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. Mr. Flick, please go ahead.

Good morning, and welcome to this morning's conference call. I'm here with Antonio Perez, Kodak's Chairman and CEO, and Bob Brust, our Chief Financial Officer. Antonio will begin this morning's call with his observations on the quarter and the other important announcements that we made this morning, and then Bob will provide a review of our first quarter financial performance. Before we begin, I have the usual housekeeping activities to complete. First, certain statements during this conference call may be forward-looking in nature while forward-looking statements as defined in the United States Private Securities Litigation Reform Act of 1995. For example, references to expectations for the company's earnings, revenue, and cash are such forward-looking statements. Actual results may differ from those expressed or implied in these forward-looking statements and 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 cautionary statements in their entirety. Lastly, although 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 that we have released this morning. Now, let me turn the conference call over to Antonio Perez.

Thank you, Don. Good morning, and welcome to our call. As you know, we have a number of important announcements this morning, which I will discuss first, and then Bob will go into more detail about our first quarter financial results. In my view, the first quarter continues to show the progress we're making in our transformation, as well as the strong seasonality of our business. Having said that, my outlook for the year remains essentially unchanged. The summary of our performance is as follows. In CDG, the Consumer Digital Group, we face a slightly higher than normal industry channel inventory position caused by the fourth quarter that created temporary pricing pressures for all models, and some transient inventory buildup. Strategically, though, I'm pleased with the fact that our digital capture business, improved earnings from year-to-year in line with our strategy of expanded margins and that our media pricing is more competitive now. GCG, the Graphic Communications Group, performed much better than expected based on the strong momentum created last year. I feel great about this performance which is a little earlier than expected, and ahead of the bulk of cost synergies planned for the year, and is based on good market acceptance. FPG, the Film and Photofinishing revenue declined was an expectation, but FPG performed slightly better than our internal plan for earnings while the Health Imaging Group was slightly behind its year for goals. Overall, our digital earnings have improved year-to-year in line with the strategy. In my view, a balance which holds that keeps us on track for the year. I will come back to more detail on the businesses later. On the strategic front, I have been working to accelerate our transformation to a digital company ever since becoming CEO last June. To this end, last…

Thanks, Antonio. 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, the quarter's performance reflects the seasonality of our transformation, particularly of our consumer digital business, plus the impact of several unusual headwinds. However, I will repeat Antonio's comment that our view of the full year is unchanged, from our January New York meeting. Let me discuss three of the headwinds in the quarter. First on this list are commodity prices, we are all dealing with oil-based increases, both business and personal, but for Kodak, the most dramatic of these are the accelerating increases in silver pricing. With the average price of silver in 2005 at approximately $7.30 an ounce, increasing to an average of $9.73 per ounce during the first quarter, and currently at about $14.00 an ounce. Due to the rapid increase in silver prices, it has been very difficult to take a significant hedge position in this commodity. Silver is used across a broad range of our product portfolio, from consumer films to motion picture film, to X-ray and digital output film, to color paper. As one measure, at $14 an ounce, the negative year-over-year impact on earnings for the balance of this year would be in the range of $2 million to $225 million. During the first quarter, the year-over-year negative pre-tax impact on earnings due to silver was approximately $19 million. Pressures also exist with aluminum pricing, a key raw material in manufacturing printing plates in our Graphic Communications Group, as well as petrochemical-based resins and general energy costs. In order to offset some of this pressure, we have recently announced broad price increases across our silver hay light buzz belt portfolio, as well as previously…

Thanks, good morning. I would like to ask you first about your comments regarding the health business, which has been by and large underperforming for about a year now in terms of revenue and margin. Are you in effect going to be treating that as a discontinued operation, even though you won't necessarily report it that way? You had had in mind to perhaps start putting some money back in the business, perhaps next year, if not this year, and perhaps start trying to grow it again. Is that now not your plan to try to reinvest and restimulate them, that business, and assuming you sell some or all of it, what might be your use of proceeds from the health business? Secondly, Antonio, you mentioned the changes in your manufacturing and logistics, and trying to align it more to the business groups. Would that in part make it easier to disaggregate the health business by having aligned the assets and the logistics more according to the segments?

