Earnings

Go To | Public Relations | Investor Relations | 1996 Fourth Quarter Earnings |

Q4 - Comments of William Monahan, Chairman & Chief Executive Officer (as prepared for delivery February 4, 1996)

Thank you, Brad, and good morning. I am very pleased to have the opportunity today to tell you our success story of 1996 and outline our plans to continue our progress to meet our 3-year objectives.

1996 was a year of intense activity and accomplishment for the employees of Imation. A new company was successfully created, and dramatic change was implemented worldwide on reducing headcount and structure, rationalizing our portfolio, and establishing a new organization worldwide.

At the same time we have begun implementing our in-depth plan to re-engineer our business processes for better quality and cost efficiency with major investments in our supply chain and I.T. systems.

We successfully spun off from 3M, created and launched a new name and identity, launched numerous new product platforms and expanded our software assets including the acquisition of Luminous Corporation in pre-press workflow software.

We are changing the culture of Imation to a faster-paced, more aggressive, more customer-focused company in the Imaging and Information Industry. We are proud to say that while implementing enormous change, we maintained our customers' loyalty; and the transition of their working with Imation as their partner is well underway.

In a moment, Jill Burchill, Imation's Chief Financial Officer, will detail for you the financial results. I'd like to share with you my focus on three areas' growth, new products and organizational change.

Our first six months as an independent company represents a solid beginning for Imation. We laid out a three-year plan for you in June, and we are right on target as we enter 1997. We're looking for greater stability and consistency in our results as we go forward.

When we look at our operations as an independent company since July 1st, we see solid evidence that our efforts are having an impact as we reduce our cost structures, flatten the organization and get back on a growth track. I'm pleased with our progress to date but I'd remind you that it is still early days and we are still in development of our new business processes.

In the first six months of Imation's existence, we have grown revenues 3.4 percent, the first growth these businesses have experienced in several quarters. Net income without special charges -- for the period since the spin off has improved by $24.2 million, over the second half of 1995. For all of 1996, operating income without special charges -- increased $66.4 million over 1995, and EPS increased from 8 cents to 97 cents.

We improved our Economic Profit $65 million in 1996, exceeding our goal of $51 million, and putting us on track to meet our $150 million goal by the end of 1998. In every line of our operating results (excluding special charges), from revenues and margins to costs and profits, we showed improvement over 1995.

Q-4 was a very solid quarter for us with EPS of 28 cents, up from 2 cents in Q-4, 1995. Our fourth quarter revenues, up 4.3 percent, were the highest in more than three years. Volume growth in Q4 was 9.9 percent, also the highest in recent years.

Equally important, these results demonstrate that our strategy of greater international penetration is realistic. Volumes and revenues grew in all geographic regions on a local currency basis. We are already beginning to benefit from increasing our focus since the spin-off, in both fast growing emerging economies and large, well established markets. For example, not only did we see substantial cost savings in our Japanese subsidiary from the reduced structure implemented last year, our renewed focus has resulted in the first local currency growth in Japan for these businesses in six years and the first profit in three years.

Key to our success has been our new product platform performance. In Q-4, 16% of our sales were from these specific new products, and 11% for the year, again right on plan.

Medical & Photo

Medical Imaging and Photo Color represent 30 percent of 1996 revenue. The success of our DryView laser imaging system continues to be the story in medical imaging. Placements continue to grow aggressively to 1,800 DryView systems worldwide, and we expect to surpass 2,000 units early in 1997. The system has been extremely well accepted by many leading hospitals and health care institutions in North America, Europe and Asia, including all three Mayo Clinic sites, the Walter Reed Army Medical Center, the University of Zurich in Switzerland, the Leeds General Infirmary in the UK and Keio University Hospital in Japan. In the 4th quarter, we began commercial sales of our desktop DryView laser imager, further expanding our product range and allowing us to extend the use of DryView systems for ultrasound and nuclear medicine applications. Led by the success of DryView, we are confident that Imation will continue to be the global marketshare leader in the placement of new laser systems (wet and dry combined).

Data Storage:

In data storage, which accounted for about 40 percent of total revenues in 1996, we continue to make excellent progress in introducing new products, strengthening alliances with other technology partners and building on our market leading presence in branded removable media.

Our TRAVAN Data Cartridge line continued its strong growth with excellent acceptance of the higher capacity models. Travan data cartridges are now the industry standard for the desktop backup, in the 1 to 4 Gigabyte range. For example, Imation Korea, through aggressive user focus has won a contract with the Korean Government, making Imation's Travan*v technology the PC back-up in all their operations.

To date, over 3.5 million drives based on Travan technology have been sold worldwide by suppliers such as HP Colorado Memory Systems, Seagate and Iomega. Our most recent product introduced under the banner of Travan, the TR-4, is making strong inroads into the low end of the server market and the high end of the PC desktop market. Additional Travan-based products are scheduled to be introduced in 1997 and will strengthen our position in all segments of the market, from desktop to server and LAN, as we increase capacity up to 10 Gigabytes per cartridge.

