Completing the Kodak Transformation

Transcription

1 November 16, 2005 Completing the Kodak Transformation Bob Brust Chief Financial Officer 1

2 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 For example, references to expectations for the Company revenue, earnings, growth of revenue and earnings, cash generation and cost savings are forward-looking statements. Actual results may differ from those expressed or implied in forward-looking statements. In addition, any forward-looking statements represent our estimates only as of the date they are made, and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. The forward-looking statements contained in this presentation are subject to a number of factors and uncertainties, including the successful: Implementation of our digital growth strategy and business model; Implementation of our cost reduction program, including asset rationalization, reduction in general and administrative costs and personnel reductions; Implementation of our debt management program; Implementation of product strategies (including category expansion, digitization, organic light emitting diode (OLED) displays, and digital products); Implementation of intellectual property licensing strategies; Development and implementation of e-commerce strategies; Completion of information systems upgrades, including SAP, our enterprise system software; Completion of various portfolio actions; Reduction of inventories; Integration of newly acquired businesses; Improvement in manufacturing productivity and techniques; Improvement in receivables performance; Reduction in capital expenditures; Improvement in supply chain efficiency; Implementation of our strategies designed to address the decline in our analog businesses; and Development of our business in emerging markets like China, India, Brazil, Mexico and Russia. Forward-looking statements contained in this presentation are subject to the following additional risk factors: Inherent unpredictability of currency fluctuations and raw material costs; Competitive actions, including pricing; Changes in our debt credit ratings and our ability to access capital markets; The nature and pace of technology evolution, including the analog-to-digital transition; Continuing customer consolidation and buying power; Current and future proposed changes to tax laws, as well as other factors which could adversely impact our effective tax rate in the future; General economic, business, geopolitical, regulatory and public health conditions; Market growth predictions, and Other factors and uncertainties disclosed from time to time in our filings with the Securities and Exchange Commission. Any forward-looking statements in this presentation should be evaluated in light of these important factors and uncertainties. 2

3 3 In this presentation Kodak references non-gaap financial measures, such as: digital and traditional September 2005 YTD Revenue ; digital, traditional, consumer and commercial; gross profit and R&D, SG&A (excluding advertising), Advertising and EFO as a percent of sales. Additional non-gaap financial measures presented include Health Group YTD Digital Revenue and DFIS Digital Revenue. Kodak has prepared a reconciliation of these non-gaap measures to the comparable GAAP measures, and a statement outlining the purposes for which Kodak s management uses this information and why Kodak believes it is useful for investors. This additional information is attached as an appendix to the copy of this morning s presentation material which is posted in the Investor Center of Kodak s web site, Kodak.com. To access this material, go to Kodak.com. From Kodak s home page click on Corporate, and then on Investor Center-Investor and Shareholder Information. The presentation materials and appendix are listed on that page under Featured Documents.

4 4 Strategy Imperative Quickly, Effectively Complete Kodak s Transition to a Profitable, Growing Digital Company

5 5 Kodak Focus: Go Faster Complete restructuring of traditional manufacturing assets as rapidly as possible Install digital cost model Focus company on: DIGITAL REVENUE GROWTH DIGITAL EARNINGS GROWTH CASH GENERATION

6 6 Why Is the Strategy Working? Why Do We Think It Is Sustainable? Core Competencies Sensor technologies Image science Human interface Marking technologies Ink Media Brand Attributes Imaging leader Trust Quality Good value Ease of use Safe choice Worldwide strength

7 7 Today Two Portfolios Rapid Growth, Improving Profitability Digital Portfolio 3Q'05 Revenues: $1.888B +47% Accelerating Secular Decline Traditional Portfolio 3Q'05 Revenues: $1.661B 20%

8 8 Traditional Strategy Recently accelerated downsizing positions traditional business for sustained profitability for the remainder of this decade Anticipating continued rapid declines in consumer traditional; entertainment and health x-ray products decline slowly No longer driving restructuring based on traditional decline projections Need traditional contribution through year end 2007 only Traditional profit stabilizes 2007 and beyond Annual EFO expected to be $300M - $400M with solid cash Prepare for end of economic life scenario

