Thanx for the link Joe. I have here excerpts from a meeting held on February 3rd (I believe the date is correct) for "sell-side analysts". These are the folks I often refer to as the "bad news bears" ! The following data was scanned using my recently purchased Kodak Photo Doc Color Scanner.................Enjoy.
KEY POINTS
- Last night Kodak held an investor meeting for sell-side analysts.
In addition to the usual suspects, CFO Harry Kavetas and Pierre
Cohade, vice president and general manager of Kodak's worldwide color
film business, were present.
- The meeting focused on Kodak's worldwide consumer film business what happened in 1997 and Kodak's strategy for 1998. We believe Kodak has steadied itself after being taken off-guard in 1997. Management is ready to revisit some of the growth strategies it outlined during its May 1997 gathering - (see our May 1 First Call note titled "May Management Meeting") - and also appears ready to defend its home market share turf.
- MARKETING WILL BE KEY IN 1998. An important point made throughout the evening is that Kodak's future is very dependent on how well management is able to translate market opportunities into revenue and earnings growth. In this vein, we continue to believe that Kodak's marketing efforts need to be substantially upgraded.
- IMPROVED COMMUNICATIONS. We believe Kodak is making a commendable effort to increase its communications with the Street. More direct interaction should help alleviate confusion and enhance people's
ability to comprehend and better appreciate Kodak's strategy.
- LOWERING FIRST QUARTER ESTIMATES. We expect Kodak's first quarter will be shaped by negative foreign currency comparisons, increases in Olympic and APS spending, and weakening demand in Southeast Asia. In addition, although a greater penetration of APS and 800 speed films should help results in the period, Easter - which occurred during the first quarter last year - is a second quarter event in 1998.
During its December period conference call (January 15), management discussed its expectation that the strong dollar alone would erase approximately $0.15 in EPS from Kodak's first-quarter 1998 results. Management reiterated this expectation last night and also suggested that Olympics-related advertising spending would delete another $0.05 from the quarter's results. Based on these factors, we are shifting $0.05 out of our first quarter estimate. We now forecast Kodak will earn $0.69, down 16% from lQ97.
- We continue to worry that pricing pressure, overcapacity and negative business mix trends will blow strong headwinds into Kodak's cost-cutting and productivity initiatives. In our view, Kodak must get back on its revenue and margin growth track before meaningful (and lasting) multiple expansion occurs.
- Management stated that Kodak began 1997 in general agreement with analyst expectations for the company, which at the time assumed EK would earn more than $5.00 per share (in 1997). Management's comfort level was based on two primary drivers - continued sales growth and fewer digital losses, neither of which came to fruition.
BELIEF IN COST CUTTING INITIATIVES. CFO Kavetas stated while not a forecaster, of all Kodak's initiatives for 1998, he was most confident in the firm's ability to improve its cost structure over the next 12 months.
REVIEW OF COLOR FILM MARKET. Mr. Cohade began the evening with a quick discussion of the dynamics that drive the worldwide color film business. Although too much capacity exists in the worldwide color film business, Mr. Cohade believes 3 positive factors characterize the industry. First, on a worldwide basis the industry is growing at 6-7% per year as companies increase usage and penetration. In mature markets such as Western Europe and the United States, film volumes are growing at 3-5% per year. Emerging market expansion paces in the high single digits - to - low-teens. Second, he emphasized the level of importance product innovation and technology play in the industry. Finally, he added that the industry attracts few competitors due to the high barriers to entry
Within this context, Mr. Cohade focused on Kodak's competitive advantage - brand recognition, distribution capabilities and product portfolio.
1998 INITIATIVES. During the evening, Mr. Cohade outlined three major Kodak initiatives for 1998.
First, TRADE CONSUMERS UP. During 1998, Kodak will continue to leverage its product capabilities in an attempt to trade consumers up the speed and product curve. In doing so, the firm hopes to be able to improve the competitive landscape (few player compete in 900 speed and APS film technologies) and improve average selling prices. In 1997, average-selling prices fell modestly despite some significant price competition. one factor helping to offset the pricing pressure was an increased mix of higher speed films. For example, industry penetration of 800-speed film grew from .01% of the market to 5% during 1997. In 1998, Kodak will focus on higher speed films along with Advanced Photo System products to help support average selling prices and revenue growth.
