now.

The operational loss was partially offset by earnings growth in both our digital cameras and digital picture frames, where we continue to see the positive financial impact from our world-class supply chain and our improved product design capability. I am comfortable we are making the right investments across the company to fuel profitable growth.

In the first quarter, much of the cash used was related to planned investments in new products and revenue growth for the year. As a result, Kodak’s first quarter net cash usage of $764 million was higher than last year’s first quarter. However, we remain confident in our plans and our seasonality to deliver our full year net cash generation.

Frank will cover cash in more detail during his remarks. Now I will discuss the businesses.

The Film, Photofinishing, and Entertainment Group, FPEG, was slightly ahead of plan and delivered another quarter of solid earnings. While FPEG’s results include a number of positive and negative factors, it is important to highlight the negative impact of the Hollywood writers’ strike and higher raw material cost plus the positive impact of a traditional asset useful life change.

Our film business continues to be an important contributor to Kodak’s success with a sustainable business model and continued product innovation. In particular, I am pleased with the significant customer acceptance of our VISION 3 films during its first full quarter of sales. When combined with our first quarter performance, it gives me confidence that FPEG will achieve their full year goals.

Graphic Communications Group, GCG -- GCG’s revenue for the quarter was up 4% driven by growth in annuities across all of the product lines, with double-digit growth in plates, workflow and consumables for digital printing. However, our equipment sales declined year-over-year, as we are seeing the typical first quarter slowdown in orders in anticipation of DRUPA.

DRUPA is the graphic communication industry’s major trade show, which takes place every four years in Dusseldorf, Germany and will begin this year at the end of May. DRUPA will be a catalyst for revenue growth in the second half. It is a great opportunity to showcase Kodak as the only supplier with both conventional and digital solutions within a unified workflow. We will be highlighting over 25 new products from our prepress solutions, workflow and digital printing product lines, with new offerings that bring offset class quality, reliability, speed and cost.

GCG’s earnings from operations were slightly below plan, down $10 million versus the prior year first quarter, as the growth in revenue was not enough to offset the increased R&D investment in commercial inkjet and the unfavorable effect of raw materials.

We will continue to monitor raw material pricing and will raise prices where appropriate, taking into account customer and competitive situations. We are maintaining full year revenue and earnings growth targets for GCG. Consistent with the 2007 seasonality, amplified this year by the DRUPA effect, we expect to see accelerating revenue growth in GCG as we move through the year.

Now, the Consumer Digital Imaging Group, CDG -- CDG led the way in Kodak’s return to growth with revenues up 20% year over year. CDG’s growth in the first quarter was driven by digital cameras, digital picture frames and consumer inkjet products. The comparison will become less favorable as we reach the anniversary dates of the introduction of consumer inkjet and digital picture frames but, as we forecasted in February, we expect double-digit growth for CDG products for full year 2008.

CDG ended the quarter ahead of plan for earnings from operations with a loss of $111 million. Within CDG, digital cameras and digital picture frames had solid earnings improvement partially offsetting the year-over-year increase in the investment in consumer inkjet. However, for the full year we continue to expect our investment in inkjet to be less than 2007, as we complete full ramp up of this important product line.

We are pleased with the demand for our consumer inkjet products. As we announced last week, we are adding new products from our lower cost platform introduced in January and increasing our channel presence both geographically and with new retailers. We are on track to achieve our full year earnings target for CDG.

Now I will turn it over to Frank.

Frank S. Sklarsky

Thanks, Antonio and good morning everyone. I will provide a bit more information around our first quarter financial results and then Antonio and I will be happy to take your questions.

As Antonio indicated, we are pleased with the company’s performance in the first quarter, which included total revenue growth of 1% and digital revenue growth of 10%. Our overall financial results reflect a few key dynamics: the impact of timing shifts in our digital printing equipment placements in GCG, much of which is related to the anticipation of products to be shown at Drupa.

In addition, we experienced some headwinds associated with commodity cost and other raw material increases and we were also impacted by the Hollywood writer’s strike in our Entertainment Imaging group within FPEG.

Our cash usage, consistent with our internal expectations, was higher than the prior year due to a number of factors that I will speak to in a few moments. That said, we are confident in achieving our full year revenue, earnings and cash commitments we shared at our February investor meeting.

For the first quarter, consolidated revenue grew by 1% including a favorable foreign exchange impact of five percentage points. Importantly, we continued to experience double-digit revenue growth in our digital businesses. It is important to note that approximately 60% of our business is outside of the U.S. and although our revenues are favorably impacted by foreign exchange, we have a substantial international cost base so the impact of foreign exchange on the gross profit line is less than 1%.