Okay. Jay, you just put it there a book of questions for me. Let me see. Let me start with the first thing, that we haven't said that we're going to sell the group. What we said is that the board has authorized us to explore strategic alternatives and we will explore them all and selling will be one of them but it is not the only one. So we cannot conclude at this point of time that we are going to sell the group. Second, the manufacturing question, if I understand it well. We've been working in carving out the different parts of the business in an effort to have a much leaner organization that will be fully dedicated to customer segments, with full accountability and focus in the ability to make decisions first, and take care of the whole -- the whole, all the elements of the P&L. And I'm talking about inventory, I'm talking about supply chain, so we can be more effective. So the business as of July 1st, there will be by and large independent in the sense that we will have control over every single element of the value chain. As far as the accounting, I'm going to get Bob to answer the question. The answer is no, but you can –

We're not going to -- I mean it is far too premature to decide how we're going to change any accounting on this thing because we have just entered into this evaluation with our advisors as to the strategic alternatives for the business so, there is no accounting change.

Last I would like to ask about your Digital EFO expectations for the year, which you are maintaining. If we strip out the consumer digital loss from the total digital profitability in Q1, that looks like about a $57 million earnings from the combined GC and Health businesses in digital, or about a 5% margin for those two businesses together. Assuming you do improve your consumer digital profitability over the remainder of the year, however, what are your assumptions for the margins for Graphics and Health? Do you need to get to a high single-digit, or 10% or more EFO margin for the non-consumer businesses to hit your numbers for the year?

The Health Group plan, it will be trending up from the first quarter as it did last year, and you can expect somewhere in the teens. 12 to 14 will be a good number. GCG, the original plan was only to be between 5 and 8, but as I said in my talk at the beginning, we are actually raising the expectation because they are doing much better and earlier than we thought.

Thank you.

Thank you. We will take our next question from Matt Troy with Citigroup.

Good morning. Following up on Jay's question, I know you're not going to put specifics around what might occur with health imaging but I was wondering, Bob, if you could just help us broadly. If I look at that portfolio, if you could break it up between what I view as the three primary buckets, one is the traditional x-ray products and related, two the digital output, and three, the remaining digital technologies, just on a percentage of revenue basis. That would be helpful, and then I have one follow-up. Thanks.

I really don't know those off the top of my head. We will have to get back to you on that. I just don't have that sorted that way.

Okay.

We will have Don and the Investor Relations -- oh, Don knows? Okay.

Yeah and just really broad sweeps, Jay.

Yeah.

The traditional x-ray business is something in the, I think 800 to $1 billion type of range. DO is probably a little bit smaller than that, and you can divide the rest out. We don't split it any further but those are just rough figures.

Okay. Second question would be just an update on the inkjet strategy. Specifically, we're approaching the back to school period, with stocking logistics probably having to begin in earnest in June, July, time frame, my admittedly anecdotal channel checks are saying retailers are not telling me anything in terms of seeing product from Kodak. I was wondering if you could give us an update. Are we still on track for back to school? Is it more, more of a seasonal issue?

That could be because they're keeping confidentiality.

Exactly, I said admittedly anecdotal, but I'm just looking for an update. Are we still on track for back to school?

I never said we're going to be back to school. We're still on track with our project. We are -- I have no news really to report, and you know why I don't want to report news until the closest possible time, the latest possible time. So but we keep investing in that business. We are accelerating things and I feel that we are in good shape, but there is nothing else to report.

Okay. Last question would be on the thermal media. Obviously, the pricing declines were known and largely a function of people like HP and other inkjet players bringing down their pricing on a bulk basis into the key holiday selling period last year. We should stabilize or have stabilized on a sequential basis, but what's to say we won't see another step-down? Where do you see thermal pricing stabilizing into the next holiday period? Thanks.

