Eastman Kodak Company (EK)

Q2 2010 Earnings Call Transcript

July 28, 2010 11:00 am ET

Executives

Ann McCorvey – Director, IR

Antonio Perez – Chairman and CEO

Frank Sklarsky – EVP and CFO

Analysts

Shannon Cross – Cross Research

Ananda Baruah – Brean, Murray, Carret

Ulysses Yannas – Buckman, Buckman & Reid

Chris Whitmore – Deutsche Bank Securities Inc.

Presentation

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Eastman Kodak second quarter sales and earnings conference call. (Operator instructions) This conference is being recorded today, Wednesday, 28 th of July, 2010. I would now like to turn the conference over to Ann McCorvey, Director of Investor Relations. Please go ahead.

Ann McCorvey

Thank you. Good morning and welcome to our discussion of the 2010 second quarter sales and earnings. I am here this morning with Antonio M. Perez, Kodak’s Chairman and CEO; as well as our Chief Financial Officer, Frank Sklarsky. Antonio will begin this morning with his observations on the quarter, and then Frank will provide a review of the quarterly financial performance.

As usual, before we get started, I have some housekeeping activities to complete. Certain statements during this conference call may be forward-looking in nature or forward-looking statements as defined in the United States Private Securities Litigation Reform Act of 1995. For example, references to the company's expectations regarding the following are forward-looking statements

economic conditions; consumer discretionary spend; currency exchange rates; revenue; revenue growth; cost of goods sold; savings from restructurings and rationalization; product pricing; gross margins; earnings; cash generation; demand for our products including commercial inkjet, consumer inkjet, pocket video cameras, and motion picture films; new product introductions; electronic component supplies; potential revenue, cash and earnings from intellectual property licensing; liquidity; and debt.

These forward-looking statements are subject to a number of important risk factors and uncertainties which are fully enumerated on our quarterly report on Form 10-Q for the second quarter ended June 30th, 2010 issued this morning. Listeners are advised to read these important cautionary statements in their entirety as forward-looking statement needs to be evaluated in light of these important factors and uncertainties.

Now, I will turn the call over to Antonio.

Antonio Perez

Thanks Ann. Good morning everyone. Before I go on to detail about the results of the second quarter, I want to take a moment to remind everyone of the important context that is critical to understanding product. We are building a new company during a difficult time and we are making real progress. Technology transitions are never easy, but on the whole, I am quite pleased both with the direction and the pace of our progress.

Our new digital businesses are gaining significant traction and providing access to large and profitable markets where Kodak has unique value propositions. This makes me optimistic about the future. With that, we are pleased to review our results with you today, and I would like to begin by highlighting several key items related to our second quarter performance that are important to consider when analyzing our total results.

First, we continue to be very successful with our commercial and consumer inkjet businesses. Based on the strength of our value proposition, consumer inkjet significantly outpaced the market, and we grew printing revenue by 50% when compared to the same period last year. We are achieving our three key objectives, building on installed base, continuing to grow ink revenue in total and as a percentage of revenue, and continuing to improve and expand our hardware platforms while reducing product costs. Our consumer inkjet business continues to be on plan and is gaining share improving profitability and we are on track to double our ink revenue year-over-year.

Commercial inkjet also continued to gain significant traction in the second quarter. Demand for our product Versamark VL Series printing systems more than doubled in the second quarter. Installation of the PROSPER S10 Imprinting Systems are growing rapidly by meeting demand to create customized output in line at offset production speed. In addition in the second quarter, we announced the PROSPER S10 CMYK, which adds color capabilities. The PROSPER S10 Imprinting Solutions are ideal for highly effective market and services enabling short runs, personalization and versioning while leveraging existing printing and finishing equipment.

We are also achieving all milestones associated with the introduction of the PROSPER Press. This early successes prepare us well for unit growth that will come in 2011. Overall, commercial inkjet revenue grew 18% for the second quarter when compared to the same period a year ago. Commercial and consumer inkjet are important to our long-term future and they continue to make significant contributions by improving both the top and bottom line.

Second, demand is improving for our largest digital businesses. Digital plates volume grew 9% and CTP output devices unit grew 26% in the second quarter when compared to the same period a year ago. Demand was particularly strong for these products in emerging markets. Despite this strong unit growth, Graphic Communications Group second quarter revenue was down 2% as prices remained under pressure due to excess industry capacity. The second quarter unit demand increase is a positive indicator for the remainder of the year, and when supply and demand become more imbalanced, we believe the pricing will stabilize. Of course, the annuities associated with the growth will help us well.

Third, within Digital Cameras and Devices, sales of our pocket video cameras more than tripled and our digital still camera volume was in line with the prior year, as we continue to focus on profitability for this business. And since the introduction of our pocket video cameras in 2008, we have been rapidly gaining share in this category, and we have plans to continue expanding our participation in the second half of this year. Digital cameras and devices revenue was negatively impacted by unfavorable price mix driven by competitive pressures in the market and declined 5% in the second quarter when compared to the same period a year ago. The good news is that we have a very strong portfolio, and we expect to grow revenue as consumers’ discretionary spend increases toward the end of the year. This is a trend that has happened every year even during recessionary years, and we expect it to happen again this year.

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