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Conversion to digital doesn't end Kodak's challenges
By Matthew Daneman

Scattered across Kodak Park are patches of new landscaping: a walkway here, a roadside border there. Small red rock stone blankets the new features. That stone is the ground-up bones of Eastman Kodak Co.'s past — crushed bricks from the forest of buildings that the company has knocked down or blown up as it tries to transform the massive industrial complex that overlaps Rochester and the town of Greece.

Kodak plans to begin heavily marketing the vacant Kodak Park land to interest more outside companies in setting up shop there.

Kodak-as-landlord is just one example of the many ways the company has remade itself in recent years as it struggles to thrive in a digital world.

picture 2.gifIn fall 2003, hammered by freefalling consumer film sales, Kodak announced a sweeping plan to change its fundamental business structure and focus on digital products. That was followed by a plan laid out in early 2004 for huge cuts in company costs.

Chief Executive Antonio M. Perez told an audience of local business and government leaders at the Riverside Convention Center on Tuesday that the company had crossed the restructuring finish line and completed the layoffs and demolitions that have marked so much of the past four years.

"A lot of the focus has been on the gut-wrenching aspects," Paul A. Walrath, chief operating officer of Kodak's film products group, said in a recent interview. "As we've been going through the process ... what has emerged is a viable, sustainable business."

But the company Kodak set out to become and what has emerged are vastly different. And questions remain as to whether the direction it has chosen will lead to success.

"Antonio Perez has done an excellent job of both cleaning up those parts of the Kodak franchise that were in decline and positioning other areas for growth," said Matthew Troy, an analyst with Citigroup Inc.

Yet Troy remains skeptical about the company's financial prospects because, he says, of "the competitive reality they face on nearly every product in which they wish to compete. ... (It is) a multifront battle in a multiyear war against numerous enemies."

A new Kodak Park

Long before the director says "action!" vast numbers of Hollywood films get their start in Kodak Park's Building 317. Seven machines there turn out large rolls of coated polyester that are the foundation for motion picture film, microfilm and aerial surveillance film. Over the past two years, Kodak has closed down polyester manufacturing operations in the United Kingdom and France and sold its facility in Colorado so that now all of its polyester output comes from Kodak Park. The operation employs about 350 people.

Adding the work from those overseas sites "took us from being slightly underloaded to being fully loaded," said Mike Wobser, a special projects manager at Kodak.

But for the most part, Kodak Park's fortunes waned as the company struggled.

The park, for decades the largest industrial complex in the Northeast, started in 1891, when George Eastman moved his company's film and paper manufacturing from what is now 343 State St. to a small cluster of buildings 2 1/2 miles to the north. Kodak Park grew over the years to cover 1,600 acres, with nearly 30 miles of roads and its own fire department and power plants.

As film's era finally faded, Kodak began downsizing its traditional photography operations. A decade ago, Kodak Park had 212 buildings with a total of 23.4 million square feet. Today, it has 104 buildings with 14.5 million square feet.

The demolition work received much more public attention this year as the company imploded several buildings in a rush to finish its Kodak Park work by year's end.

Kodak Park today is responsible for most of the company's film output — the finishing step in film manufacture still is done at sites around the globe — and produces the ink for a new line of desktop inkjet printers. The park also houses more than two dozen independent companies, many of which once were part of Kodak.

Kodak Park "now is an industrial campus that has a mix of Kodak activity and other businesses' activity," said Walrath.

Kodak plans to spend $200 million over the next several years on Kodak Park in addition to the $15 million to $20 million spent recently on upgrades of the power plant and sewer systems.

Plans include extensive landscaping and moving all employee parking inside Kodak Park.

"It's our desire nobody crosses Lake Avenue, nobody crosses Ridge Road," said David P. Stoklosa, director of Kodak's Rochester facilities.

The company plans to replace miles of chain-link fence around the perimeter with more decorative fencing. Part of Kodak Park might even become an open campus, not fenced off, Stoklosa said.

Much of Kodak's marketing will focus on what the property has to offer — a 100-megawatt power generation facility with enough juice to power 90,000 Rochester-area homes, a 50-million-gallon-a-day water supply and its own railroad system.

"You say, 'Holy cow, what other site has all that?'" Stoklosa said. "We're looking for people who need steam, who need cheap electricity, whether they're a chemical-based operation or not."