In the quarter, the company’s gross profit margin decreased slightly to about 20.3% from about 20.6% in the prior year. This change is attributable largely to the mix impact of substantially increased units of Consumer Inkjet printers as compared to the prior year when the product was first introduced, the impact of the Hollywood writer’s strike in FPEG, along with continued unfavorable impacts of increased commodities and other raw material costs.

These effects were partially offset by continued improvements in digital cameras and digital picture frames and the impact of lower depreciation expense resulting from a change in useful lives. As it looks today, higher commodity and other raw material costs will continue to impact the company throughout the year. This area remains volatile and only a portion of the impact can be mitigated through hedging strategies.

Our SG&A decreased $9 million or 2%, and improved about a half point as a percent of sales to 18.4%. We continue to build on the substantial structural cost reductions achieved in prior periods.

We had consolidated first quarter GAAP pre-tax losses from continuing operations of $74 million versus $193 million in the year ago quarter, an improvement of $119 million, mostly attributable to lower year-over-year restructuring charges and continued reductions in SG&A.

As for restructuring, the company had minimal restructuring charges in the first quarter, which were more than offset by a $10 million net curtailment credit. We do anticipate some level of rationalization charges for the remainder of the year consistent with our guidance in February. Our corporate cash payments related to restructuring for the quarter were approximately $60 million.

On a segment basis, our Consumer Digital Imaging Group’s revenue grew by 20%, from $462 million to $554 million for the quarter, an increase of $92 million dollars. This was achieved on the strength of digital cameras, digital picture frames, and our Consumer Inkjet products.

The loss from operations increased by $36 million from $75 million in last year’s first quarter to a $111 million loss this year. The year-over-year decline in earnings resulted largely from increased investment in our Consumer Inkjet products, including the launch of the new platform, partially offset by improvements in profitability in digital cameras and digital picture frames.

Taking a look at Graphic Communications, our GCG business grew revenue by $29 million or 4% for the first quarter. This growth was a bit lower than our full year growth target but in line with our seasonal pattern and we also saw some softness due to our customers anticipating new product offerings to be rolled out at Drupa.

On the earnings side, GCG posted a $1 million loss in the first quarter, a decline of $10 million from the year ago quarter, largely attributable to R&D and related investments in our commercial inkjet business and the negative impact of aluminum cost.

Before I review the first quarter results for FPEG, I would like to share with you a few details associated with an accounting change in estimate, which we implemented this quarter.

As some of you know, in mid-year 2005 the company shortened the useful life assumptions on most of its traditional manufacturing assets to reflect the anticipated decline in the company’s traditional film and paper businesses. This operating assessment resulted in the useful lives of these assets ending in mid-2010 for accounting purposes.

Based upon the performance of the business and our latest projection of market trends, we have now concluded that to varying degrees, the estimated useful lives on these assets will be longer than previously anticipated. This has resulted in a decrease in depreciation expense for the company effective January 1, 2008.

As Antonio indicated, other factors aside, this decrease in expense favorably impacted earnings for the first quarter of 2008 by approximately $16 million. This accounting change will result in a favorable impact on earnings for the entire year of about $96 million dollars.

With respect to results in FPEG, revenue declined by about 13% to $724 million. This reduction was due to the anticipated declines in Film Capture, Paper and Photofinishing, along with the impact of the Hollywood writers strike on Entertainment Imaging.

Year over year earnings declined slightly by $4 million. This decline was largely due to lower volumes in our consumer film business and the impact of the writer’s strike along with the negative impact of higher silver and other raw material costs. This was partially offset by continued cost reduction efforts and the previously mentioned benefit associated with the change in useful lives.

As a result, Kodak reported a GAAP loss from continuing operations of $114 million or $0.40 per share, an improvement of $61 million or $0.21 per share from the prior year loss of $175 million or $0.61 per share. This improvement is largely attributable to lower year on year restructuring costs, offset by a higher tax provision in the current year quarter.

I would like to add a few additional comments on the tax provision for the quarter. The company booked a net tax provision of $40 million in the first quarter. This is due primarily to losses in the U.S., which are not benefited, as well as taxes provided on earnings in many of our international operations.

We are still anticipating a book tax rate of between 25% and 30% for the year and cash taxes in the range of approximately $150 million, including the taxes due on gains from the sale of Health Group and HPA from the prior year.

First quarter net cash generation reflected a use of $764 million, compared to a use of $453 million in the year-ago quarter, an increase of $311 million. The year-over-year change is primarily attributable to higher working capital, including payments to suppliers related to fourth quarter 2007 revenue growth, and increased inventory build in the first quarter in anticipation of revenue growth in the second quarter and beyond.

In addition, increases in performance based employee compensation and cash payments associated with a number of previously accrued tax items, contractual obligations and legal settlements impacted the year-over-year change for the quarter.

