Eastman Kodak Company (KODK) Q4 2010 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter 2010 Sales and Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Sandra Rowland, Director of Investor Relations. Please go ahead, ma'am.

Good morning, and thank you for joining us for today for Kodak's fourth quarter 2010 sales and earnings conference call. Here with me today are Antonio M. Perez, Kodak's Chairman and CEO; as well as Ann McCorvey, Kodak's Chief Financial Officer. Antonio will begin this morning with his observations on the quarter, and then Ann will provide a review of the quarterly financial performance. Certain statements during this conference call and question-and-answer session, 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: Revenue; revenue growth; cost of goods sold; savings from restructurings and rationalization; product pricing; gross margins, earnings; earnings growth; cash generation; emerging markets growth; demand for and performance of our products, consumables and services, including commercial inkjet, consumer inkjet, workflow software, prepress packaging printing solutions and products for thin film displays and special chemistry; commodity cost; 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 in our press release issued 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. Now, I will turn the conference call over to Antonio M. Perez.

Thank you, Sandy, and good morning, everyone. Our fourth quarter and full year results reflect a consistent and sustainable momentum that we are having with our core growth initiatives: Consumer inkjet, commercial inkjet, workflow software and services and packaging. We grew these products lines 23% in the fourth quarter and 18% for the full year, demonstrating that our unique value propositions continue to resonate with consumers and our business customers. In the fourth quarter, consumer inkjet had its largest revenue quarter since we launched the product line in 2007. We grew printers and ink revenue 40% in the fourth quarter, when compared to the prior year. We built momentum each quarter during this year as we introduced new products, expanded our distribution channels, particularly in the Office Store segment and resolved supply constraints that we had in the first half of the year. We continue to expand our installed base as we grew our printer volumes by 45% during the year, including 63% printer volume growth in the fourth quarter. This is remarkable growth when you consider that the industry grew less than 5% and is a testimony to consumers' acceptance of our value proposition because we maintained our price premium compared to the market. In addition, we know that we are reaching the right consumers, those who print the most, as we grew our ink revenues 86% during the fourth quarter and 77% for the year. More importantly, because of our increase in scale, we doubled our gross profit dollars in 2010 and we expect to sustain this momentum heading into 2011. We are on track to become profitable during 2011 and to generate positive earnings for the total of 2012. Our Commercial Inkjet business also had its largest revenue quarter of the year in the fourth quarter and achieved a number of key milestones. The transformation in the graphic industry to digital printing is happening now. Our PROSPER Press is ready and we are prepared to lead our customers through this transition with our color and black-and-white PROSPER Presses. Our presses, based on our breakthrough Stream Technology, deliver offset class quality, offset class speed, media flexibility and lower operating costs, combined with the ability to perform variable data printing. Their productivity is superior to any digital press in the market. We continue our PROSPER Press installations in all regions of the world. In 2010, our growth was primarily fueled by sales of PROSPER components as we quadrupled the number of printing systems that we sold. Our FLEXCEL NX revenue within Packaging Solutions tripled in the fourth quarter. Our FLEXCEL NX system is designed for a wide range of mainstream packaging applications and uses unique technology to deliver exceptional high-resolution print quality packaging, combined with significantly reduced production cost. This leading edge solution helps our clients stand out in the market with packaging that really grabs customers' attention on the shelf and drive sales. We doubled our installed base in 2010 when we placed our 100 FLEXCEL NX system in the fourth quarter. As with our growth initiatives, our rapidly expanding installed base will drive higher margin annuities in future periods. Finally, our Workflow Software and Services business, which integrates all of our offerings, picked up momentum in the back half of the year, growing by 21% when compared to the second half of 2009. The growth was driven by strong demand for business across the services in the emerging markets. I am very pleased with the strong performance of this core growth businesses which are critical to our digital future. In the fourth quarter, we continued to see industry-related challenges in three of our mature businesses, Prepress Solutions, Digital Capture and Devices and Entertainment Imaging. As a result of the difficult market conditions in these businesses we fell short of our 2010 revenue targets. Revenue in our Entertainment Imaging business decreased 19% for the year. During 2010, we saw industry-related volume declines as the major studios made and released fewer feature films. In addition, the growth in demand for 3D movies has accelerated the conversion to digital