Well, I can't speak -- I can't speak for the others. We took very significant price reductions, as you know. They were anywhere between 38% and 50%. That was a very significant price reductions that we took. And the idea was to be more competitive. And obviously at the same time, we are, we've been working to reduce our own costs. So it is not that all that goes out of our profit. We feel very well, we felt that the number of units that are being sold through is high, so we think that we are very competitive now. I can't tell you this is going to happen again. If it happens, we will have to do something about it but so far, so good.

Thanks, guys.

We will take our next question from Laura Starr with Equinox Capital Management.

I just wanted to ask a question about the film, the entertainment imaging business, was down 7% in the first quarter, but the -- we moved to the second quarter, the lineup of blockbuster sort of movies coming out this -- over the next three months seems much higher than last year. Are you expecting the comparison this year in the second quarter versus last year to be much higher?

Hi, Laura. Yeah, it went down in the first quarter. Most of the people that we talked to, and it is our feeling as well, most of it -- most of this is caused by content, by poor content, content that hasn't been accepted by the audiences. Having said that, what is very important to know, this is, this is factual data is that in North America, the assistance have grown 2% to 3% this year, the number of people going to see movies have gone up.

The box office is up too this year.

Yes and their revenues about 5% up.

Right.

This is before Memorial Day weekend, which is normally the time when all this blockbusters that you mentioned and they're all ready to come out, are coming into play. So, I don't know how those are going to be received. But we are -- we're optimistic but we keep saying the same thing we said before. We expect this business to be flattish. We don't expect this business to grow significantly, or go down significantly. On the other hand of the equation, we have seen as well a shortage in what is called the theatrical window, which is the time from a movie is going to the theaters and then coming into DVDs. It doesn't seem to affect the attendance to the theaters, though, which is an interesting thing. And so -- and then, we are doing well with our digital -- with our digital program. Our pre-show digital, we are actually the largest shareholder of independent theaters as far as pre-show digital projection. We have 2,000, I believe, or a little more, I don't know, about 2,000 installations already in place. We have a system they can actually perform through HDs, so we are ready for whatever happens, although it is going to happen slowly, and we know this is going to -- there are going to be some pilots this year and next year and the year after and this is going to be in our view a long process, and a hybrid industry, and we're working through it.

Okay. Thank you very much.

And we will take our next question from Jack Kelly with Goldman Sachs.

Good morning. Antonio, can you just go back to maybe consumer digital, and talk about the first quarter. You mentioned inventory back up at retail, and maybe talk about take-away. I mean could we be seeing at least in terms of consumer digital cameras, the beginning of the flattening or decline, because it sounded like camera sales went down, so have we reached penetration maybe sooner rather than later?

Let me take a little perspective to give you the best answer that I know. We did very well in the fourth quarter, and in fact, I can tell you that we are doing very well in sell-through in the first quarter. Sell to is a different story. Obviously, we, the inventory in the channel has to clear up in the first quarter. We expect that it will be, clear up by the second quarter. Our pricing points are moving up. We are moving a lot more the V series -- our V series has been incredibly successful. We're very proud of it, and is a much higher price that, the original cameras, the collect use itself, so we are happy with that too. As you probably noticed, we have introduced new models starting with the second quarter, because we know that what happens in the first quarter is a clean up of the old models. And then on top of that, we have been careful as far as taking what market share we want to gain and which one we don't want to gain. So during the first quarter, where you have all this pricing deals, we only decided to participate in the ones that we thought were appropriate for us following this strategy of margin expansion. Now, overall, the market is flattening. And we knew that when that, I mean there is going to be some growth, but nothing compared to the last three years. So that's -- so that's the story. We are on track. We are making more money than last year, and I feel optimistic for the year.

So versus a decline in your shipments of digital cameras, you're saying the sale of Kodak cameras at retail was up?

No, the sell-through. The sell-through, not the sell-to. The sell-to was lower. That's why in our numbers it shows –

Yeah, that's what I'm saying. We're down 10% plus in selling to retailers but you're saying retail sales of cameras to consumers was up for Kodak?

That's right, very strong, and that's really what counts. When do you sell these things to the retailers is relative, what matters at the end of the day is when the retailer finally sells these products to a final consumer.