9 9 Traditional Strategy Traditional Business Attributes in 2007 Asset base declines from ~$3 Billion to ~$1 Billion 7,000 additional positions eliminated Reduced useful lives on remaining assets Stabilized earnings and cash flow Positioned for end of economic life scenario Restructuring cash component diminishes after 2006 GAAP earnings highly variable during next six quarters due to restructuring

10 Digital Strategy Continue to drive success in digital markets Digital still cameras, printer docks, kiosks, online services Computed radiography, healthcare information systems Computer to plate systems, graphic workflow solutions Achieve target Digital Business Model by 2008 SG&A reduced as percent of sales from 18%-to-19% of sales to 14%-to-16% by 2008 ~ $600 Million in expense reduction ~ 2,300 positions eliminated 10

11 Corporate Business Model Revenue: $13.5B ~$17-$18 B Corporate Model Gross Profit 30% 30% R&D 6% 5% SGA 14% 11% Advertising 4% 4% EFO 6% 10% % of Sales Traditional Digital (includes New Technologies) Gross Profit R&D SGA Advertising 32% 30-31% 3% 1-2% 15% 13-15% 4% 3-4% Gross Profit R&D SGA Advertising 29% 29-31% 10% 5-6% 14% 10-11% 4% 4-5% EFO 10% 11-12% EFO 1% 9-10%

12 12 Market Participation CONSUMER Consumer Digital Imaging Group Phil Faraci, President Film Imaging Systems Mary Jane Hellyar, President HEALTH Health Group Kevin Hobert, President COMMERCIAL Graphic Communications Group Jim Langley, President

13 13 Today Digital Market Presence Kodak Has a Leading Position in Key Digital Product Categories Where We Participate Consumer digital cameras Snapshot printers Retail kiosks Kodak EasyShare Gallery (previously Ofoto) Computed Radiography Medical laser printers NexPress and Versamark digital printing presses KPG CTP (Computer To Plate) media, digital proofing and prepress solutions Creo CTP equipment, workflow software

14 Consumer Digital Strategy Your Pictures Anytime, Anywhere DEVICES Consumer CONTENT Professional SERVICES PRINTING 14 Devices-Content linked with Printing-Services drives Kodak s profitability model.

15 15 Consumer Digital Digital Cameras Received J.D. Power customer satisfaction award for second consecutive year #1 US market share September ytd 05 EasyShare-One available now World's 1st Wi-Fi consumer digital camera Received Popular Science Best of What s New award Selected as 1 of 50 must have products on the TechLiving 2005 Hot List Received CEA Best of Innovations 2006 award

16 Consumer Digital Kiosks/Media Strong market share leader ~70,000 placements worldwide New Kiosk G4 family announced September ytd 05 revenue growth +43% Snapshot Printers/Media #1 US market share September ytd 2005 revenue growth +94% Received CEA Best of Innovations 2006 award for EasyShare Photo Printer 500 Kodak EasyShare Gallery US market leader 16 September ytd 2005 revenue growth +49%

17 Health Group Media Business Product Business IT / Service Bus. Computed Radiography Image Networks Analog film Digital Radiography Informatics - RIS / HIS 17 Digital film Dental PM Implementation Dental Dental Software, Workflow, CAD, Services

18 18 Health Group Digital Currently ~65% of revenues from digital products and services September ytd 05 revenue growth Digital capture (CR/DR) +20% Services +10% HealthCare Information Systems +36% #1 WW market share in digital output

19 Health Group Focus Focus on cost improvement Drive revenue growth New DR products available strong 4Q sell-in Strong HCIS order book and continued installation execution improvement CR momentum regained Dental products continue growth Digital Output decline will constrain digital revenue growth near term Improve digital portfolio profitability Recent organization change increases focus/accountability Outlook for 2006 digital earnings significantly improved 19

20 20 Graphic Communications Group Creative Key Market Segments Packaging In-Plant Data Printers Digital Service Providers Commercial Printers Newspapers Centers Data Centers Kodak Solutions Workflow & Professional Services Digital Prepress Digital Print

21 Graphic Communications Group Blended Production Environments Customers Print Traditional Sheetfed Prepress File Prep - Proof Web Press Internet Job Submission Manage Workflow, Color, Assets CTP/DI Remote Proofing Digital Controller Digital Color 21 Hybrid Workflows & Dispersed Locations Digital B&W