screen. At the end of 2010, 30% of the first-run screens worldwide were digital screens. One of the revenue decline was in line with the updated forecast we gave you in the second quarter. The biggest challenge for the Entertainment Imaging business, and our other traditional FPEG business, is increase in commodity costs. Silver prices were higher than 2009 levels all year, but between September and December, the price of silver rapidly increased by about $10 a troy ounce to break points that we have not seen for over 25 years. The increasing silver costs impacted our results in 2010 and is significant as we enter 2011. Entertainment Imaging and our other traditional business teams will aggressively take costs out to better align our cost structure with the top line and the silver costs realities. We are also hedging and we are indexing our new contracts to silver pricing. We will also continue with our successful initiative to expand into adjacent growth markets where our material science expertise offer us real revenue opportunities, such as thin film for digital display and specialty chemistry. These programs are gaining very good traction and will help to mitigate the higher revenue declines in our traditional businesses. For example, in 2010, revenues from these programs represented already 13% of FPEG revenues. We expect that this percentage will grow to 30% by 2013. These initiatives are all cash accretive and are likely independent of silver. Our Digital Capture and Device business, excluding nonrecurring intellectual property licensing revenue, decreased by 21% as customer demand in the digital still camera, particularly in the point-and-shoot category where we participate, declined significantly in the fourth quarter. This was a steeper decline than we anticipated or experienced in the prior three quarters. We do, however, continue to gain traction with our award-winning pocket video cameras, growing both revenue and market share. We doubled revenue in the fourth quarter and grew by approximately 170% for the full year. We continue to focus on profitability rather than chasing volume and we made progress. Excluding nonrecurring intellectual property revenue, Digital Capture and Devices finished the year with a higher gross profit rate in comparable gross profit dollars on 13% lower revenue. We will aggressively follow this strategy in 2011 and focus on the profitable segments of this market, trading top line growth for improved earnings. Despite 4% year-over-year Digital Printing volume increases, Prepress Solutions revenue declined 6% for the year and 8% for the fourth quarter. As we have previously indicated, the decline was primarily due to the competitive pricing environment, especially in Europe, where industry overcapacity continued to have the most negative impact. We recently launched our innovative new TRILLIAN Plate, which brings an impressive combination of outstanding productivity and performance. It significantly lowers the lower cost of ownership when compared with typical digital process plates that are in the markets today. We are now ready to scale this product offering and it will position us well to compete in the current pricing environment. In the fourth quarter, we continued to see very strong demand for our prepress output devices, with 19% year-over-year volume growth. This is a positive sign since we know that this increase in our installed base of computer-to-plate devices, or CTPs, will yield consumables growth going forward. Also we continue to see strong Prepress Solutions growth in the emerging markets, which for Prepress Solutions represents already over 20% of its business. Our business grew 14% for the year in those regions. In fact, for the year, we saw a double-digit growth in the emerging markets in all of our GCG businesses. We believe that because of our broad and integrated commercial portfolio and the positive market dynamic, we will continue with strong growth in the emerging markets in GCG. Now let's turn to intellectual property and cash. We successfully executed our intellectual property strategy in 2010. We exceeded our goal for generating new innovative patent applications, and we entered into three significant intellectual property arrangements, including adding a new license during the fourth quarter. Each of these agreements is in line with the three fundamental objectives that we have for our intellectual property licensing program, which are design freedom, gaining access to new markets and partnerships and generated cash and earnings. In anticipation of a question about Monday's news from the U.S. International Trade Commission Action, it is important to remember that this is one step in a longer process. And that the full ITC commission will ultimately determine the final outcome of this case in May. Beyond that, I don't intend to say anything further related to outstanding litigation. While our cash performance was off of our projections we finished the year $1.6 billion cash balance. As a result of the refinancing activities we completed early in the year, we have no significant debt maturities until 2013. I'm comfortable with our cash position, which will enable us to continue to invest and scale our growth initiatives and execute our strategy. Overall, I'm pleased that despite a smaller top line than we had anticipated, we delivered earnings and are well within the range that we had targeted and we accelerated momentum with our core growth initiatives that are so important for our future. I will turn now to Ann who will provide more details on our financial performance.