Second, DRIVE PURCHASE INTENT. According to management, studies suggest that 70-80% of US consumers intend to purchase Kodak when they enter a store. However, Kodak is losing between 5-10% of consumers at the time of purchase to other branded products as well as private label - such as Fuji, Agfa, Konica and Imation films. To help drive the level of consumer follow-through, Kodak said it plans a significant increase in consumer advertising in 1998.
Third, MEGABRAND ADVERTISING. In 1998, Kodak will roll out a new strategy designed to create a mega-brand for Kodak film. The firm will basically create two lines of film product. First, will be the Kodak Max brand (mega-brand) which will now include 400 speed, 800 speed and single use film (in the past, Kodak Max represented Kodak's 800 speed offering). This will be the focus of Kodak's traditional advertising effort. Second, will be Kodak Gold, which will be limited to 200 and 100 speed films. Kodak does not plan to alter prices as a result of this new branding strategy (although prices will likely shift as the competitive landscape changes throughout the year).
As initially discussed at its meeting in May 1997, Kodak continues to examine segmentation possibilities in the consumer industry. Although it was distracted by the competitive landscape in 1997, management intends to focus on possible segmentation strategies in 1998. In other words, do not rule-out the possibility that Kodak will introduce cameras and film for the kids market segment in an effort to expand the overall market in 1998. Other segment focuses are also probable, we believe. Once again, Kodak's ability to market will be key.
MARKET SHARE IN 1997. Excluding the US, Kodak believes it has gained 5 points of market share (on a volume basis) over the past 24 months. The firm believes it is gaining market share in all geographies, except in its largest market - the United States. Kodak did not comment on total worldwide market share during the evening. The highest growth rates for Kodak continue to be in lower margin geographies. Excluding the negative business mix shift, Kodak said it has not seen unusually aggressive pricing in other international regions.
The company continues to believe that the current price gap on color film in the US between Kodak and Fuji is back at levels seen in 1996 -or about 20%.
DEFENDING ITS MARKET SHARE POSITION. According to Kodak, US industry volume shipments rose 5% in 1997, Kodak's units increased about 2%. As a result, Kodak believes it lost about 3-4% points of share (versus an historical rate of loss of about I%+) for the full year 1997.
There are several independent agencies that track data for the photography business. Kodak has access to all of these sources; outside forecasters typically do not. For the most part, these sources track a partial picture of the industry and do not capture the entire landscape. Kodak has not historically discussed market share issues in great detail. As a result, a high degree of confusion and controversy surrounds the topic of market share in the industry.
To clarify its assertion of 3-4% market share loss in 1997, management explained that the firm takes each of the sources available and consolidates the information to create its worldwide market share estimates. Unfortunately, Kodak was not able to give a detailed explanation as to why such large discrepancies exist between its data and some of the tracking sources to which outside forecasters subscribe.
Regardless, Kodak lost significant market share in the US last year and will fight a fierce battle in 1998. Over-capcity and intense competition will exert their influences once again - and Kodak's management must stand ready to both implement its strategies and react aggressively to changes in the competitive landscape.
APS PENETRATION WILL BE VITAL IN 1998. We believe APS represented 45% of Kodak's worldwide film revenue in the fourth quarter. When asked what would be a satisfactory level of APS penetration at the end of this year, management suggested that APS could represent 8-9% (a doubling) of the film by the end of this year.
SOUTHEAST ASIAN DEMAND SEEN WEAKENING IN 1998. Southeast Asia continues to present numerous challenges such as price pressure, translation issues, and a contraction of demand. Over time, Kodak believes weaker competitors could suffer and ultimately be unable to compete in this difficult environment - therefore benefiting Kodak the leader in many of these regions.
Regards,
Joe |