Looking forward, we remain committed to achieving our previous guidance for full year 2008 cash goals.

We ended the first quarter with about $2.2 billion in cash and cash equivalents. Our debt stands at about $1.6 billion and we will pay about $250 million in debt that is due in May. We continue to be pleased with our strong balance sheet and the significant liquidity position it provides us. And in recognition of the progress we have made, S&P recently improved its outlook on the company to stable.

In summary, we will continue to drive toward achieving our financial performance targets for the year including revenue, earnings from operations, and cash. As we continue to place more digital equipment on both the consumer and commercial side, we are building a strong foundation for an increasing annuities business for the future. While we will continue to be challenged with higher commodity and other raw material costs, we will be aggressive in our efforts to maintain a lean cost model, drive working capital efficiency, and evaluate product and pricing opportunities.

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

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Matt Troy with Citigroup.

Matt Troy - Citigroup

Antonio, it’s been about a year since the sale of the Health Care and the proceeds. I was wondering if you could just give us an update, to the extent possible, one, I know an issue initially identified was it would take some time to repatriate the cash. Has that been done to the effect it can be? And then two, could you give us an update, either your thoughts regarding deployment of the cash or at least a process in your engagement with the board in that decision?

Antonio M. Perez

Not much change from what I told you before, Matt. Some of the repatriation has occurred and the process continues. The first objective is to invest in organic growth. You’ve obviously seen that this quarter. We have Drupa in front of us and we have to put a lot of money behind that and we continue to be investing aggressively and developing the consumer inkjet business.

As far as usage for that extra cash, apart from the organic growth we are obviously looking for opportunities with good returns for the company outside for non-organic growth and we keep looking very seriously at the possibility of share repurchasing.

And it is a topic that is a constant topic in our board meetings and we have external people helping us with ideas about what to do, what is better for our shareholders, the timing of all of that, and when we have more news, we will certainly let you know.

Matt Troy - Citigroup

Okay, we’ll stay tuned there. A question for Frank on the reassessment of the useful lives on the film assets, I understand that’s a non-cash -- so we’re really not talking about any difference in economic earnings but I was just curious, to the extent it is going to be a $96 million benefit on the depreciation line, if I look at you keeping your guidance flat for EBIT for the year, it would imply something else coming in potentially a little bit weaker and again, I appreciate this is not a cash issue. But I was wondering if I’m understanding or framing that correctly and what is it that might be coming in a little bit lighter on the EBIT side such that this $96 million lift doesn’t allow you to raise the guidance at this point?

Antonio M. Perez

Well, this is not Frank, as you probably know by now, but it could, Matt, but given the situation with the raw materials, which may or may not change, and due to the fact that there were rumors of another possible strike from the actors, although it looks like it’s kind of softened now, we thought it was prudent at this time to do that. That doesn’t mean that we may not change that later but at this point, at this time, there were enough up and downs that the first thing we thought we should give you was this is the effect and you have the number.

If nothing else will change, if the raw materials would stay relatively constant, then obviously this will have a very important effect on the earnings but not in the cash, as you said. We just thought it was too early to make that conclusion. We’ll leave it up to you. We give you the data, you can read through it. We thought it wasn’t prudent to do it right now.

Frank S. Sklarsky

Matt, just one clarification, because you mentioned the reevaluation of the film assets. I just want to make sure we understand that this was an assessment of assets that impact both the film business as well as the paper business. The internal team has been very diligent at finding ways to redeploy portions of that traditional asset base toward using it for our digital businesses. We make a portion of our ink at Kodak park for the consumer inkjet product. We also use some of these assets to produce thermal paper for our growing kiosk and dry lab business. So that was all part of the assessment and what gave us some more confidence looking out into the future, along with the continued steady strength in entertainment imaging.

Matt Troy - Citigroup

Well, yeah and absolutely and I think the longer view would see a net positive that you can extract greater cash flow and economics from those assets.

Antonio M. Perez

Let me explain, Matt, why we did it right now -- I mean, when we faced the decline of film in 2004, we made a best assessment and we knew that we had to be aggressive with this, and we said the best data we have suggests that 2010 would basically be the end of this. Obviously -- and then on top of that, we had a very complicated manufacturing structure in which some of those were used by several products. It was very difficult to do anything but set the date for 2010 as the best information we have.

Today obviously the manufacturing structure is very clean. We know what asset is used for what, so we went asset by asset and we did a thorough analysis and obviously we know it is not going to -- it is not going to go away in 2010, so we added, depending on the asset, maybe one or two years to that, which is the prudent thing and the right thing to do.

