FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (TMF Debit)

Eastman Kodak
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343 State Street
Rochester, NY 14650
(716) 724-4000
http://www.kodak.com

ALEXANDRIA, VA (September 16, 1997)/FOOLWIRE/ --- Eastman Kodak held an analyst conference call today following their announcement last night that they would not meet earnings expectations for the quarter. The company experienced poor performance during the first two months of the third quarter. While there is still a month left to go in the quarter, barring extraordinary reversal, it is clear that quarterly earnings will fall significantly short of those a year ago. Should the July and August performance trend continue through September, they could see earnings which are 40-50% lower than the same quarter a year ago. On that basis, full-year operating earnings, which exclude the Wang in-process R&D charge, and other one-time charges could be as much as 25% below the $4.50 per share operating earnings they posted for 1996.

FOREIGN EXCHANGE. The adverse effect of foreign exchange continues to be a very significant problem for Eastman Kodak. Using the August 31st spot rates, the impact of the stronger dollar is projected to have a greater impact in the third quarter than in the first and second quarters combined. At those rates, currency is projected to reduce third quarter earnings by $0.19 per share compared to $0.14 per share for the first half of 1997. Full year, the effect of these same rates will be to reduce sales by approximately $550 million and earnings per share by approximately $0.45.

With 55% of their sales coming from outside the US, the effect of the stronger dollar on sales and earnings is profound. In addition, their manufacturing cost base is US-centric. In Southern Europe and other areas where currency tends to follow the Deutsch mark, Kodak has a very limited manufacturing cost base. Furthermore, with high gross profits on a number of their key product lines, the stronger dollar has reduced gross profits significantly based on translating local currency gross profits into US dollars. The company has to take necessary steps to continue to compete profitably under the assumption that the dollar will remain the leading unit of international commerce and a strong currency.

CURRENCY HEDGING. They are re-examining the issue of hedging. They are getting some outside help to look at it as well. Under any scenario they have looked at so far, the magnitude of the strengthening of the dollar just experienced is such that they are not persuaded that there are any classic hedging programs that are affordable and would work without taking almost speculative positions in currencies -- which they don't think is appropriate for the company. They are very concerned about earnings volatility and if they can figure out a way to do this that is economic, they have a very open mind to that. They have stopped sitting around waiting for the dollar to weaken. They are working on the assumption that it won't weaken.

PHOTO-FINISHING CONSOLIDATION. Color negative paper is among the most important products in terms of its contribution to earnings. This product has been under very significant price pressures in 1997 with world prices down 8% through August. This phenomena goes beyond the loss of the Wal-Mart business last year. The entire photo-finishing industry in the US went through a significant consolidation in the past year and a similar movement is currently underway in Europe. The net of this consolidation has been to lower prices in the photo-finishing industry and the color paper they use. While prices have stabilized to some extent since the beginning of the year, the year-over-year comparisons remain very difficult.

This price decline in combination with foreign exchange has substantially reduced the earnings contributuion from this very important product. The impact in the US market is even more pronounced as volume is also down on a year-over-year basis due to the loss of the Wal-Mart business.

Color negative film prices vary significantly by geography. While film prices are down year-over-year due to actions taken last year, they have not changed dramatically year-to-date. However, significant price reductions by their principal competitor in the US have created a price disparity that has driven an unacceptable level of share loss in some important channels.

ACCELERATING SHARE LOSS. While they calculate that their total share loss is down in the full US market by somewhere between 2-3% on a moving 12-month average, they believe that has accelerated in recent months in important mass merchandisers, drug, and food channels. The volume loss resulting from this decline in share is another factor in their poor earnings performance. One-time-use cameras continue to experience downward price pressure on the order of 7% on a year-over-year basis due to low-cost private label suppliers.

They have put some programs into the market including increased promotion, on package couponing, and the old Gold Film. That will close some of the price gap between Kodak and their major competitor. That will put some pressure on price in the fourth quarter. They think they will claw back some of this accelerating share loss they saw. That is what is in place for the fourth quarter.

MEDICAL X-RAY. Medical x-ray, which is another significant earnings contributor, continues to experience significant price declines. The consolidation in group purchasing organizations goes on with contracts hotly contested, usually on the basis of price. In the first 8 months of the year, medical x-ray film prices are down 8% on a worldwide basis and more than that in the US markets.

DECLINING PRICES IN REWRITEABLE CD MEDIA. The company mentioned declining prices in rewriteable CD media during the second quarter conference call. They have seen prices decline 40% through the first 8 months of the year. While they expected a rate of decline consistent with the fast-paced digital business, recent increments in industry capacity that have come online have had the effect of moving prices lower even more quickly.