22 Graphic Communications Group Integration On Track End-to-end portfolio solution completed with: KPG acquisition (closed April 1) Creo acquisition (closed June 15) Strong presence in digital printing Versamark Market leader in transactional printing September ytd 05 revenue growth +10% 22 NexPress New product enhancements driving customer acceptance Steady growth in average monthly page volumes

23 23 Digital Business Model (includes New Technologies) Digital Revenue: $5.5B ~$14 B The New Kodak Corporate Digital Model Gross Profit 29% 29-31% R&D 10% 5-6% SGA 14% 10-11% Advertising 4% 4-5% EFO 1% 9-10% % of Sales Consumer (DFIS) Commercial Gross Profit R&D SGA Advertising 19% 24-26% 9% 4-5% 9% 6-7% 6% 7-8% Gross Profit R&D SGA Advertising 38% 36-39% 11% 7-8% 19% 13-16% 2% 1-2% EFO -5% 6-7% EFO 6% 13-15%

24 24 We are Largely on Track (through Sept. '05) Digital Revenue Growth: Ahead of Plan Digital Earnings: Good progress Last 4 months of 2005: verysignificant seasonality >40% total company digital revenues >50% DFIS digital revenues Cash Generation: Remain committed to Plan Restructuring: On/Ahead Of Plan

25 25 Funding the Transformation Achieve 2005 Cash Flow Goals (Net Cash Provided from Operations) Traditional inventory reduction Digital earnings seasonality Reduction in capital spending Surplus asset sales Receivables opportunity IP monetization opportunity Will offset impact of: Lower earnings Higher restructuring cash payouts

26 26 Solid Liquidity Completed $2.7 Billion in Senior Secured Credit Facilities $1 Billion 5-year revolving credit line $1.7 Billion 7-year term loan ~$1.2 Billion drawn at closing to repay debt from Creo acquisition Cash on Hand at End of 3Q 2005: $610 Million Strong fourth quarter cash seasonality Primary Use of Excess Cash: Debt repayment

27 27 Within 24 Months Completing Traditional Products Restructuring and Implementing Digital Business Model Traditional mfg. assets reduced from ~$3 Billion to ~$1 Billion SG&A reduced by ~$600 Million 9,300 positions eliminated Incremental annual savings: ~$800 Million Incremental life of program cash charges: ~$470 Million 2005/2006: Peak years for restructuring cash payouts

28 28 External Reporting Changes Eliminating Earnings Per Share Forecasts Due to Complexity of: Writing off $2 Billion in assets Significant changes in infrastructure Eliminating Use of Operational Metrics GAAP Earnings only except: Digital revenue Digital earnings Investable cash Recognizes increasing accounting complexity to separate GAAP and Operational Substantial Progress Made in Remediating Material Weakness Issues

29 29 Focus Going Forward DIGITAL REVENUE GROWTH DIGITAL EARNINGS GROWTH CASH

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32 APPENDIX Reconciliation of Non-GAAP Financial Measures to Comparable GAAP Measures In its November 16, 2005 Completing the Kodak Transformation presentation, Kodak referenced certain financial measures on an operational basis that are deemed to be non- GAAP financial measures, such as: Digital and Traditional September 2005 YTD Revenue ; Digital, Traditional, Consumer and Commercial: Gross Profit, R&D as a Percent of Sales, SG&A (excluding advertising) as a percent of sales, Advertising as a percent of sales and EFO as a percent of sales ; Health Group Year-To-Date Digital Revenue and D&FIS Digital Revenue. Kodak has prepared, where practicable, the following Appendix in order to provide investors with a reconciliation of these non- GAAP measures to the comparable GAAP measures. The Company believes that these non-gaap measures represent important internal measures of performance. Accordingly, where they are provided, it is to give investors the same financial data management uses with the belief that this information will assist the investment community in properly assessing the underlying performance of the Company, its financial condition, results of operations and cash flow on a year-over-year basis. The following reconciliations are provided with respect to terms used in the November 16, 2005 presentation of Kodak s Chief Financial Officer, Bob Brust. Digital and Traditional Year-To-Date Revenue The year-to-date revenue and year-to-date revenue growth information presented in Completing the Kodak Transformation presents Digital and Traditional revenues to present a measure of performance for the Digital and Traditional portfolios on a standalone basis. Because of the presentation of these amounts on a stand-alone basis, this revenue information represents non-gaap measures. The table below reconciles Kodak s Digital and Traditional year-to-date revenue and year-to-date revenue growth to total company year-to-date revenue and year-to-date revenue growth (dollars in billions): Three Months Ended Three Months Ended September 30, 2005 September 30, 2005 (Growth Rate) Digital revenue, as presented $ % Traditional revenue, as presented (20%) New Technologies revenue.004 (22%) Total Company revenue (GAAP basis) $ % 1