Matt Troy - Citigroup

Thank you. The last question I had is just on inkjet. I think the numbers we looked at has you at a 2%, 3%, 4% market share on sell-through, certainly one year in, a good number to be at. I was wondering if you could just maybe expand on your learnings now that you are a year deep -- has the competitive response been what you thought? Have you seen even a competitive response? And just looking out 12, 18 months, what is the share outlook from a Kodak perspective? You’ve articulated 2010 -- can you stick to those goals at this point? And just talk about I guess just generally what you’ve learned in this first year, both positively and on the challenge side. Thanks.

Antonio M. Perez

We certainly stick to those goals. Learnings -- there are a variety of them. The response from our competitors, which there has been one, it wasn’t so much in products. We haven’t seen that. They haven’t changed the business model of their product structure or the product design. What they have been is a lot more aggressive in the channel. And that was one of the options that they had and an intelligent one, I guess, so it is -- they made very competitive for anybody to get room in the channel and get the right placements at the right time. You know, there’s a limited number of them and everyone fights for those and that we’ve seen a very, very serious response.

We haven’t seen a response to our business model and to our value proposition. Not that we expected them to have one, because I think it’s a pretty complicated thing for them to do, from our point of view.

For us, this year is a critical year of introducing new products with a low-cost platform. We came with -- the first platform was obviously you can over-design, as you normally do with your first platform. You want to make sure things are going to work and the first time you make a printer, you tend to over-design and it’s fine. Obviously we needed to move rapidly to a much lower cost structure with the same performance or better performance. This is what we did. We introduced the first product of this new platform in January. We just introduced the second and you are going to see more things coming this year, getting ready for the big season.

This is a very important year for us. We think we have very good momentum. We think that slowly but surely the business model has been realized by a lot of people and I think that will play in our favor.

Matt Troy - Citigroup

Excellent. Thank you for the detail, as always.

Operator

Our next question comes from Jay Vleeschhouwer with Merrill Lynch.

Woo Jin Ho - Merrill Lynch

Good morning. This is Woo Jin Ho for Jay Vleeschhouwer.

Antonio M. Perez

I thought you sounded different, Jay.

Woo Jin Ho - Merrill Lynch

Just a little today. First with respect to the inventory build in the first quarter, we understand that it is being built to help fulfill the expanded distribution for the consumer inkjet, but still what are your expectations for inventory turns and how many weeks of sales needed to be, to fill the channel, especially given the apparent near-term risk to consumer spending?

Frank S. Sklarsky

Without going into specific details on turns for individual products, we are striving to improve, continually improving inventory performance throughout the year across the business. What I would say in the consumer digital side, we are close to the benchmark in terms of turns, and that is a business that has improved its turns substantially from the 2 range to well over 3 over the past year-and-a-half, and that’s attributable to largely the new business model associated with digital camera and devices and frames.

The rest of our businesses still have upside opportunity, quite honestly. The graphic communications side, whether it’s equipment in graphic communications where we have opportunities to improve our cycle on customer installation and acceptance, thereby improving the cash cycle. And also in the consumer inkjet side, but for consumer inkjet right now the issue is making sure that we can effectively fulfill all the demand that is out there. It is a good problem to have but that is what we are focusing on right now before we get up to a level where we are looking at turns. You know, turns are high right now for some specific products in consumer inkjet, just because we are building to demand.

But I would characterize the CDG overall as doing well and GCG still has opportunities, and we have some pretty aggressive internal inventory targets for the end of the year.

Antonio M. Perez

Let me add a couple of things -- as far as consumer inkjet and all the CDG products, we believe we have a leading supply chain. We have a lot of flexibility in moving volumes up and down a lot faster than obviously we were able to do a few years ago, so we feel comfortable with that.

We haven’t see, obviously given the results that we have, a huge effect on consumer spending. A little bit in the U.S., certainly not in Europe, where our performance has been spectacular. And the other thing to our advantage, if there is one advantage -- and I hate to say it like that -- in having such a small market share is that it will be a lot easier for us to grow. And in many of these categories, we have still in the new categories, we’re still newcomers. Our ability to grow, we have a good value proposition, good value chain, good cost structure -- we think we are very well protected, as much as you can obviously, to changes in consumer spending.

Woo Jin Ho - Merrill Lynch

With respect to consumable usage, what are you seeing in terms of the usage, specifically consumer printing activity at retail, online, and at home, as well as at prepress and digital usage within GCG?

Antonio M. Perez

Well, GCG has gotten growth thanks to the increasing consumables. An example, the color pages in NexPress went up by 21% quarter to quarter. We don’t disclose every single product. We’ve been disclosing color pages because it is such an important indicator of where that business is growing.