Okay. This is a question maybe for Bob. On the potential divestiture or partial sale or whatever you might do on health care, I thought there was a provision in the -- I guess the new bank loan deal that you negotiated last year that up to 1.1 billion of asset sales would be required to pay down debt. Is that just triggered Bob, by an outright sale, so if you did something less than that, that provision wouldn't be triggered?

An outright sale would require payment of the coveted debt, which is about 1.1 billion to 1.2 billion. Any other options we would choose, we would have to deal with at that time. But we're talking about reviewing alternatives here. We have not made a decision nor has a decision been made. So if we did outright sell, we'd pay the debt.

Okay, and just finally, Bob, on the restructuring, you mentioned or was it Antonio described it was mentioned as being kind of already in the plan. I guess this year we're going to have restructuring charges of 1.1 billion and then maybe another 500 next year, and so maybe you could just talk about those numbers and what the cash implications of those two -- those numbers would be?

Jack, the cash this year, we've been talking about is around $650 million, and we are tightly controlling ourselves at that rate, and it was close to 138 million in the first quarter. It tends to be built up toward the third quarter and then diminish a little bit in the fourth. Next year, there will be a fairly sharp reduction in restructuring. There will still be some significant charges but cash will probably be -- we've got it before down around 200 million to 300 million, so it will be probably half or less than half of this year's. So once we get through this year, we're really through the lion share of it.

Okay. So the 650 in cash this year would be equivalent to the expense, the charges of 1.1 or so, and then next year –

1.1 billion to 1.3 billion, yes, depending on how, -- We estimate this and we start the year and we actually get to the actual assets, you have to write them down. So, I would say 1.1 billion to 1.3 billion would be the financial charge.

And the 2 to 3 next year might gross up to 5? The 200 million to 300 million --

Yes, somewhere around there. I don't know yet. We will have to give you some more guidance on that in September. You have to wait and see how fast we can get everything done this year and then what is left over, but it will be materially lower next year, and it will be early in the year. As we come out of '07, we should be having this pretty well cleaned up.

And just on the silver price increases which were implemented May 1, excuse me, price increases, because of silver, implemented May 1. Did you see any build-up or any acceleration in shipments in April or in the first quarter, as people try to anticipate those price increases?

No. We didn't see that. That market is kind of a -- this is not a growing market where those things tend to happen. This was a market -- now, we don't know what the rest of the industry will do but material costs goes high significantly, we feel this is the right thing to do.

Okay. Good. Thank you.

We will take our next question from Chris Whitmore with Deutsche Bank. Mr. Whitmore, your line is open. Please go ahead with your question. And we will go ahead and move on to our next question with Ulysses Yannas with Buckman, Buckman and Reid.

Hi, Antonio. You're talking about price declines of 38% to 50% in kiosk media. You had the decline of 9% in overall revenue. That means that your burn through rate was what, over 50%?

Yes, to say again –

I was trying to come down to this burn rate at kiosks.

The burn rate continues to be very good. It is excellent. We haven't seen any reduction in burn rate or anything. Actually, it is going up. Burn rate is going up. We put the price at that point because the environment, because the ecosystem, because of the other systems that come into play. We have to put a price that is competitive to the one arm lab, to the home printing, and to the other kiosks that come around, so we did an analysis, we model these things, looking for the impact on our customers and market shares, what's the best economic solution for that. And that's how we put the price. But we feel -- we are very -- we feel very strong about our kiosks and the burn rate. The burn rate is going up. We don't have a problem there.

How about the package things you are doing, cameras and the printer docks?

You're going to be seeing less than that. Normally when you do this, obviously you make a very attractive price for both, and that plays a role when you're trying to build your install base, one or the other or both, and reinforce the value of the connection, and everything else. But obviously, it is not as attractive financially as when you -- for us, as when you sell them separately. So, you are going to see less this year of those than we did last year.

You were talking last year about the Versamark doing extremely well. Is that continuing to be strong besides an express?

