PGT's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: PGT, Inc. (PGTI)

PGT, Inc. (NASDAQ:PGTI)

Q4 2012 Earnings Call

February 21, 2013 10:30 am ET

Executives

Brad West – Director, Finance and Corporate Controller

Rodney Hershberger – President, Chief Executive Officer

Jeffrey T. Jackson – Executive Vice President and Chief Financial Officer

Analysts

Sam Darkatsh – Raymond James

Gunnar Hansen – Sidoti & Company, LLC

Operator

Good day, ladies and gentlemen, and welcome to the PGT Fourth Quarter 2012 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host Mr. Brad West. You may begin.

Brad West

Good morning and thank you for joining us for PGT’s fourth quarter 2012 conference call. I’m Brad West, Corporate Controller, and I’m joined today by Rod Hershberger, President and CEO; and Jeff Jackson, Executive Vice President and CFO. Rod and Jeff will represent PGT in this morning’s call.

Before we begin, let me remind everyone that today’s conference call may contain statements concerning the company’s future prospects, business strategies, and industry trends. Such statements are considered to be forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements do not relate strictly to historical or current facts. Rather, they are based on our current expectations and are subject to risk and uncertainty.

Actual results may vary materially from those contained in the forward-looking statements. Please refer to the February 20 press release, our most recent Form 10-K, and other documents filed with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements.

A copy of our press release is posted on the Investor Relations section of our corporate website at www.pgtinc.com. Included in the press releases are the unaudited consolidated balance sheets and statements of operations prepared in accordance with GAAP and adjusted information, which is quantitatively reconciled to GAAP. Our company uses non-GAAP measurements as key metrics for evaluating performance internally.

A detailed explanation of these non-GAAP measurements can be found in our press release, which was included as an exhibit to our Form 8-K filed February 20 with the SEC. These non-GAAP measurements are not intended to replace the presentation of financial results in accordance with GAAP. Rather, we believe these non-GAAP measurements provide additional information for investors to facilitate the comparison of past and present performance.

For today’s call, Rod will provide an overview of our performance for the fourth quarter ended December 29, 2012, then Jeff will discuss our results in more detail. After their prepared remarks, they will take your questions.

With that, let me turn the call over to our CEO, Rod Hershberger. Rod?

Rodney Hershberger

Thanks, Brad. Good morning, everyone. In 2012, we focused on driving sales in our core markets utilizing strategies such as promotional activities and partnering with national accounts to take advantage of the growing new construction market. Our focused promotional activities positively impacted Q4 sales as it capitalizing on our value proposition. These activities combined with the improving housing market through the sales increase of $9.5 million, or 26.6%. The sales of our flagship product line WinGuard grew 38% over the prior year. From a market perspective, new construction sales increased $5.3 million, or 59.8% as a result of improvement in the new construction market and our partnering with National Accounts.

Repair and Remodel sales increased by $4.2 million, or 15.7% as we continue to see signs of an economic recovery beginning. From a product standpoint, fourth quarter sales included an increase in our impact sales of 32.8% to $34 million, compared to $25.6 million in the prior year. Our non-impact products, which include Aluminum, Vinyl and Eze-Breeze increased $1.1 million, or 10.6% from 2011. EBITDA in the fourth quarter was $6.9 million, or 15.3% of sales, compared to prior year’s fourth quarter EBITDA of $0.6 million, or 1.8%.

Our gross margin was 35.4% of sales compared to 25.1% for the fourth quarter of 2011. This increase of 10.3% was driven by additional volume, mixed improvement, and continued focus on operational efficiency. SG&A costs for the fourth quarter of 2012 increased $300,000, or 2.2%. This was driven by $1.3 million increase in employee-related compensation expense offset by a decrease of $400,000 in selling materials and advertising expense, $200,000 in reduced transportation costs and $200,000 in bad debt expense.