33 Annual EFO Traditional The Annual Traditional EFO information presented in Completing the Kodak Transformation excludes information related to Kodak s Digital products and services to present a measure of projected performance for the Traditional portfolio of products and services. Because of these exclusions, this EFO information is a non-gaap measure. The table below reconciles Kodak's definition of Traditional EFO to earnings from continuing operations before interest, other income (charges), net, and income taxes as determined under U.S. GAAP as projected for 2007 and beyond (dollars in millions): 2007 and beyond Traditional EFO, as presented $ $ 400 Digital EFO (including New Technologies) 1,200-1,400 Earnings from continuing operations before interest, other income (charges), net, and income taxes (GAAP basis) $1,500 - $1,800 Traditional Asset Base The Traditional asset base information presented in Completing the Kodak Transformation excludes asset information related to Kodak s Digital products and services to present a measure of Traditional assets. Because of this exclusion, this asset information is a non-gaap measure. The table below reconciles Kodak s definition of Traditional asset base to net property, plant and equipment as determined under U.S. GAAP for the historical period 2004 (dollars in billions): Traditional asset base, as presented $ 2.9 Digital (including new technologies) asset base 1.6 Net property, plant & equipment (GAAP basis) $ 4.5 A reconciliation for Traditional asset base decline from $2.9 billion as of December 31, 2004 to $1.0 billion as of December 31, 2007 is not presented because the comparable GAAP measure could not be computed on a forward-looking basis, as it is not practicable or possible to determine future Digital asset base changes. 2

34 Digital Revenue The Digital revenue information presented in Completing the Kodak Transformation excludes revenue information related to Kodak s Traditional products and services to present a measure of revenue for the Digital portfolio of products and services. Because of these exclusions, this revenue information is a non-gaap measure. The table below reconciles Kodak's definition of Digital revenue to net sales as determined under U.S. GAAP for the historical period 2004 and as projected for 2008 and beyond (dollars in billions): & beyond Digital (including new technology), as presented $ 5.5 $ 14 Traditional revenue Net sales (GAAP basis), as presented $ 13.5 $17-18 Gross Profit Percent - Digital & Traditional and Consumer & Commercial The gross profit percent related to Kodak s Digital product group, as presented, in Completing the Kodak Transformation excludes the gross profit percent information related to Traditional products and services to present a measure of gross profit for Digital products and services. The gross profit percent related to Kodak s Traditional product group, as presented, excludes the gross profit percent information related to Digital products and services to present a measure of gross profit for Traditional products and services. The gross profit percent related to Kodak s Consumer Digital product group excludes the gross profit percent information related to the company s Commercial Digital products and services to present a measure of gross profit for the Consumer Digital products and services. The gross profit percent related to Kodak s Commercial Digital product group excludes the gross profit percent information related to the company s Consumer Digital products and services to present a measure of gross profit for the Commercial Digital products and services. Because of these exclusions, these gross profit percentages are non-gaap measures. The table below reconciles the Digital and Traditional gross profit percent, as presented, and Consumer and Commercial gross profit percent, as presented, to gross profit percent as determined under U.S. GAAP for the historical 2004 period and as projected for 2008: Digital gross profit percent, as presented 29% 29%-31% Traditional gross profit percent, as presented 32% 30%-31% Total Company gross profit percent (GAAP basis), as presented 30% 30% 3