Yes, Versamark, we have a very good profit for the year. They tend to be very large orders. This first quarter, they were -- they were weak compared to last year. They don't have a true competitor, if you ask me. I mean, they have a very specific technology.

-- Products new Vera, a competitor.

Which one?

I'm sorry, Xerox’s new Vera.

I don't consider that a competitor. It’s a different technology. Continuous injet is a very specific characteristics and for the jobs that that has been designed, I think is -- there is the best alternative. But as when the deals are coming, we have very good prospects for Versamark for the year. It is just this first quarter, compared to the year ago first quarter was weaker than last first quarter, but it doesn't have any sign of, any negative signs for the year.

How about the cost reduction out of the KPG and Creo acquisitions? Where do you stand there? You were talking about $150 million.

Yes, cumulative over two years. They're on track, maybe slightly better. The bulk of those are going to come later this year. But they're on track. That organization is executing beautifully. I have full confidence that they will get those numbers.

You haven't started yet on Creo, have you?

Well, yes, we have started on Creo. Actually those cost reductions have a lot to do within those two organizations working together to eliminate dualities and improve productivity. Those numbers are around -- is the whole GCG but a lot has to do with the two organizations working together to improve productivity. So, those numbers are applied both to KPG and Creo. Some, the rest of GCG, but by and large it is about KPG and Creo.

Great. Thanks a lot.

Thank you.

We will take our next question from Carol Sabbagha with Lehman Brothers.

Thanks. Just a couple of follow-ups on the consumer digital businesses. You kept your digital profits I mean your digital revenue growth for the year the same, although it looks like consumer digital may come in lower than expected for the year. Is something else going -- is something else within that going to do better as the year progresses to make up for, I'm guessing some more muted expectations around consumer digital?

I don't know that we count the expectations on anything yet, Carol. What are you referring to?

Well, it’s just given how you talked about digital revenues, consumer digital revenues as the year progresses, doesn't sound like you're looking for significant growth coming from that business as a whole.

Oh, I see. Well, what I tried to say, what I tried to say is that the primary, the most important objective for that organization for this year is margin expansion. If we have to sacrifice growth to get the margin expansion that we want, we will do so.

Okay, let me –

Hopefully we won't have to sacrifice a lot of growth to do that, but if that will be the case, we think it is the right thing to do because there are a lot of deals out there, there are, that could be questionable.

So on consumer digital cameras, you mentioned that the retailer sell-through to the customer was up in the quarter. Can you give us kind of a feel what that was?

It is a little too early; it is a little too early. We have, we have this daily and weekly, some information of what is going on in some of the key retailers. We don't get every single retailer in the world. So, I don't want to give you a number. I will -- this takes a little longer. We take -- we have a sample of key retailers. It is a very good sample. It gives you an idea what the world is doing. But I wouldn't -- I wouldn't put that number, I wouldn't put -- I wouldn't make that number public. I just know that our sell-through this quarter is fine, and is doing fine. Even though our sell-to is, is lower than last year.

Okay. And then in the kiosk business, just so we're not surprised for the year, it seems like you said your media unit sales were strong but there was pricing. Was your hardware sales down, or is it mostly pricing, and therefore it could take another couple of quarters to anniversary out of the numbers?

I basically think is the price of the media, and the fact that we created large packages that were sold in the third and the fourth quarter, and some of those, they haven't gone through yet. There was an expectation of certain amount of printing by our retailers, and every company came with large packages, moving from 40 to 160 pages in the printer dock, and I believe that some of those packages, they still haven't been used. So some of that in the price and it is not a real usage. The real usage is going up but maybe not as fast as the industry predicted.

Do you think the kiosk business for the year will be up in revenues?

Yes. That's the plan we have today, yes.

Okay. And then I think you mentioned, continuing on consumer digital, I think you mentioned that digital -- that digital capture profits improved, or losses improved year-over-year, while the total segments losses widened.

Yes.

What was the main factor there? And then Bob, in his comments, mentioned kind of a major overhaul of the consumer digital businesses to get to profitability. What are the key points in that overhaul? Is it simply just walking away from bad business?