Lastly, within our core markets, total housing starts were up 52% for the fourth quarter of 2012 when compared to 2011. Single-family starts during the quarter were up 42%, compared to a year ago. Some highlights for the year include, sales were $174.5 million, up $7.3 million from prior year, or 4.3% increase.

Housing starts improved 40%. WinGuard dollar sales were up 11.8%. New construction sales increased $8.7 million. Gross margin percentage of 34.2%, up 640 basis points from 2011 adjusted gross margin, net income of $9 million, or $0.16 per diluted share, compared to an adjusted net loss of $0.10 last year, and EBITDA of $24.7 million, up $12 million, or 96% versus 2011 adjusted EBITDA.

This improvement in net income and EBITDA resulted from increasing sales and profitable categories, improving manufacturing efficiency, reducing scrap, and increasing efficiency within our transportation team. Looking at 2013 and beyond in January of this year, we closed the sale of our Salisbury, North Carolina facility for approximately $8 million in cash, which provides additional momentum for 2013.

With that, I’ll turn the call over to Jeff, who will review the results for the quarter and year in greater detail.

Jeffrey T. Jacksons

Thank you, Rod. For the quarter WinGuard product sales grew 38.2% over last year. This was due to promotions and an improved new construction market. In addition to our focus on sales, we also focused on gross margin, which increased to 35.4% for 2012 from 25.1% in 2011. This improvement is a result of increased volume, operating efficiencies, as well as reduced scrap.

EBITDA was 15.3% of sales and we are generating cash flow from operations of $6.8 million during the quarter. Our quarter ending cash balance was $18.7 million and we prepaid an additional $3 million of our outstanding bank debt during the quarter, bringing our 2012 total debt payment to $8 million and our net debt to $18.8 million.

During the fourth quarter, we announced the stock repurchase program. Through the end of December, we acquired 922,694 shares of our common stock at a cost of approximately $3.9 million. In 2013, we have acquired an additional 134,500 shares at a cost of approximately 600,000.

As of the date, the remaining authorized amount under out stock repurchase program is approximately $15.5 million. We remain financially strong employees to take advantage of opportunities to drive brand awareness and market share gains. We expect the additional investing in our brand to drive volume and our improved leverage to continue to feel the momentum we’ve enjoyed in our EBITDA and cash flow growth.

We reported net sales of $45.2 million for the fourth quarter, a 26.6% increase over prior year quarter. Breaking down our sales drivers for the fourth quarter compared to 2011’s fourth quarter, we have WinGuard sales, were $32.2 million versus $23.3 million, an increase of $8.9 million or 38.2%. Sales of non-impact products were $11.2 million versus $10.1 million, up $1.1 million or 10.6%. Offsetting these increases was primarily the sales of $1.4 million versus $1.7 million, a decrease of 300,000, architectural system sales of 500,000 in 2012 versus 600,000 in 2011.

Gross margin for the fourth quarter of 2012 was 35.4% versus gross margin of 25.1% in the fourth quarter of 2011. Our increasing gross margin was driven by our strong sales increase driving 360 basis points. Improved operating efficiencies of 350 basis points, reduced insurance and other spending increased margins by 180 basis points. Lower cost of materials increased margins by 110 basis points and improved product mix added another 30 basis points.

Our average cost of aluminum was approximately $0.95 per pound during the fourth quarter, compared to the fourth quarter of 2011’s weighted average of $1.03 per pound. During the fourth quarter of 2012, our cost of aluminum was comprised totally at spot purchases. As our aluminum hedges were not classified as effective for accounting purposes. We did pay $63,000, or approximately $0.02 per pound, which was reported in other income and expenses for the ineffective contract that settled during the fourth quarter.

As of the day, we have 24 aluminum forward contracts that settled at various times through the end of 2013 for 3.9 million pounds at an average price of $0.94 per pound. These contracts are also ineffective for accounting purposes and we’ll be reported in other income or expense in 2003 versus cost of goods sold.