Thanks, Antonio, and good morning, everyone. I will provide a detailed look at our fourth quarter financial results, a quick summary of the full year's performance and then Antonio and I will take your questions. As Antonio indicated, we continued to gain strong traction in 2010 with our growth initiatives: Consumer inkjet, Commercial inkjet, Workflow Software and Services and Packaging. We are very pleased with the market share trends we are seeing for these businesses and we see plenty of growth in their future. When we entered the fourth quarter, our internal plans and our external indicators predicted a stronger selling season than actually occurred. Most noteworthy, revenues for our digital cameras were impacted by increased pricing pressures as consumers opted for cameras at the lower price point and consumer demand was lower than expected. Revenues for our digital plates were also impacted by competitive pricing environments, especially in Europe, where industry overcapacity continued to have the most negative impact. The revenue decline in these two large businesses is the primary reason we did not achieve our 2010 digital revenue growth goals. While full year revenues were below our targeted range, we did achieve our goal for segment earnings from operations by delivering above plan intellectual property licensing revenue and continuing to improve our cost structure. We ended the year with a cash position of approximately $1.6 billion. Now let's turn to the fourth quarter and full year results. Consolidated revenues for the quarter were $1.9 billion, a 25% decrease versus the prior year. A significant portion of this decline was due to the timing of intellectual property transaction. Other factors include the continued industry-related volume declines at our Traditional businesses, accelerated market softness and consumer discretionary spend for digital cameras and lower kiosk media burn. For the full year 2010, total consolidated revenues were $7.2 billion, a decrease of 6% from the prior year. This decline is largely due to lower volumes at our Traditional businesses and the previously stated pricing pressures in our Digital businesses, partially offset by higher intellectual property licensing revenues. Our fourth quarter gross profit margin was 19.4% versus 34.4% in the year-ago quarter. This decline is largely due to the result of intellectual property licensing transaction in the fourth quarter of 2009. For the full year, gross profit margins improved approximately four percentage points. This increase in gross profit margins was largely due to higher intellectual property licensing, cost improvement in both Digital Capture and Device and Consumer Inkjet, partially offset by negative price mix for digital cameras and digital plates. The net silver and aluminum commodity impact to gross profit was an unfavorable $13 million during the quarter versus the prior year and a favorable $9 million for the full year. As Antonio indicated, we are implementing a number of actions to mitigate the impact of each increased commodity pricing on our 2011 results. Our pretax restructuring charges totaled $24 million for the quarter and $78 million for the full year. Restructuring-related payments from corporate cash were $17 million for the fourth quarter and $88 million for the full year, which is slightly lower than our previous guidance. For the fourth quarter, GAAP earnings per share from continuing operations were $0.12 compared to GAAP earnings per share of $1.36 in the fourth quarter of 2009. For the full year, GAAP loss from continuing operations was $58 million, an improvement of $174 million, largely due to improved earnings performance in our Digital businesses, including higher IT, lower restructuring charges and a benefit due to the expected realization of certain tax assets. This was partially offset by higher interest expense and the one-time, non-cash charge associated with an early extinguishment of debt from the first quarter financing transaction. Now let's take a look at the results by segment. For the quarter, Consumer Digital Imaging Group's revenue were $731 million, a decrease of 40%. On the earnings side, GCG segment earnings from operations decreased by $437 million, as compared to last year's fourth quarter segment earnings from operations. This decline in revenue and earnings is largely due to the timing of intellectual property licensing revenue, negative price mix on our Digital Capture and Devices businesses, reduced volumes for kiosk media and unfavorable foreign exchange. This decline was partially offset by improved sales of our pocket video cameras, higher volumes of consumer