SUMMARY. Industry consolidation, changes in competitive pricing strategies, and jockeying for leadership in digital products have all contributed to the pricing pressures the company has experienced this year. These factors will work themselves out over time. The company needs to take the steps necessary to operate successfully given these market realities. Currency impact is about a third of the problem, consumer is about a third, and digital is about a third -- but digital is a vague term because it overlaps into consumer.

FLAT GROWTH IN EMERGING MARKETS. During July and August emerging markets have returned to flat growth. They reported flat emerging market sales in the first quarter which largely recovered in the second quarter. They have now returned to no growth in the third quarter. During the first two months of the quarter, China experienced strong sales growth, but declines in Eastern Europe and Latin America, combined with very slight growth in the balance of Asia netted flat sales results. They continue to be very positive on their emerging market opportunities, but they understand there will be ups and downs in this segment.

DIGITAL PRODUCTS. Losses in their broadly defined digital products has widened somewhat during the start of the third quarter with the movement of writeable CD from a profit contribution to a loss as the principal reason. They continue to sustain investments in attractive digital growth opportunities such as networking imaging services. In addressing the opportunity and challenge which digital represents, the company is working to define the right allocation of its own resources through a careful review of its investment portfolio, while examining how to best cost-leverage its efforts with those of other companies.

REDUCING THE COST STRUCTURE. In light of this business environment, the cost of operating the company must be reduced. This has been a high priority and strategic issue for some months now. They were not prepared to go into details of these cost initiatives at this time but stated that it is their intention that these issues be both material and put in place quickly. The company has not reached a decision whether or not a restructuring charge will be taken this year.

The company intends to take the necessary actions to achieve a cost structure which will give them the pricing flexibility to meet any pricing strategy of their competitors. The company continues to believe that there is an enormous opportunity in both their film business as well as their digital activities. They will sustain investments in both areas. They believe their current performance to be unsatisfactory and they are committed to aggressively turn that situation around.

MIS SYSTEMS. There is no surprises or new news with regard to what they are doing with their IS activities and the SAP plan specifically. They just completed the first live installations of SAP from a field support viewpoint. Those took place in Spain and Portugal. They also made some manufacturing-based application installations in Shanghai and there was some manufacturing stuff regarding their digital products in England. They have been, for some time, funding both the legacy system activity while they are investing in this SAP/ERP conversion which will ultimately displace those legacy systems. That is on course and Kodak is asking that community as well as the other communities within Kodak to come back with a very hard look at what they might do to reduce the rate of expenditure on that activity but not to the point of endangering or moving away from a very aggressive conversion to SAP. Their total IS expenditures are along the range of $500 million. 1998 is going to be a tough year because of the overlap converting the systems.

FOCUSING ON CORE IMAGING BUSINESS. They have focused the business on their core imaging businesses but, within that, they have been making investments in parts of it which have to be suspect at this point given the currency pressures. They can't sit around hoping for the dollar to weaken, they have to believe that this is life and get their cost structure in shape just as the Japanese companies did when the yen was down around 90. They have to admit that they are in a pricing environment that is much fiercer. Therefore, some of the things they were investing in, even within the imaging business, are on the bubble right now because strategically they aren't as important as some others. They are looking at their R&D portfolio and how they spend all of their R&D money, and are looking at all of their businesses. They don't mean they are looking at the top level 7 or 8 businesses, but at the 100-200 sub-businesses that make up the company. With respect to the copier business, copiers really are not part of this issue, it is making its plan and Kodak continues to honor its commitment with Danka.

OTHER BUSINESSES. The company was asked about how other portions of the business are performing. The motion picture business continues to do very well as do some of their other businesses. In the microfilm area, not so much microfilm but Eastman Software, which they bought in the first quarter, continues to be a significant investment.

OUTLOOK. They are absolutely convinced that there is no reason the company shouldn't be able to achieve an average 10% earnings per share growth over time. They are going to correct what happened this year. They are not going to correct it, probably, all in one year, but they never said it would be a smooth 10%. They have been out of the market for two days in terms of their share repurchase program because of this disclosure, but they have been in at very low levels and will continue to be in at modest levels. They still have the second $2 billion program in place. They will honor the $2 billion program and let that play out, but will consider their options carefully before increasing their debt load to ramp up the repurchase program.

They are contemplating no change in the dividend at this time. The company's cash profile remains very healthy and very attractive. There are a lot of forces that play on gross margin. Obviously price is driving margin down . Mix, as they move into digital markets, more equipment-intensive businesses, and emerging markets, they will have a mix shift where some of the higher growth areas have lower margins. To counteract that they are doing what they can to look at cost below gross margin and on the cost of goods side of things to help gross margins.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.