Our selling, general and administrative expenses were $11.9 million, an increase of $300,000 from the fourth quarter of 2011. Highlights within SG&A include $1.3 million increase in employee-related compensation expense, decreases in advertising and selling materials of $400,000, a $200,000 reduction in transportation cost, a decrease of $200,000 in bad debt expense and approximately $200,000 reduction in other miscellaneous expenses.

Interest expense was $800,000 compared to $900,000 in the fourth quarter of 2011. This decrease primarily relates to lower debt and a reduced interest rate driven by our improved leverage. We had a small tax benefit during the quarter as we re-class as we released the portion of our deferred tax asset valuation allowance to offset our regular tax expense.

Our net operating loss carry-forwards are estimated to be approximately $18 million at the end of 2012. We had net income in the fourth quarter of $3.2 million or $0.06 per diluted share versus net loss of $6.3 million or $0.12 per diluted share in the fourth quarter of our prior year. This net loss in the fourth quarter of 2011, include $6 million in non-cash impairments charges as well as the $2.3 million tax benefit related to the charges. Adjusting for these charges, our net loss would have been $3.6 million in the fourth quarter of 2011 or $0.09 per diluted share.

EBITDA was $6.9 million for the fourth quarter of 2012 versus adjusted EBITDA of $600,000 for the fourth quarter of 2011. The increase in EBITDA of $6.3 million is driven by our increase volume, which added $4 million to our EBITDA; $1.6 million from improved operating efficiencies; $600,000 from reduced insurance expenses; $500,000 form reduced cost of materials; $400,000 from reduced advertising and selling materials; $200,000 from reduction in bad debt and $200,000 reduction in transportation cost. These process were somewhat offset by $1.3 million increase in employee compensation cost. A reconciliation of net income and EBITDA which I’ve just discussed has been included in our earnings release for your reference.

Turning to our balance sheet; as a December 29, 2012, our net working capital excluding cash and assets held for sale was $16 million, a decrease of $400,000 compared to the end of the third quarter of 2012.

DSOs decreased 32 days at the end of the fourth quarter, compared to 39 days at the end of the fourth quarter of 2011. Our free cash flow for the quarter was $6 million, mainly driven by our EBITDA, excluding non-cash stock compensation expense of $7.3 million, we used $300,000 for working capital. We spent another $600,000 in capital additions and paid cash for interest was $600,000.

During the quarter, we prepaid $3 million of our debt bringing our gross debt to $37.5 million as of the fourth quarter. On January 31, 2013, using proceeds from the sale of our Salisbury plant, we made an additional $7.5 million voluntary payment on our debt. This brings our gross debt balance to $30 million at this time.

In January, we continued our growth trend with sales finishing 22% above prior year. We expect this trend to continue during the quarter. Our increased cash flow and improved profitability have provided us with new flexibility that take share within our core market of Florida and grow internationally as well.

We are investing an additional $1 million in our brand during the first quarter 2013 in various activities our promotional related, marketing related such as TV and radio. Our operations are well positioned to produce product to meet the demand of incremental sales, which will allow us to increase profitability by leveraging our current cost basis.

Lastly, our stock repurchase program has reduced the outstanding shares providing a benefit to our shareholders. As of today, our current outstanding shares – our basic outstanding shares are $52.7 million.

With that, let me turn the call back over to Rod.

Rodney Hershberger

Thanks, Jeff. Some of the nation’s largest homebuilders are reporting increases in new home orders. Our core markets while still below normal have grown as well and we are well positioned to capitalize on market opportunities and gain share.

We expect our first quarter launch of our new Storefront Commercial System in entry doors, which features large pint of glass used for retail storefronts and modern residential designs to provide sales growth as we continue to focus on increasing our product offering and push into this adjacent market.

As we head into our busy season, we have added over 60 new team members since January 1, and have more positions to fill. Our company is looking to build on our recent successes and our leadership is implementing strategies, which are designed to grow PGT sales and market share.

