Kodak expects rising demand for digital products, services

Sales expected to grow 36% a year until 2007, shareholders are told

September 23, 2004|By BLOOMBERG NEWS

ROCHESTER, N.Y. - Eastman Kodak Co., the world's biggest photography company, said demand for digital products and services is rising faster than it had expected and that more than half of its sales should come from that business by next year.

Digital sales will increase at an annual rate of 36 percent from this year to 2007, Kodak said yesterday at a meeting in New York with investors. The Rochester, N.Y., company had projected annual growth of 26 percent from 2002 and 2006.

Total revenue should increase by 7 percent to 8 percent from this year to 2007 as waning demand for film limits gains made in digital markets, Kodak said. Chief Executive Officer Daniel Carp is cutting costs and selling divisions that don't fit his strategy of focusing on digital consumer, health and printing businesses.

Sales of traditional products such as film will drop 16 percent a year through 2007, Carp said in a televised interview. He expects digital products to contribute as much as 75 percent of sales by then.

Kodak's shares rose 68 cents, or 2.2 percent, to close at $32.35 yesterday on the New York Stock Exchange. They have climbed 23 percent this year. At that pace, the shares would have their biggest annual gain since 1995.

Brian Eisenbarth, chief investment officer of Davidson Investment Advisors in Great Falls, Mont., which owns 350,000 Kodak shares, said Kodak is "exceeding the road map they set out last year, when we decided to take a position. We bought into Carp's vision and now it's paying benefits.

"Kodak's share price could go north of $50 a share in five years," he said. "We've earned almost 50 percent on our investment in less than a year. We didn't expect to see that kind of return for three years or so."

Kodak's digital-camera sales increased by 94 percent in the first half from a year earlier, it said in slides for the meeting. Carp said he expects strong holiday demand this year for digital cameras, which are owned by a third of households.

The company maintained its target for sales of $16 billion by 2006 and operational profit of $3 a share that year. Operational profit can exclude some costs and gains.

For the second half of this year, Kodak l expects an operating profit of $1.25 to $1.55 and net income of $1.71 to $2.01. It was expected to have operating profit of $1.39, the average estimates of as many as nine analysts surveyed by Thomson Financial.

Kodak was the worst performer in the Dow Jones Industrial Average last year, falling 27 percent, and the stock was removed from the Dow in April because of its shrinking value.

Sales at Kodak rose last year after three straight years of declines. Last year was the low point for earnings, Kodak said.

Last year, Kodak's share of the consumer digital-camera market rose to No. 4 worldwide, helped by demand for its Easyshare line, the company said. Kodak said it was the only U.S. company in the top five and ranks No. 2 in digital-camera sales in the United States.

Kodak is targeting gross margins of 30 percent for the first half of this year, less than the 33 percent it posted last year and the 31 percent in the first half of this year. Margins will be lower because digital products are less profitable than film.

Carp plans to cut 21,000 jobs by 2006, compared with 70,000 at the end of 2002. Kodak has closed 43 wholesale photo labs since June last year, cutting the number of labs worldwide by more than half.

The company plans to "remove" 24 buildings in Rochester by the end of this year, the slides said. The company plans to reduce its total floor space by a third by 2006.

Carp is financing the digital moves with $1.3 billion in dividend savings, cash from film sales and savings from cost cuts.

Kodak won't have to go to the bond market for money in the next three years, Chief Financial Officer Robert Brust said. "We have plenty of cash," he said.

From this year to 2007, Kodak expects to generate $3.6 billion in "investable" cash flow, which can be used to pay debt and make acquisitions or technology investments.

Kodak also plans to trim $800 million of debt by the end of this year, and expects to reduce its debt-to-capital ratio to less than 30 percent in 2007 from 50 percent last year.

"They've made some good progress in terms of cutting costs as they leave the old traditional world, but they have yet to prove how much they can make in the new digital world in terms of profit margins," said Goldman Sachs analyst Jack Kelly.

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