Legends LLC, one of the largest trading card companies in the nation, is based in what had been a Kodak-owned building on Lee Road and still gets most of its utilities from Kodak at rates far below off-campus rates, said Morgan Scott, real estate manager.

Acquest Development LLC of Erie County is in the process of buying 330 acres of Kodak Park South, plus Building 605, a 2.1-million-square-foot climate-controlled warehouse.

"We're getting a lot of interest already and we haven't even started marketing the property," said Acquest President William Huntress. "With the Canadian dollar the way it is right now, Rochester is destined for more businesses coming in. (At Kodak Park) you've got great buildings, great location — those types of properties are hard to find."

'A valuable place'

Not counting parking lots, Kodak Park has 250 to 300 acres of developable land available. Much of that acreage is "shovel ready," Stoklosa said.

"It's going to be a very valuable place for this community," Perez said.

Future demolitions, at least in the short term, seem unlikely.

Kodak's facilities in Kodak Park, Colorado and England now are "busting at the seams," Chief Financial Officer Frank Sklarsky told a group of investors last month. "It's going to be a while before we have to do any (further) shrinking of those facilities."

When then-CEO Daniel A. Carp stood on a New York City stage on Sept. 25, 2003, he laid out a wide-ranging plan to take Kodak away from its photographic film cash cow to new business ventures such as home inkjet and commercial printing. The company's new focus was to be on commercial printing, consumer digital imaging and health imaging.

That Kodak doesn't exist.

The company did build a commercial printing arm, spending $2 billion in 2003 on acquisitions to create its graphic communications group that now competes with Xerox Corp. and others in turning out digital printers.

And Kodak did make a big push into the crowded consumer inkjet market earlier this year with its Easyshare All-in-One printer. Advertising revolved around Kodak's inkjet cartridges being cheaper than those of competitors such as Hewlett-Packard Co.

Kodak also has taken big steps to handle consumer film's decline. Since 2004, Sklarsky said, 65 percent of the company's traditional manufacturing jobs have been eliminated and 55 percent of its square footage has been demolished or sold.

Of 14 major factories Kodak had involved in film manufacture, 11 have been closed down, Perez said.

Better balance sheet

Many of Kodak's financial reports since 2003 have shown losses as the company spent $2 billion in cash and took $3.3 billion in restructuring charges to make it all happen. With debt paid down, "the balance sheet is in the best shape it's been in several years," Sklarsky said. "Next year, when that restructuring number comes down ... there's a lift of cash flow just from the absence of restructuring. People are excited about making that move from defense to offense."

But Kodak's health group is gone, sold earlier this year to Onex Corp. of Toronto. The unit is now Rochester-based Carestream Health Inc., with more than 1,400 workers locally.

And Kodak has not built the financial muscle Carp hinted at in that 2003 speech, when he said revenue could hit $16 billion by 2006. They fell short by $2.7 billion.

But the company is demonstrating some success. For the first nine months of 2007, Kodak had a profit of $461 million, compared with a loss of $617 million for the same span in 2006. Kodak remains the biggest consumer film and entertainment film company in the world, Sklarsky said, and also is tops in snapshot printing and in certain parts of commercial printing.

In digital camera sales, Kodak remains in third place with 15 percent of the market, trailing longtime leader Canon and Sony, according to industry analyst IDC.

Yet Kodak "has product all over the place and the brand still means something to consumers," said Chris Chute of IDC.

Kodak's challenge, Citigroup's Troy said, is that digital imaging is an easier business for competitors to enter than was traditional photography. While companies such as General Electric are pushing into digital imaging more as a marketing investment, Kodak needs to actually make money from it.

The company likely will announce its year-end financial figures in early February, giving a clearer picture of how — or if — its changes are paying off.

But while Perez gave a deadline of December 2007 for wrapping up Kodak's restructuring, "it's not as if there's going to be this clean break (on Jan. 1)," Troy said.

"This has been a multiyear, gradual migration playing out before the employees, the community and Wall Street. Where they are I don't think is a surprise to anyone."

First published by the Democrat & Chronicle, 23rd December 2007 (http://www.democratandchronicle.com)
Written by Matthew Daneman
Published here with permission.