inkjet printer and ink and continued cost improvement in Consumer Inkjet business. CDG's full year revenue increased by 5% to $2.7 billion and segment earnings from operations improved by $295 million to $330 million, primarily due to higher intellectual property licensing revenue and increased revenue from our Consumer Inkjet business. Moving on to Graphic Communications Group, GCG. Fourth quarter revenue was $757 million, a decrease of 3% versus the prior-year quarter. For the full year, GCG's revenue were $2.7 billion, a decrease of 2% versus the prior year and essentially flat in local currency. The revenue decline for the quarter and for the year was primarily caused by negative price mix for digital plates, resulting from current industry overcapacity. However, it is important to note that for the year, our digital plate volume increased by 4%, which is in line with the industry. The revenue decline for the year was partially offset by increased sales from PROSPER's product line, including consumables and services and Document Imaging Production scanners. GCG's fourth quarter segment earnings from operation were $12 million, compared to earnings of $36 million in the prior-year quarter. For the year, GCG's segment loss from operations was a $13 million improvement from the prior year. This improvement in earnings is largely attributable to the Significant cost improvement in our Electrophotographic Printing Solution business and lower material costs specifically, aluminum; partially offset by negative price mix for digital plates; continued investment in Commercial Inkjet and Workflow Software and Services businesses. Taking a look at the Film Photofinishing and Entertainment Imaging Group, FPEG. FPEG's revenue declined by 25% to $439 million for the fourth quarter and declined by 22% to $1.8 billion for the year. FPEG posted a loss from operation of $3 million for the quarter and $62 million in earnings from operations for the year. FPEG's revenues and earnings for the quarter and full year were impacted by industry-related volume declines across each of the businesses, as well as higher silver and petroleum-based raw material costs. FPEG's operating margins were 4% for the full year, down three percentage points when compared to the prior year. The decline was primarily the result of increased commodity costs. The business continued to aggressively manage cost ahead of this revenue decline. Taking a look at our balance sheet. We began 2010 with just over $2 billion in cash and ended the year with over $1.6 billion in cash, reflecting a decline of approximately $400 million. The following factors contributed to this decline in cash: Cash used in operating activities of $219 million reflect the continued investment in our growth initiatives, increased interest payments and the previously discussed restructuring payment; it is also important to note that cash from intellectual property transactions and the benefit payment were similar to last year; the cash used in investing activity of $112 million reflect capital expenditures that were in line with last year and were partially offset by modest proceeds from asset sales; cash used in financing activities of $74 million reflect the payment of $62 million in debt maturities, along with some debt issuance costs. Our cash balance provides us with the ability to continue to make the investments necessary to complete our transformation. I also want to bring to your attention a couple of accounting matters as it relates to our 2011 financial reporting. Effective January 1, 2011, we will implement a change in useful like estimates for certain assets associated with our Traditional business. This change updates the estimates we made in 2008 to our current operational plan and we estimate that this change will result in a favorable impact on earnings for the full year 2011 of about $30 million. This change does not impact corporate cash. Also effective January 1, a recently announced issued accounting pronouncement will require the company to perform a goodwill impairment test for FPEG. The results of this analysis are not yet known. We will provide further disclosure of the status of the company analysis in the Form 10-K to be filed in February. While 2010 proved to be a challenging year, we are pleased with the positive results of our growth initiatives, our earnings performance and the momentum that provides us as we enter 2011. We look forward to providing you with more details on the company's plans for 2011 and beyond next week at our conference with the investment community in New York City. Thank you very much. Now Antonio and I will take your questions.