35 Consumer (D&FIS) Gross profit percent Digital, as presented 19% 24%-26% Traditional 31% 30%-31% Less: Impact of amounts transferred from Commercial Imaging (1)% - D&FIS gross profit percent (GAAP basis) 28% 25%-27% Commercial (Health, GCG & All Other) Gross profit percent Digital, as presented 38% 36%-39% Traditional 33% 28%-29% Total Health, GCG, Commercial Imaging & All Other gross profit percent (GAAP basis) 36% 35%-37% R&D as a Percent of Sales - Digital & Traditional and Consumer & Commercial R&D expense as a percent of sales related to the Digital product group as presented in Completing the Kodak Transformation excludes the R&D information related to the Traditional products and services to present a measure of R&D expense as a percent of sales for the Digital products and services. R&D expense as a percent of sales related to the Traditional product group excludes the R&D information related to Digital products and services to present a measure of R&D expense as a percent of sales for Traditional products and services. R&D expense as a percent of sales related to the Consumer Digital product group excludes the R&D information related to the company s Commercial Digital products and services to present a measure of R&D expense as a percent of sales for the company s Consumer Digital products and services. R&D expense as a percent of sales related to the Commercial Digital product group excludes the R&D information related to the company s Consumer Digital products and services to present a measure of R&D expense as a percent of sales for the company s Commercial Digital products and services. Because of these exclusions, the Digital and Traditional R&D as a percent of sales information are non-gaap measures. The table below reconciles the Digital and Traditional R&D expense as a percent of sales, as presented, to R&D expense as a percent of sales as determined under U.S. GAAP for the historical period 2004 and as projected for 2008: 4

36 Digital R&D Expense as a percent of sales, as presented 10% 5%-6% Traditional R&D Expense as a percent of sales, as presented 3% 1%-2% Total Company R&D expense as a percent of sales (GAAP basis), as presented 6% 5% Consumer (D&FIS) R&D expense as a percent of sales Digital, as presented 9% 4%-5% Traditional 2% 1%-2% D&FIS R&D Expense as a percent of sales (GAAP basis) 4% 3%-4% Commercial (Health, GCG & All Other) R&D expense as a percent of sales Digital, as presented 11% 7%-8% Traditional 3% 1%-2% Less impact of amounts transferred to D&FIS (1)% - Total Health, GCG, Commercial Imaging & All Other R&D expense as a percent of sale (GAAP basis) 11% 5%-6% SG&A (excluding Advertising) expense and Advertising expense as a Percent of Sales Digital & Traditional and Consumer & Commercial SG&A (excluding Advertising) expense and Advertising expense as a percent of sales related to the company s Digital product group excludes SG&A (excluding Advertising) and Advertising expense information, respectively, related to the company s Traditional products and services. SG&A (excluding Advertising) expense and Advertising expense as a percent of sales related to the company s Traditional product group excludes SG&A (excluding Advertising) and Advertising expense information, respectively, related to the company s Digital products and services. SG&A (excluding Advertising) expense and Advertising expense as a percent of sales related to the Consumer Digital product group as presented in Completing the Kodak Transformation excludes SG&A (excluding Advertising) and Advertising expense information, respectively, related to the company s Commercial Digital products and services. SG&A (excluding Advertising) expense and Advertising expense as a percent of sales related to the Commercial Digital product group excludes SG&A (excluding Advertising) and Advertising expense information, respectively related to the company s Consumer Digital products and services. 5

37 Because of these exclusions, the SG&A (excluding Advertising) and Advertising expense as a percent of sales is a non-gaap measure. The table below reconciles the Digital and Traditional and Consumer and Commercial and SG&A (excluding advertising) expense as a percent of sales, as presented, to SG&A expense as a percent of sales as determined under U.S. GAAP for the historical period 2004 and as projected for 2008: Total Company SG&A expense (excluding advertising) as a percent of sales Digital, as presented 14% 10%-11% Traditional, as presented 15% 13%-15% SG&A (excluding advertising) expense as a percent of sales, as presented 14% 11% Advertising expense as a percent of sales Digital, as presented 4% 4%-5% Traditional, as presented 4% 3%-4% Total Advertising, as presented 4% 4% SG&A expense as a percent of sales (GAAP basis) 18% 15% Consumer (D&FIS) SG&A expense (excluding advertising) as a percent of sales Digital, as presented 9% 6%-7% Traditional 8% 6%-7% Advertising expense as a percent of sales Digital, as presented 6% 7%-8% Traditional 4% 3%-4% D&FIS SG&A expense as a percent of sales (GAAP basis) 13% 5%-6% Commercial (Health, GCG & All Other) SG&A expense (excluding advertising) as a percent of sales Digital, as presented 19% 13%-16% Traditional 10% 10%-11% Advertising expense as a percent of sales Digital, as presented 2% 1%-2% Traditional 1% 1%-2% Total Health, GCG, Commercial Imaging & All Other SG&A expense as a percent of sales (GAAP basis) 18% 11%-12% 6