If it wasn’t in GCG for the good growth of the consumables and the usage, we wouldn’t have been able to grow this quarter because the equipment sales, as we said, we knew they were going to be low because of Drupa. We are introducing more than 25 products at Drupa. Nobody wants to make a decision unless it is absolutely necessary before Drupa and we see that every four years when Drupa comes.

So for GCG, the consumables, we are very happy. The usage keeps going very nicely.

As far as inkjet, nothing much has changed since the data that we gave after the fourth quarter. Very high usage. Still I will be cautious and I will be the first to proclaim what it is when I think we have enough of an installed base to certify that this is something that is going to continue. Right now, we are very well aware that the customers we are attracting are the ones that tend to be more attractive to this business model and therefore they are going to print a lot and therefore our numbers are fantastic, but we cannot say how much they are going to continue like that. We hope they will be high. We know they will be higher than the average but we don’t know up to what level.

Woo Jin Ho - Merrill Lynch

And a couple of more -- first, do you foresee any possibility of any gross margin improvement this year in any of your hardware or equipment within CDG and GCG? And you talked about the pre-Drupa effect here to GCG revenues, how are you baking in the post-Drupa effect into the outlook for the year, as well as further out?

Antonio M. Perez

The first one, we have already seen margin improvement in devices for us, both in digital cameras and in digital picture frames, mostly because we have improved the way we designed these products and our supply chain is paying back, you know, the work that we did in the -- so yes, we do expect an increase of the device gross margins.

What was the second part of the question, was the -- yeah, the Drupa. We put a very -- we were very conservative on the first quarter with our numbers for GCG because we were -- we knew by talking to our customers, obviously we showed to many of our future customers the new products that we are going to introduce in Drupa. They are not going to see them in Drupa for the first time, and that obviously cuts both ways. On one hand, you excite your customers with the new things coming; on the other hand, they were ready to make a purchase, they are not going to make it. We think it’s the first thing to do -- we have to let them know, so we knew.

Now, as far as we know, we haven’t lost any order that we are aware of. We’ve seen delays in orders. We’ve actually seen delays in very significant orders for first -- in the financial, you know, big financial institutions. From what we know, we are still going to get these orders; it’s just that we didn’t get them in the first quarter.

So when we see the effect of Drupa and obviously -- we believe that we are going to achieve the goals that we set for the year for GCG, which were 6% to 7% growth of the top line.

Woo Jin Ho - Merrill Lynch

So in terms of the Versamark business, I know there was a lot of anticipation for the Stream technologies that you’ve previewed over the past couple of quarters, and you mentioned that there has been some delays, but given the anticipation of Stream, could there be a lingering drag on demand to the Versamark business at all?

Antonio M. Perez

No, I think -- it is not just Stream that is going to introduce over there. We have a very important -- I don’t know if this is public now. We are introducing a very important drop-on-demand commercial printing press that has received a lot of very nice comments from the customers that have seen it and we think -- and that is immediately for sale when we go to Drupa and we think that is going to have an effect.

I think as well, people, they need to see what Stream is going to do, so they make their choices about what model of Versamark they are going to buy, you know, thinking about the future.

I think after Drupa, and during Drupa, actually, during Drupa and after Drupa, you are going to see an acceleration of this industry. I mean, it happens every four years. I don’t have any reason to believe that it won’t happen this year.

Woo Jin Ho - Merrill Lynch

Great. Thank you.

Operator

Our next question comes from Carol Sabbagha with Lehman Brothers.

Carol Sabbagha - Lehman Brothers

Thank you. Just first a question on cash flow -- just looking at it from a very big picture, you were down a little over $700 million in the first quarter, seasonally usually a weak quarter. Nevertheless, you have a lot to make up to get to your full-year target. So if we look at it from a very sort of big picture perspective, what are the big buckets that we should look for improvements, or to contribute to cash flow to get to your full-year target?

And my second quick question on cash flow is you were down a little bit more than you were last year in the first quarter. Should we see a meaningful improvement in the second quarter or is this more of a second half event for you guys on the cash flow side?

Frank S. Sklarsky

Taking the second question first, Carol, I think that you will see gradual improvement throughout the year. As you know, we generate the vast majority of our cash in the back-half of the year and really in the fourth quarter. And this year I don’t see a substantial change in that dynamic.

I would say to your first question, where we would see some of the improvements, we’re a pretty agile management team. We’ve got a lot of levers to pull. One thing we are not going to do is slow down the investment in things that are going to grow our top line. What we will do is keep a very tight rein on capital spending to make sure we are deploying that to those areas which are going to contribute to growth.