[Operator Instructions] And our first question comes from the line of Ananda Baruah from Brean Murray. Ananda Baruah - Brean Murray, Carret & Co., LLC: Antonio, I appreciate that you do not want to go into sort of the process too deeply with the ITC. But I was just wondering, can you comment if you guys were given any particular reason for the ruling -- and I guess kind of looking at the ITC white paper, it didn't appear that any was given from the judge? I'm wondering if you guys got any feedback?

No, if you ask me the [indiscernible] on the process then we'll tell you that in the following days there will be a disclosure of why the ruling was done that way. And there is a process, obviously, to go after that and everybody will have some say. This is a complex process. We issued a PR statement and I stick to what we said in the PR statement. Ananda Baruah - Brean Murray, Carret & Co., LLC: And I guess just to that end, I'm sure you'll talk to your IP guidance next week but if you could help us at all here, would this impact -- since you've been exceeding the 250, 350 guidance the last couple of years, would this in any way impact your thinking around 250 to 350 for 2011?

We will talk about all of that in February, but let me say one thing. I'm not concerned about the cash impact of this decision. We have the ability to generate sufficient cash to continue the strategies that we have. And we'll look for what the decision is best and we will operate accordingly and we'll give you more detail in February. Ananda Baruah - Brean Murray, Carret & Co., LLC: I guess maybe Antonio, one for you and maybe Ann as well. On the Camera business, it feels like kind of the camera market was a little bit softer than expected for everybody in the December quarter. I mean, could you just talk to, strategically, your thinking about the Camera business, has it changed at all as we moved through 2010? And then even if strategically sort of what you want to do with go-to-market hasn't changed a whole lot, are there anything that you guys think you can do to improve the profitability of the business?

I think we can and you'll see, as I said in my notes, you will see a very aggressive strategy in abandoning segments that are not profitable. And just staying on the segment where we know we can make money. And that will, of course, we're going to sacrifice top line but we're not interested in that, we are interested in the bottom line. So you'll see a big difference in the way we operate that business in 2011. Of course we will continue to take advantage of our success in video cameras and the other parts of the business that are doing well, we'll take a very aggressive approach to the placement of digital still cameras, both in segments and in geography that is proven that they are not going to be profitable.

And our next question comes from the line of Arun Seshadri with Crédit Suisse.

I wanted to ask you about, first, on GCG business, versus your outlook that you gave us in the third quarter call, where you explicitly stated that you expect GCG to grow in the fourth quarter. Can you talk about what changed between that time and when you reported this quarter?

We were expecting -- the number of units continue very much where we thought it was going to be. And we have about 36% market share worldwide and we get that number approximately. The issue was that we were expecting the pricing pressures, especially in Europe, to get lower, get smaller, softer and it didn't happen. And that is because of the revenue performing the way it did. We continue to have very good performance in emerging market, which is very, very important for the future, for next year and for most of the growth is going to be there. There's not going to be much growth either in Europe or in the U.S. So the strategy is twofold, it's to contain the pricing decline in the developed regions. And for that we came up last year with the plate that we called TRILLIAN, which is important because it offers very high productivity, much higher than the rest of the market, and therefore, it would allow us to either price it higher or at least to deal with the price decline, one of the two. And then continue with our plan for the emerging regions where we -- a lot of the success that we had in CTPs was in the emerging regions and that bodes very well for our next year and digital plate volume in the emerging regions. Now if you think actually that currency out, you will find that GCG was actually flat in the fourth quarter. And that is important, too. So there was an improvement quarter-over-quarter although small but it was an improvement in the overall market performance. So there was slightly less pricing pressure, not significant, but enough that we were flat quarter-over-quarter. We have a lot of faith in the new platform for TRILLIAN. We worked very hard at the beginning of last year to come out with something that will serve as a tool for the situation and we're going to scale it this year.

And then next could you talk about how big, revenue-wise, your four growth businesses are?

They're about slightly over 10% of the company growing rapidly, obviously. So they will become a lot more this year and it would be very significant in 2012. Those four businesses are the basis for the future of the company, so they are very important.

And then I think you said in the quarter that the growth in those four businesses was, again, double digits, could you give a number or percentage?

Yes, it's 23% in the fourth quarter and 18% for the full year.

And then finally, I wanted to ask you a question on your cash flow generation. Excluding IP and if I back out roughly $500 million in IP cash flow incoming in the fourth quarter of 2009 and backing out the $78 million that you got in IP in 4Q 2010, I noticed that the cash flow generation excluding IP was still much weaker in 4Q 2010 versus 4Q 2009. Can you give us a little bit more color around why that was?