Our employees are committed to deliver on our value proposition and to succeed as part of the PGT family. In conclusion, we are pleased with our recent performance, excited with our present opportunities, and believe the future will produce increased shareholder value.

With that, I’ll conclude and Jeff and I will be happy to answer your questions. Mini, if you could get the first question please.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Sam Darkatsh from Raymond James. Your line is open.

Sam Darkatsh – Raymond James

Good morning, Rod, Jeff, Brad, how are you?

Brad West

Hey, great, Sam, how are you?

Rodney Hershberger

Good morning.

Sam Darkatsh – Raymond James

Doing well. First question regarding the share repurchase, pretty heavy I guess in December and a little bit also in January, although I noticed that with the proceeds of the North Carolina plant you opted to pay debt down as opposed to use that for additional share repurchase. How should we read that? How valuation sensitive are you Jeff with respect to your share repurchase plans?

Jeffrey T. Jackson

Yeah, we look at that Sam as an opportunity just to basically reduce the number of shares versus tied to any certain valuation initially we did. But based off what we think the future holds, I do obviously have a number in mind. We don’t disclose that in terms of what we are willing to pay. But as opposed to using like the cash from a cell to do it versus operational cash, I think based off our current trends, we should be net cash flow positive by the end of the second quarter. So we’re basically using net cash flow and it’s been ample enough to fund our share repurchase program. So we had $7.5 million, we thought better way than to just retire more debt.

Sam Darkatsh – Raymond James

Okay. Second question the – probably the most encouraging thing I saw, a lot of the things are encouraging, but all in all being up well into the double-digits in the fourth quarter, that’s the first time I think we’ve seen a positive all in our market for a couple of years. What do you attribute it to now? And what do you think the prospects of that going forward are based on your visibility and leading the indicators you look at?

Unidentified Company Representative

You start and I’ll finish.

Rodney Hershberger

Yeah, I think this is my opinion, so it’s really not necessarily my opinion, but I think when you look at that market, then you see housing price was just starting to rise again and there is a little more confidence. Depending on what area, what NSA you are in you’ll see prices go up year-over-year, 7%, 8%, 9%, some areas maybe a little bit stronger than that, there starts being a little more confident, I think in homeowner, the value-added is one of the better pay back.

So the value-added by replacing windows and doors, particularly when you’re putting impact in you’re going to get that back out of the house, and if you did choose to live there for a few more years, because the value is not quite there to get reduced insurance cost. So I think it’s – I tie it more to consumer confidence maybe than anything else that they’re right now. I know Jeff may have a little bit of a different opinion as he talks to people.

Jeffrey T. Jackson

Yeah, I think I definitely agree what Rod said. I would add also the fact that the job market appears to be stabilizing and improving in general. Obviously, when new construction coming back into the market like you pointed out in your (inaudible) 57% increase that will create jobs.

Typically, there is a one to two year lag in job creation with home starts. So as those home starts continue into their second year, I do expect job markets to get better and obviously that will bring the confidence and also the fact that the rental market seems to continue to be on fire, ultimately that’s going to flip and obviously driving people into new homes even as we speak just split the supply demand there. So again, all positive things that will ultimately land to the R&R market successful.

Sam Darkatsh – Raymond James

Last question and I’ll defer to others, you noted in your remarks that you went after some promotional opportunities in the fourth quarter and I think you also mentioned that in the first quarter you’re looking to spend a little bit more money in selling costs. Obviously it was effective, still effective today. Do you think, however, if this activity continues more widespread that it might adversely impact pricing?

Rodney Hershberger

No, I think pricing of the product you sell is steady. We’ve actually heard of competitors taking price increases. We haven’t done that yet obviously, but I think pricing is not a big of an issue now. What’s becoming more of an issue is meeting demand and capacity and obviously with our infrastructure that plays right into our sweet spot.