LS-120, while still in start-up, is now showing the progress we have been waiting for. The volume of LS-120 drives has ramped up dramatically this past quarter. In October, 30,000 drives were manufactured, in November that moved up to 60,000 and by December more than 100,000 drives were produced for the market.

Both MKE and Mitsubishi announced that automated production of LS-120 drives has begun and that they are now in a position to deliver a combined volume of one million LS-120 drives per month to PC OEMs before the middle of this year.

OR Technology, a developer of the slim-line LS-120 drive, is now shipping its A: drive product through a number of distribution channels, including Tech Data and Ingram Micro, two of the world's largest hardware wholesalers and distributors of computer products. Through these two companies, over 100,000 value-added resellers and systems integrators globally now have access to LS-120 drives a key enabler in making the LS-120 technology available to business users. Sumitomo Corp. announced it purchased shares in OR Technology and will start distributing the drive. Also, ORC in Singapore is distributing upgrade kits in Asia.

So, we see the LS-120 off to a solid start with an aggressive promotion campaign already underway. We anticipate additional announcements, activity and visibility in the marketplace in the coming weeks and months.

Printing and Publishing

Printing and Publishing made up more than 20 percent of total revenues in 1996, as we adjusted our portfolio to exit product lines that were not generating economic profit. Even with this trimming, Printing and Publishing achieved revenue growth in the fourth quarter.

Our Rainbow digital proofing line in Printing and Publishing showed strong growth in Q-3 and Q-4, as we add features to this customer-driven workflow process solution. The Graphic Arts Technology Foundation rated our RAINBOW System No. 1 of all dye sub proofers.

Our acquisition of Luminous Corporation was completed in the quarter, and we are now well placed to grow our digital workflow business worldwide. As we talk with customers, they are telling us that Luminous provides exactly the right technology focus needed in the digital pre-press arena. As we extend the Luminous products through our distribution channels, we see opportunities to expand our presence globally.

Our plan to introduce new "dry" film and plates for the printing industry *) new products based on our DryView technology investment that has been so successful in our Medical Imaging business continues to gain pace, and we are working with a number of image-setter manufacturers to introduce new solutions in the first half of this year.

We also strengthened our customer service capability in the fourth quarter when we launched a new telephone technical support center. You will see additional service capabilities in the coming months, as Imation sets the standard for service and technical support in the printing and graphic arts industries, and as we broaden our ability to support customers worldwide.

Third: Organizational Change.

We are changing our culture to produce a faster, more aggressive response to customer demands and a sharper focus on profitable growth opportunities by everyone in the company, with fewer structural and bureaucratic hurdles. And we are seeing evidence that we are making that necessary transition.

I just talked about our separate business units, but we are seeing evidence of team work and synergy across business units that is having a positive impact. For example in December we announced a type of printing paper that delivers all of the image quality of conventional photographic paper, yet can be used with any of today's desktop color ink jet printers. Although the product was developed primarily by our photo color products team, we leveraged Imation's competencies in printing and publishing, medical imaging and data storage to rapidly accelerate our product development, manufacturing and marketing efforts. This is a big change. In the past, if the resources for a project like this were not available in a given business unit, the project would have been delayed until those resources became available. We know this isn't an option today, so we pulled key resources from our different business units in order to rapidly develop and test a product that we believe has good sales potential. So, we see the necessary changes in behavior already beginning to occur.

We also have a focused program to engage Imation employees as owners. Each employee around the world received options on 100 shares of stock. We have increased the variable compensation component of salary for top management to a minimum of 40 percent of total cash compensation, tied to meeting our Economic Profit goals. We have also set a minimum stock ownership requirement of one and one half times annual salary for senior management.

In summary, Imation has made a solid start in its first six months. By focusing our efforts on aligning our cost structure to our opportunities, on generating growth and on changing the culture, we see every opportunity to be a leader in the imaging and information industry and a successful and profitable company. Now I'd like to introduce Jill Burchill, Imation's Chief Financial Officer. Additional information about Imation is available on the company's web site at http://www.imation.com. To receive stock quote updates, recent earnings and news releases, corporate information and related shareholder services, call Imation's toll-free shareholder information line at 1-888-IMN-NYSE(1-888-466-6973).

Certain portions of these comments which do not relate to historicalfinancial information may be deemed to constitute forward looking statements which are subject to various factors that could cause actual result in the future to differ materially from these statements. Among these factors are the company's ability to meet its cost reduction and revenue growth targets, its ability to establish itself as an independent public company, competitive industry conditions including historical price erosion in certain product categories, foreign currency fluctuations, and the market acceptance of newly introduced products as well as various factors set forth in the Company's Information Statement included in the Form 10 Registration Statement, filed with the Securities and Exchange Commission on June 21, 1996. Imation™, Travan™, and DryView™, are registered trademarks of Imation Corp. Rainbow™ is a trademark of Imation Corp.