So as we talked through the cash flow for 2010, and if you look at the full year, the IP cash was essentially in line for full year with prior years. We did have, for the full year higher interest expense than previous years. We continue to invest in our core growth initiatives. And so I think the year-over-year quarter differences are driven largely by the lower earnings and working capital.

And just a clarification on your answer there -- I mean, I get roughly $830 million of inflows from IP in 2010 in cash. So was 2009 similar, then, similar number?

The net cash, you're doing just the nonrecurring IP, but the net cash from IP was similar year-over-year.

Okay, so the net cash is -- when you say net cash how is that different from nonrecurring cash?

The difference would be the taxes, the withholding taxes that are associated with some of the IP settlements. Other things like that, cost of litigation, those things.

And then finally, in your cost of goods sold, have you quantified or can you quantify, the $13 million impact that you gave us this quarter, commodity cost is negative. Is that predominately silver and can you talk to us and tell us a little bit more about silver as a percentage of overall cost of goods sold?

Yes, the negative impact in the fourth quarter is predominantly silver. And the way we talk about silver, to think about it, is that for every dollar change per Trillium, it's about $10 million to $12 million impact as it flows through costs. There is a slight delay from when the price increases to a flow-through, but you can think of that as the impact.

Our next question comes from the line of Shannon Cross with Cross Research. Shannon Cross - Weeden & Co. Research: My first one is on the Film business. Can you talk a bit about how we should think about that business trending from a margin standpoint? Any potential restructuring that would need to happen as volumes decline. And I'm sure you also talked about a lot of this in February, but if you could give us just some ideas on your thoughts on the Film business?

I mentioned a few things, Shannon. I said that we will have obviously aggressive restructuring cost associated with that business given the decline. I think the most important thing for us is to find a way to deal with the silver variability. We managed this business for cash. And we have to moderate the impact of silver and we have the tools to do that, fundamentally. There are other small ones but fundamentally is that to go for index pricing for new contracts index to the silver price and, as well, doing hedging when it's appropriate for the contracts that are already done that you cannot change. And those two things are in place plus the cost controls. Shannon Cross - Weeden & Co. Research: And then on the Kiosk business, which is clearly facing tough headwinds because of the contract that ended, can you just remind us was that sort of an October end? And so we will phase that through the next few quarters or, I don't know, Ann, maybe you could provide some color on just how we should think about that and how you've been able to offset it with perhaps additional new placements?

No, you have to -- the Q4-to-Q4 comparison is very negative for the business because of the transition from the one retailer. The most important thing is during this year, we actually increased the number of locations where we have now kiosks. So we have gained a very large number of deals that put us again at the same level or higher than the locations that we had before that loss. When there is a transition from one retailer to another, there is a concrete gain that you have in the few months in which we are leaving that retailer, because the prices of the consumables get to be higher because the volumes are lower. When the volumes of the retailer are lower, they have to be higher for the consumables and that obviously helped with the results of the businesses. Even though we were losing that deal, the bottom line was very good because we were pricing consumables a lot higher. You will see that starting in Q1 and Q2, you will see that affect go away and I expect this business to go back to the levels that it was before that because we have achieved, during the year, the number of positions, the number of locations that we had before. Shannon Cross - Weeden & Co. Research: And then Ann, if you could talk a little bit on the cash flow side for first quarter. As your businesses evolved so much over the last couple of years from a seasonality standpoint, can you talk a little bit about the puts and takes on the working capital, and we should keep in mind as we model first quarter cash flow?

Obviously we'll talk about full year 2011 in February and go through as we normally do, the detail on what we think the cash flow operating plan will be. But I would not expect just for the first quarter of 2011 to be seasonally significantly different than has been in the company's history.

And your next question comes from the line of Ulysses Yannas of Buckman, Buckman & Reid. Ulysses Yannas - Buckman & Reid: Talking of goodwill for FPEG, if my memory serves me right it's about $622 million. That is fairly associated, I think, with your purchase of labs in Europe. Is that correct?

It's associated with all of the historical transactions that we have made, including still labs in Europe, Qualex and other things. Ulysses Yannas - Buckman & Reid: So in essence we should be assuming that the bulk of it would be written off, correct?.