38 EFO as a Percent of Sales Digital & Traditional and Consumer & Commercial EFO as a percent of sales related to the Digital product group excludes EFO as a percent of sales information related to Traditional products and services to present a measure of EFO as a percent of sales for Digital products and services. EFO as a percent of sales related to the Traditional product group excludes EFO as a percent of sales information related to Digital products and services to present a measure of EFO as a percent of sales for Traditional products and services. EFO as a percent of sales related to the Consumer Digital product group as presented in Completing the Kodak Transformation excludes Commercial Digital EFO as a percent of sales information related to the company s Commercial Digital products and services to present a measure of EFO as a percent of sales for the company s Consumer Digital products and services. EFO as a percent of sales related to the Commercial Digital product group excludes EFO as a percent of sales information related to the company s Consumer Digital products and services to present a measure of EFO as a percent of sales for the company s Commercial Digital products and services. Because of these exclusions, this EFO as a percent of sales is a non-gaap measure. The table below reconciles the Digital EFO as a percent of sales, as presented, to earnings from continuing operations before interest, other income (charges), net, and income taxes as a percent of sales as determined under U.S. GAAP for the historical period 2004 and as projected for 2008: Total Company EFO as a percent of sales Digital, as presented 1% 9%-10% Traditional, as presented 10% 11%-12% Total Company EFO as a percent of sales 6% 10% Less: Restructuring expense as a percent of sales (7)% - Earnings from continuing operations before interest, other income (charges), net, and income taxes as a percent of sales (GAAP basis) (1)% 10% Consumer (D&FIS) EFO as a percent of sales Digital, as presented (5)% 6%-7% Traditional 9% 15%-16% Less: Impact of amounts transferred from Commercial Imaging to D&FIS (1)% - D&FIS earnings from continuing operations before interest, other income (charges), net and income taxes (GAAP basis) 6% 7%-8% 7

39 Commercial (Health, GCG & All Other) EFO as a percent of sales Digital, as presented 6% 13%-15% Traditional 13% 10%-11% Add: impact of amounts transferred from Commercial Imaging to D&FIS (1)% - Total Health, GCG, Commercial Imaging & All Other earnings from continuing operations before interest, other income (charges), net, and income taxes (GAAP basis) 6% 12%-13% Health Group Digital Revenue The year-to-date Digital revenue for Kodak s Health Group information presented in Completing the Kodak Transformation excludes Traditional Health Group Portfolio revenues to present a measure of performance for the Digital Health Group portfolio on a stand-alone basis. Because of the presentation of this amount on a stand-alone basis, this revenue information is a non-gaap measure. The table below reconciles Kodak s Digital and Traditional Health Group revenue to total Health Group revenue for the ninemonth period ended September 30, 2005: YTD Revenue Digital products and services, as presented ~ 65% Traditional products and services ~ 35% Total Health Group year-to-date revenue (GAAP basis) 100% Digital Revenue Percentage The year-to-date Digital revenue percentage information presented for the total company and the D&FIS segment in Completing the Kodak Transformation excludes Traditional revenue to present a measure of performance for the Digital products and services portfolio on a stand-alone basis. Because of these exclusions, this revenue information is a non-gaap measure. The table below reconciles Kodak s Digital and Traditional revenue to 2005 total company revenue, as projected: 8

40 Projected Total First Eight Last Four Fiscal Months of 2005 Months of D&FIS Digital revenue, as presented < 50% > 50% 42%-43% D&FIS Traditional revenue 57%-58% Total D&FIS revenue 100% Total Digital revenue, as presented < 60% > 40% 55%-56% Traditional revenue 44%-45% Total Company revenue (GAAP basis) 100% 9