No, it was a combination of things. Digital capture did better than last year, as far as the year goes. Kiosks, Printer Dock and Kodak Gallery did worse than last year. Hard to -- it doesn't mean much for us in the first quarter. I mean obviously we would like it better, but the first quarter is very small in this, and because of the changes we made to the, to the thermal media, this is understandable and is predictable. The other element that Bob was referring to, we have -- we have been investing in SG&A in the Consumer Digital Group, although by the end of the year, it will be reduced. But compared to the -- to last year, we have more SG&A in CDG than last year. This is because during this fleet of DFIS, it is a pretty complicated thing, and we don't want to lose sales dramatically, so we had the tendency of make sure that we get ourselves right before we start to reduce SG&A, which we will -- it will happen, it will happen during the second and the third and the fourth quarter. I described the plan of moving from basically 61 countries, where we directly sell, with our own, our own office and our own people, into 20. This is not that we're going to abandon the other markets. It is just much more efficient to pick those 20 where there is sufficient size, thereby ourselves, but the rest is going to use, we're going to use distributors, which is a very typical thing to do. We are in the process of doing this, and by and large, it will be done by the end of the year. So the SG&A will go down, but in the first quarter, it is up. Because of the split that was done of DFIS between the digital and the non-digital.

One last question, and thank you for taking so many. On the price increases that you instated across the board around your film products, it might be too early to say, but if you could walk through the major segments and tell me if any are sticking, and how the feeling is around customer acceptance and whether they will be able to go through?

I think they're going to stick because we're not going to move them down. I don't know how the world is going to react. This is the right thing to do. It doesn't make any sense. It doesn't make any sense in any way, shape, or form to absorb this enormous cost. It doesn't make any sense. So I don't know what our competitors are going to do but we are going to stick with those.

Thank you very much.

And we will take our next question from Sam Doctor with J.P. Morgan.

Thank you. I have a couple of questions. Most of them have been answered. But can you give us a sense of overall advertising? Was it up year-on-year this year? You said it was up in CDG. Was that an absolute increase or was it a reallocation of advertising expense?

The advertising was higher in CDG, yeah.

But in aggregate for the fourth quarter, was it -- ?

I don't know that, Sam. We are looking at it. We will tell you in a second. Right now, I just -- I'm starting to look like I expect you guys to look at this, by segment. It was up slightly, like 4%.

Okay.

Oh, no. 4 million.

4 million.

It was up 4 million, sorry.

Okay.

That's practically nothing.

Great. On the GCG plan, you said you’re raising the target from 5% to 8% operating margin. What is the new target?

What is that?

The new target for earnings from operations from GCG?

Oh, we are going to raise the target, and I'm still negotiating with my team. They're over-performing. It's very clear that they're over-performing, and it is very clear that the opportunity is better than what we had in the plan. We don't have a number yet.

Okay. And final question from me is, what is the philosophy on the cash balance? I know that you’ve said that at the moment you're looking at $1 billion minimum, but if you're looking at reducing debt by what 800 million, are you looking at that contingent on asset sales, or is your target you will be looking at exclusive of what you might do with the cash?

It’s the exact story we gave in the January meeting. We started the year with about $1.7 billion of cash. We anticipate generating about 500 million. Included in that 500 million will be asset sales, as we -- as they become available through the restructuring. So that would be 5 plus 1.7 billion is 2.2, and plan on paying down about $800 million of the debt so I envision ending the year at about 1.3 billion or 1.4 billion, so no change at all.

Okay, great thanks.

And management, at this time, I would like to turn the call back over to you for any additional remarks or closing comments.

Well, thank you very much. I really appreciate the time that you take to listen to the call. Again, I want to reiterate that this is a very typical first quarter. There are lots of strategic wins for us. There are some clear issues that we have to work on, specifically inventory buildup; we're going to deal with that in the second quarter. Otherwise, I see the year, the way we planned it at the beginning, we have the same goals, and we are ready to execute. Thank you very much.

And ladies and gentlemen, this does conclude today's teleconference. You may now disconnect, and have a great day.