Number two, we have some very aggressive initiatives underway for the remainder of the year on all the elements of working capital, so continued improvements in past due receivables, continued improvements in simplifying the business, which will help us lean out the supply chain, improvements in our revenue forecasting, which will also help us keep inventory levels lower, and also very significantly some aggressive initiatives around accounts payable, which were commenced in the middle of last year but which we are accelerating this year to bring ourselves much more quickly in line with our peer group days payable outstanding.

So those are some of the key areas. And of course, as you know, for the remainder of this year cash payments for rationalization charges will be much, much lower than last year. So when you look at the year-over-year compare on a quarterly basis, that will also help us improve.

And again, in the first quarter, there were about $150 million plus of items that I’ll say are special in nature that were accrued at the end of the year that were paid out in the first quarter, so that was part of the explanation also. But our goal is still to achieve our cash targets for the year.

Carol Sabbagha - Lehman Brothers

Another sort of broad question for your outlook for the year -- I know that the CDG EBIT came in as you expected, although a little bit below our expectations, but you are still for the year looking for that business I think to have 2% to 3% EBIT margins. But you are going to have more inkjet hardware sales hopefully this year versus last year and potentially lower licensing, given your forecasts. What are the variables that give you confidence that you can have this margin improvement from ’07 to ’08?

Antonio M. Perez

Carol, you made two wrong assumptions there, from our point of view with all due respect. I don’t know why the IP is going to be less. You said that -- we never said that. We stick to the 250 to 350. I don’t know why you said that. That is not -- we don’t agree with your statement.

The other one, yes we are going to put more inkjet printers into the -- but guess what? We are getting a very nice number of cartridges coming now -- slowly. So those two -- so don’t look at inkjet -- inkjet, it is a big investment still for the year but we believe it is going to be less than last year and it is because even though we are going to place more units there, remember they are a lower cost platform so they are less costly for us and we are beginning to see a lot of cartridges that are being sold.

Carol Sabbagha - Lehman Brothers

My only comment on IP, Antonio, just -- you know, I wasn’t saying that -- I thought last year you had over $500 million and I thought you said average annual 250 to 350. That doesn’t mean that that’s what’s coming in this year, so that’s sort of why I made that comment.

Antonio M. Perez

I don’t recall making that assertion. All I can tell you is that we do expect this year from 250 to 350 and it will come. It didn’t come in the first quarter so it will come later.

Carol Sabbagha - Lehman Brothers

Okay, and my other question is on GCG -- you’ve had a lot of headwinds on commodity costs over the last 12 to 18 months, and I’m assuming that underlying that the margin trend is obviously improving much more meaningfully than we can see. Aside from sort of a reversal on these commodity costs, is there a lot of potential cost savings from all that you’ve done integrating these businesses left to be had, or have we gotten most of them and they have just been sheltered, you can’t see them because of their higher commodity costs?

Antonio M. Perez

Two things -- the answer to your first question, yes, they have been -- there are better margins than you can see. Second, Drupa comes only once every four years and we put a lot of money behind Drupa, and that’s the right thing to do but unfortunately it comes and all the expenses, they tend to come two quarters before Drupa and we talked about R&D. There are many other expenses that are associated with Drupa and a lot of cash that is used because you have to have a good show. I mean, this is -- you don’t have a good Drupa, you can really damage your business. So when Drupa will be gone, we won’t have those expenses anymore. We will have a lot less, I mean. So you will see that too.

Versamark, which was basically the most under-performing as far as units, it is very easy to understand why this has happened. I mean, we [inaudible] by ourselves by talking so much about the new stuff that we are coming with, you know? NexPress grew. I think it will grow more after Drupa but it grew this quarter and you know, the color units. Black and white is going down, as you know, but the color grew nicely and the color printing pages, as I said before, grew 21%. So we see a lot of potential in that group.

The only fear for that group is that we have small customers and medium size and larger customers, so what is going to happen for the rest of the year for those small customers that [no one can capitalize] and they need loans to get this product, so we put in place ourselves the ability when it’s appropriate to actually provide financing for those people, if we see obviously that it’s a good deal for us.

So that’s the only thing that I have. My only worries -- you have two worries about GCG is how well we are going to do in Drupa. We are coming with very good intentions, a lot of products and a lot of stuff, lovely good stuff, a lot of money behind. And then what happens with the crisis, as far as them being able to get the money they need to buy these products. Those are the two things that bother me about GCG.

Carol Sabbagha - Lehman Brothers

Thank you very much.

Operator

Our next question comes from Shannon Cross with Cross Research.

Shannon Cross - Cross Research

Good morning. One question to start with on the commodity pricing; obviously silver and aluminum impacted you fairly significantly. A few years ago, and this goes back to Bob Brust and that, but it used to be common, sort of like a dollar of silver increase impacted us say $30 million to $60 million. I know it’s much less than that now, given how you’ve changed your product mix but can you give us any indications on how sort of to think about some of these moves in commodities, which who knows what, the dollar may go down again -- how to think about the impact both on the silver side as well as on the aluminum side?