Well it's hard for us to make a judgment until we complete the analysis. So we want to make sure that we give you the appropriate answer and we should have that done in time to give it to you in the 10-K. But we do want to remind you as with the one we've done previously, this is a non-cash... Ulysses Yannas - Buckman & Reid: You have some new business in FPEG that you talked about, how is that doing and what percentage of the total is that now?

I said in my notes, in my comments that it's -- they grew about 7% in 2010, it represents, right now, about 13% of the total revenue. This is a very important activity that was started two years ago and starting to bear fruits now. And it's about thin film technologies and special chemistry and others. We think this business will continue to grow to the point that by 2013, we believe it would be 30% of the total revenue of FPEG and it's cash accretive, already, because we're just repurposing the assets that we have. We don't have to make any significant investments of any kind. As repurposing the assets and what's important as well is, by and large, is independent of silver. So we're working very hard to make that as fast as we can. Because this is the best tool that we have to moderate the decline and help with the cash generation. Ulysses Yannas - Buckman & Reid: Antonio, it appears that consumer inkjet sales in the fourth quarter were very slow. How do you explain or why did you increase the price of the 10C color cartridge by 25%?

We don't think it was low. The market was slow for the whole year with the growth and we don't exactly numbers but we know that is lower than 5%. What that means is that fewer people were willing to buy new printer or to replace the printer they have. So they're changing their printer at a slower rate. Our business is based on taking, fundamentally -- you know, replacing someone else's printer. The growth that we have in the fourth quarter, I think, is very impressive. And we grew 40% in a market that didn't grow, maybe 3%, 4% -- I don't know what the number exactly but low single digits. And when you look at the ink, we actually grew 77% for the full year, which is the most important metric of this business; and, because of our scale, actually the gross profit was actually doubled. So we achieved the goals that we have with the gross profit, which was to double the gross profit for the year. We're very satisfied with the growth. Our objective all along with this business was to turn this business profitable during 2011. We are tracking for that and to have positive earnings in 2012 for the whole year and we are tracking for that. Ulysses Yannas - Buckman & Reid: In your digital camera sales, what percentage of the market are you up to right now, have you approached flip?

So we're number two, I think we're getting close to -- I can't tell you a number exactly. I think in another month that will be published, but we are in high double-digits and we are approaching.

Our next question comes from the line of Mark Kaufman with Rafferty Capital Partners.

I've got a question, it pertains to the start with last call when you mentioned that cash was still expected to be between $1.8 billion and $2 billion at year end, and I guess the call was at the end of the quarter in October. At this juncture, you come in a couple of hundred million dollars below the low end of that range. And I certainly understand it from the standpoint of lower cash flow from the items that you called out. And looking at the changes in working capital, in my mind, I see that the inventories and receivables are higher than where -- originally would have expected, now that may be part my fault not recognizing the impact of the rollout of the commercial printers.

At that time we were very close to settle on at the end because we think it was appropriate.

Well I do have a question, though, about where your inventories are with relationship to the Commercial Printer business and the high-speed commercial business and related products should I be thinking in the future that because of the investment in the business that they are going to be higher? Or that you had been building up inventory to meet the backlog that you have discussed previously for 2011?

I think you should be thinking about the fact that as we've been preparing to really get a number of these units in the marketplace, we've been building units up and we intend to sort of put them into the marketplace as we go throughout the year, but we don't expect that increase in inventory to be there at year end.

And so my other question relates to receivables. I know you have the Samsung receivable running throughout the year. Is there anything in the two deals that you signed up third quarter, fourth quarter that impacting the receivables at year end?

No.

So is there anything else in receivables that might be higher than normal?

No, we're actually really pleased with our receivables balance, and one of the things that the company has been working on over the last year and a half or so, is to really drive down past dues and we've been really successful with that. So there isn't anything in receivables that should be odd. With the fourth quarter as with -- in particular because of the holiday season and where it falls, we could have some sales that were closer to the end of the month than normal that might have pushed your receivable balance up. But I don't think you should think of there being anything odd in receivables. And the other question you asked about receivables, we do want to mention that for digital cameras, as we talked about, we do have a revenue shortfall than we expected and some of that did end up in inventory.