So what we do with the promotionals expense to grab the volume and they have been successful and it will be as I mentioned at least $1 million more incremental spend during the first quarter. But we really believe that’s going to lay a good foundation for us to leverage in the second quarter and third quarter in terms of sales growth. But no I don’t think it’s going to affect pricing long-term. I think pricing eventually given all the positive indicators. We’re going to have some pricing power if anything.

Sam Darkatsh – Raymond James

Yeah, to that point with respect to the leverage on SG&A; so after the first quarter what were you spending the extra million dollars, should we expect the typical 50% to 65% or so fixed cost to flow through on the SG&A line?

Rodney Hershberger

Yes, I mean apple-to-apples if we did the same thing, and in the first quarters we did in the second would be a million bucks less in EBITDA, again because of the extra spending. So the margins of the product, the contribution, the make up, the mix is all still tracking in the first quarter, actually as expected and maybe a little better, so.

Sam Darkatsh – Raymond James

So you’re going to spend an extra million or two or million dollars in the second quarter than beyond on a year-on-year basis also?

Jeffrey T. Jackson

No. We will spend additional in the second quarter, but it won’t meet $1 million. The $1 million is kind of the initial seed if you will.

Sam Darkatsh – Raymond James

Okay.

Jeffrey T. Jackson

Yes.

Sam Darkatsh – Raymond James

Okay, all right. Thank you so much.

Jeffrey T. Jackson

You bet.

Operator

Thank you. (Operator Instructions) We have a question from Gunnar Hansen of Sidoti. Your line is open.

Gunnar Hansen – Sidoti & Company, LLC

Hey, guys. I think you guys already mentioned, could you go over just the growth rate I guess so far in the month of January and I guess kind of give us a little bit more color in terms of the residential breakdown in terms of what’s kind of driving that growth?

Jeffrey T. Jackson

Yeah, I mentioned so far till January, we’ve grown at 2.2% over prior year’s January, and also expect that kind of percentage to continue as we move through the quarter. The breakdown, all in all, it’s still starting to get better for us, but it’s still new construction driven. We’re actually hitting some larger projects as well. In the past, we either had one or the other. And now, it seems like we got a good steady growth rate going and we’re getting some large projects both international and South East Miami area. So that’s kind of – I don’t have the breakout between new construction all in all handy, but new construction is going to still be a good driver for us in the first quarter.

Rodney Hershberger

A lot of what we saw in January was driven by WinGuard. So we saw a really nice bump from our WinGuard sales, the rest of them were relatively flat and mainly down just ahead, but we saw a lot of demand for WinGuard. We think if those WinGuard sales go up particularly with some of the larger homebuilders, they will drag along some of the other sales too for their projects, so we’re pretty positive looking at.

Jeffrey T. Jackson

Yeah to that point out of the increase year-over-year 76% was impact related, so.

Gunnar Hansen – Sidoti & Company, LLC

Great, great. And then I guess some of the advertising campaigns you guys are looking to do it. What sort of mediums have you guys can have the most success in the past and where you guys are looking to kind of distribute some of that incremental spend?

Rodney Hershberger

We’re actually doing it right now as part of the spend is happening in the first quarter. And we look at the MSAs and we look at households that we can touch and we realize that. Our name is pretty well known particularly in this market. But a lot of it in the first quarter is radio and television advertising in the markets that we want to hit, hitting right demographics, and it’s been pretty successful for us. We typically would do that later in the year, closer to – maybe close to Hurricane season when awareness is high. We wanted to do it this year early in the year because we have more people here.

Gunnar Hansen – Sidoti & Company, LLC

Great. And I guess just with some of those incremental people, what’s the workforce and sales force at this point? What’s your level at?

Rodney Hershberger

That has 1,100 in total.

Gunnar Hansen – Sidoti & Company, LLC

Great, great. All right that was all. Thanks guys.

Rodney Hershberger

Thanks.

Operator

Our next question comes from (inaudible). Your line is open.

Unidentified Analyst

Hi, good morning.

Rodney Hershberger

Good morning.