Frank S. Sklarsky

A couple of points there, Shannon; obviously silver is a lower impact now than it used to be. It’s probably more in -- I will characterize into the high teens to the low 20 millions per dollar of silver, because of the reduction in the troy ounces that we both buy directly as well as the troy ounces that are embedded in some of our other raw material buy.

Aluminum, I don’t have a number for you but I will say aluminum was a larger impact in the quarter than silver. Some of that was just the magnitude and some of it was relative amount that we’ve been able to cover through different strategies.

The other point I would make though is that what’s hitting all competitors right now are other raw material costs other than just aluminum and silver, and that means anything that is petrochemical based, whether it’s resins, plastics and so on, and also the fuel surcharges on transportation costs.

So I don’t have an exact number for you. Those are the things that we are very watchful of, in addition to just the raw input commodities for aluminum and silver. So again, mid 20s millions of dollars for the first quarter on aluminum and silver, and then some amount above that impact on petro-based inputs and transportation costs.

Shannon Cross - Cross Research

Okay, so just to confirm because I want to make sure I get this right -- the mid-20s is basically per dollar or is that year over year impact?

Frank S. Sklarsky

No, that -- year over year for first quarter, about $24 million, $25 million.

Shannon Cross - Cross Research

Okay. And can you give us any indication on your hedging strategies? I’ve noticed you are doing a bit more now.

Frank S. Sklarsky

Well, the strategy really on aluminum, as opposed to actually direct hedging, we have the ability to vary our contracts between a fixed and a floating rate, and we kind of try to stay agile on that as we see the market. The thing with silver is that because the run-up was so dramatic in such a short period of time, I think it would have been impossible to layer on the kind of coverage according to the step model that we have, just in that very short window. But we do have some amounts of coverage for each of the commodities, as long as -- as we go out through the year in declining amounts quarter by quarter. We do buy some of our aluminum in Euro, which does help us a little bit. But you know, nevertheless it is still an impact year over year and we continue to pursue what is a step model for hedging, which declining coverage over time in the out quarters.

Shannon Cross - Cross Research

Okay, great. And then I just had a follow-up question, Frank, on the change in useful life, just to make sure -- there is no impact to cash taxes. Has there been any -- you know, any benefit from accelerated depreciation? Anything we should keep in mind that might impact cash over the next few quarters related to the depreciation change?

Frank S. Sklarsky

Not anything significant. We are still holding to our cash tax number of about $150 million this year, and that includes about $60 million that will be paid on the gains of sale for Health and HPA, so no specific impact on cash taxes from cash depreciation changes.

Shannon Cross - Cross Research

Okay, great, and then one just final question for Antonio, from a sort of macro standpoint -- given the pressure you are seeing on the commodities side, and I am sure the Euro is impacting you on the SG&A side as well in that, what -- sort of how you sit back and look at your cost structure and say okay, at what point will we need another restructuring -- just if you could give us any thoughts as to how you are sort of viewing it, how many quarters are you going to give us before you take another look at your cost structure -- anything you can give us on that would be helpful. Thank you.

Antonio M. Perez

I don’t see anything like that, certainly not this year or even in the years to come. When we came into this year and when we put our plans for the year, we kind of new a lot of what was going on in the market, so -- and I think you probably remember in February, we did say that we took into account our best estimate of the economy and how that would impact both retail as well as the small businesses we were worried about and we put that in our numbers. So our numbers already included when we came up with the numbers for the year a prudent approach to a market that we weren’t sure how it was going to be.

The cost structure is getting better every day. I don’t see any more than $60 million to $80 million in rationalization for 2008. There’s no scenario in my mind that will do that.

In a few years from now, but I cannot tell you when, but there will be one time in which we will have instead of two factories for paper we will have only one. I can assure you by that time, the restructuring will be so small that you won’t even notice because we are already getting ready for that. But I can’t even tell you when it is because it will take a few years for us.

So I don’t see any restructuring of any magnitude that I can think of any of the scenarios that we -- I mean, you tell me the economy, the whole world economy is going to crash down, then we have to have another conversation. But with what I know and what we know and with the modeling we do and with the growth that we expect, no, I don’t expect anything more than what we have published.

Shannon Cross - Cross Research

Thanks, Antonio, and I am sure you are well aware of this, but Sprint just announced that Bob Brust has been named the CFO, so --

Antonio M. Perez

Good, good for him.

Shannon Cross - Cross Research

-- continues on. Thank you very much.

Operator

Our next question comes from Ananda Baruah with Banc of America.