And then Antonio, your comment was that you're thinking at the time was there was another patent deal potentially in the works for the fourth quarter?

We always have more than one, Mark. We have a variety of them and there was a specific one that was almost consummated, and it went wrong at the end and we didn't take it.

Our next question comes from the line of Chris Whitmore with Deutsche Bank.

I wanted to follow up on some of the cash flow questions. First, can you quantify the cash received from IP payments in 2010?

It's $676 million -- it's in the $600 million range.

I'm sorry, did you say in the $600 million range? If I exclude that, the business earned about $1 billion in free cash flow for 2010, is that correct?

That's $629 million.

I guess the underlying question I'm trying to get at here is if you exclude the IP income, the operating businesses are burning about $1 billion in free cash flow annually, and you seem to have grown a dependence on these IP deals. Is that how you view it, do you think you need to continue to win these IP deals to maintain the levels of investment in the business? And secondly, and perhaps related, are you considering any significant asset sales or other sales to raise cash to continue to fund the ongoing investments that you're making in these growth businesses?

No, the first question. When the company decided to create a new digital company, we only had really one source of cash to do that. The cash generated by FPEG was fundamentally dedicated to the transformation, the restructuring of FPEG and to pay for the legacy liabilities of FPEG. So the only way that the company has to create a new portfolio was to monetize IP and use that IP to fund the new businesses that you know that we have. The dependence of that is a smaller and is smaller, in fact I've been on record saying, that very much after 2012 we believe that our strategy with IP -- while we will continue to monetize IP, it will be changing significantly to more of a creating balance sheets other way of getting value for our shareholders for the IP portfolio we have, rather than cash. So the answer to your question is no. We don't need to generate all of this amount of HP to continue with the program. Not that it's a bad thing to have it. We're very proud of the monetization that we have created. But no, the business, as I said, Consumer Inkjet will be stand by its own. It will be positive in 2012, and Commercial Inkjet it will turn profitable during 2012 and will generate positive earnings in 2015. I'll give you the two examples of the two, by and large, largest investments that we have in the company. That gives you an idea that the means for that cash to continue to invest decreases exponentially as we get into 2012. The second question, yes, with the decline of FPEG there is an opportunity to have asset sales. And we will do that as the decline occurs. So we will be doing that next year and years to come and that will be a source of cash, as well.

One follow up would be around just kind of looking back at the Consumer Inkjet and Commercial Inkjet businesses, in terms of investment in 2010, what kind of inflection are you anticipating from those business from 2010 to 2011, 2012? I think you gave us the outlook for 2011, 2012, I'm just wondering how much investment was made in those businesses in the trailing 12 months?

Why don't we wait until February and we'll talk -- Pradeep Jotwani will talk us in a lot of that, about consumer inkjet. And Phil [Philip J. Faraci] Faraci will talk at depth in Commercial Inkjet. It is better to have the whole perspective of the business to answer those questions appropriately.

And at this time there are no further questions. I'd like to turn the conference back to Antonio Perez.

Well, thank you very much for attending. Again, overall, I'm pleased that we delivered the earnings that were within our targeted range, despite the lower revenues. In fact, the Digital earnings of $301 million, more than tripled our previous record that was in 2007, where we have positive $87 million. I'm very pleased that we have a very strong positive momentum with our core growth initiatives, stronger than we have ever had. I'm very pleased, as well, with our presence in the growing geographies, which I think is extremely important moving into the next few years, given the slow recovery of Europe and the U.S. And we're looking forward to discussing the strategy in more details in New York with all of you. Thank you very much.

Thank you. Ladies and gentlemen, this concludes the fourth quarter 2010 sales and earnings conference call. If you'd like to listen to a replay of today's conference, please dial (303)590-3030 or 1(800)406-7325, followed by a passcode of 4395323. Thank you for your participation. You may now disconnect.