Unidentified Analyst

Couple of questions, one, I don’t know if you said it, but the mix of U.S. versus international business, what was the breakdown?

Rodney Hershberger

Florida was fondly and 88% of our sales. International was about 4% and then the rest is U.S. that outside Florida.

Unidentified Analyst

Got it. To the margins on the international are they comparable to the Florida market?

Rodney Hershberger

Yeah, actually international sales maybe a little higher, because typical we don’t spend a lot of time down there servicing warranty of net-net of the margins tend to be a little bit more robust internationally.

Unidentified Analyst

Then the next I was going to ask in terms of lead times, what’s the lead time today for a distributor or their contractual orders windows, how long does it take in to get and are those lead times increasing or shortening?

Rodney Hershberger

No, our lead times really haven’t changed in about four or five years. We give our customers a standard lead time and they bear a day or two here or there depending on how busy we are. But we kind of set our lead times up, so when our customers are out selling products or projects, they can quote it to their customer and know that they’re going to get their product on time.

We talk a lot about the value proposition and to us that’s one of the most important things we do is you order the product, you get, we’re 99.7%, little north of 99.7% on time complete delivery, so you know when you’re going to get it and you know that a lot of times. So that’s pretty important to us.

Unidentified Analyst

Sure.

Jeffrey T. Jackson

Yeah, in terms of [light] just to give you a number, our lead times range from probably five days kind of standard to 10 days.

Rodney Hershberger

Yeah, our most complicated product, it’s close to three weeks.

Unidentified Analyst

Yeah.

Jeffrey T. Jackson

On our simplest products, it’s five days – four or five days.

Unidentified Analyst

Okay.

Jeffrey T. Jackson

And everything we do is custom, we don’t build the stock.

Unidentified Analyst

Okay.

Rodney Hershberger

With that said, we can turn pretty much most any product in three days if we have to.

Unidentified Analyst

Okay. And what kind of utilization is the facility running at I was also wondering how many shifts you’re running?

Rodney Hershberger

Well, right now we’re running one full production shift and spotted second shift for various product lines. In the glass side, we’re running pretty much three shifts, not four shifts, but too solid shifts than a skeleton third shift.

In terms of capacity, we’re running five days a week. So there is always a weekend you can calculate into that as well as additional shifts. So it’s really a tough thing to say and it also depends on the mix. If it stays at the current mix, we’re probably maybe 50%.

Jeffrey T. Jackson

And let’s say, I mean the rule us on, the mix is going to change things dramatically rule us on, we’re around a shift and a half, we can go three shifts and at weekends, if we need to. So I would say, rule us on 50% and it might even be soft with that a little bit.

Unidentified Analyst

So you think you could run sales, I mean I think back in ‘06 timeframe, you guys get it to like $60 million run rate on the quarterly basis. So do you think you could run that kind of sales level with the capacity we have in place?

Jeffrey T. Jackson

Yes. Yeah, we ran over $100 million in a quarter in 2006.

Rodney Hershberger

And we can run that obviously, we’d add shifts, and with that kind of volume, we’d add a little bit of an infrastructure to forward as well in terms of have our people along our shifts. But yes, this plan can produce depending on the mix, current mix that can produce $300 million out of the thing.

Unidentified Analyst

And then going forward, other than aluminum, I mean, is there any reason I think given the demand that gross margin should change much rather than improving the next two quarters.

Rodney Hershberger

Again, I want to kind of comment too much forward, but I don’t see anything is going to impact us negatively other than volume.

Unidentified Analyst

Okay. All right, that’s all I have. Thank you very much.

Rodney Hershberger

Great, thanks a lot. Thanks.

Operator

Thank you. I’m showing no further questions in the queue at this time. I’ll hand the call back to Jeff for closing remarks.

Jeffrey T. Jackson

Okay. Well, thank you for joining us today, and we look forward to speaking to you again next quarter. If you have any further questions, please give me a call and have a great day. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes the conference for day. You may all disconnect and have a wonderful day.

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