Ananda Baruah - Banc of America Securities

A couple, if I could; I guess the first one is on cameras. One of your competitors made comments last week that they’d seen camera pricing become meaningfully more aggressive and it impacted their top line and their margins. It certainly doesn’t seem to have impacted your top line too much but I was just wondering if you could talk about any change in camera pricing trends, or I guess what you are seeing as far as camera pricing goes out there in the marketplace, and how if at all the outsourcing of your camera manufacturing could insulate you from margin pressure.

Antonio M. Perez

Well, I don’t know who told you that but I think that has been true since 2003 when I came here. I wouldn’t change one single word of what you said, describing the situation with the digital camera since the moment I came into this company. It has been as brutal and as aggressive and as difficult as you just described. So there is nothing -- there is no news.

Yes, it is very aggressive. That’s why we made the changes we made in the way we design, our product platform, that’s why we changed our whole supply chain to one that we are very proud of and we think is very agile, very low cost, and remember, we tend to play in more in kind of the lower price, so if one should be suffering with this, it will be us and we are not suffering with that.

Ananda Baruah - Banc of America Securities

Antonio, I appreciate those comments. So from your vantage point, sort of aggressive pricing as a rule notwithstanding, you haven’t seen anything incremental occur over the last couple of months?

Antonio M. Perez

No, no.

Ananda Baruah - Banc of America Securities

Okay, appreciate that. And then just --

Antonio M. Perez

But it’s very aggressive -- yes, it is aggressive because it is hard to differentiate. Having said that, we are one of the first companies that came with smart capture, which is the way these cameras are going to be with Sony and I think some other companies are coming with that too, but we are leading in feature sets that really matter for the masses and we keep a very, very low and lean cost structure. That’s the only way to run this business.

Ananda Baruah - Banc of America Securities

Thank you. And just a follow-up, if I could, regarding your plate business and just general trends that you are seeing in the offset market so far in 2008. I guess there has been data to suggest, at least in the U.S., that the offset market is slowing to some degree. Could you talk about what you are seeing in that market, I guess both in the U.S. and in Europe, and sort of any impacts to your business there, your plate business?

Antonio M. Perez

Well, we have double-digit growth in plates. If we can keep that -- you know, worldwide, worldwide, which is the figure that we disclosed. But we see the plate market healthy -- again, this is very competitive though. I can say the same thing as far as cameras -- it’s a good margin business, a higher margin than cameras and the key competitors involved, they are very aggressive. So are we. We work constantly in lower costs. You know that we put a new plant in China to help us with lower cost of Asia-Pacific.

Actually, we’ve been suffering with lack of capacity in a couple of things. We didn’t mention that in the call but in plate, we kind of are getting better now with China. We are not quite out of it and in inkjet, I am surprised that none of you has called and said that you went to five or six stores, you couldn’t find our printers because they are out of stock.

So we still have some capacity issues, in part because we play safe and we are obsessed with supply chain and maybe too much, we have to do better. But plates, I see the business is going to be competitive for a long time. It’s about very good processes, very low cost, and good quality and you have to have critical mass, though. This is one business without critical mass, you can’t go anywhere. So we are the largest supplier in the world of plates and I guess that gives us some advantage in critical mass.

But I expect the market to be very competitive. We don’t have any dreams that it is not going to be like that.

Ananda Baruah - Banc of America Securities

Do you view what is going on in the U.S. economy as a potential headwind to the plate business as we move through the next couple of quarters?

Antonio M. Perez

Well, the biggest installation of NexPress is in the U.S. and they are printing a lot. Now they don’t need plates for that.

Ananda Baruah - Banc of America Securities

I’m sorry, the plate business I was referring to, the offset market.

Antonio M. Perez

Okay, plates. I don’t have the numbers from the U.S. in plates, but worldwide -- it’s been a great quarter of plates. I don’t have any -- if something were to happen significantly in the U.S., actually I believe where the issue was was more in Europe. I mean, the less growth was in Europe than in the U.S., so no, I haven’t seen anything.

Ananda Baruah - Banc of America Securities

Okay, great. Thank you.

Operator

Ladies and gentlemen, that does conclude today’s question-and-answer session. At this time, I would like to turn the call back over to Mr. Perez for any additional or closing remarks.

Antonio M. Perez

Thank you very much. Thank you all for your questions and for attending the call. I know that there are other important companies doing this the same day, so I appreciate that you chose to be with us. We are pleased with the first quarter. It is within the plan that we have. This quarter fits perfectly within the plan that we presented to you in February, so we are on track to achieve our revenue, our earnings, and our cash goals for the year. Thank you very much.

Operator

This does conclude today’s conference call. We appreciate your participation and you may now disconnect.

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