Spherion Corporation Q1 2009 Earnings Call Transcript

May. 4.09 | About: SFN Group, (SFN)

Spherion Corporation (NYSE:SFN)

Q1 2009 Earnings Call

April 30, 2009 09:00 am ET

Executives

Roy Krause - President & CEO

Mark Smith - CFO

Analysts

Jeff Silber - BMO Capital Markets

Mark Marcon - R.W. Baird

Ty Govatos - CL King

Operator

Good morning and welcome to the Spherion’s first quarter earnings conference call. At this time all participants are in a listen-only mode. Later after the presentation, we will conduct a question-and-answer session. (Operator Instructions). Today’s conference is being recorded. If you have any objections to this, you may disconnect at this time.

Now, I will turn the meeting over to Mr. Roy Krause, President and Chief Executive Officer. Sir, you may begin.

Roy Krause

Thank you. Good morning, everyone and welcome to Spherion’s first quarter conference call. Before we begin our prepared remarks, Mark Smith, our CFO will read the Safe Harbor Statement.

Mark Smith

Thanks, Roy. This call may contain statements that are forward-looking in nature and accordingly are subject to risks and uncertainties. Factors that could cause future results to differ from current expectation include risks associated with the company’s ability to implement its business strategy, acquisitions, competition, changing market and economic conditions, currency fluctuations and additional factors discussed in this call and in our filings with the SEC.

The company’s actual results may differ materially from any projections we discuss on this call. Additionally, we may make statements referencing certain non-GAAP financial measures. Management believes the non-GAAP measures are useful in evaluating operations, but should not be considered an isolation or as a substitute for financial measures or performance as determined by GAAP.

A reconciliation of non-GAAP measures to our GAAP financial result has been provided in our press release, which can be found in the Investor Section of our website. One additional comments before Roy begin his remarks.

In the first quarter, we reclassified two of our businesses, Todays Office Professionals and Recruitment Process Outsourcing from the Staffing Services segment to Internal Organizational business strategy changes.

We have posted prior year segment information reflecting these changes also in the Investor Relation section of our website.

And all comparison mentioned by us in this call reflect the changes that I just mentioned.

Roy Krause

Thanks, Mark. Certainly decline in economic activity continued throughout the first quarter with unprecedented job losses in both the number and rate of decline.

Within that very difficult context, we continue carefully adjusting our cost structure while maintaining a focus on longer-term business objectives.

I believe there are teams executed appropriately during the quarter and we will continue to adjust our process and infrastructure to maintain positive cash flow.

The BLS permanent and temp employment numbers again declined at an accelerating pace throughout the quarter.

But as we exited the quarter, we saw some stabilizing in our closely watched revenue per day trends. For example, in the month of March, we averaged approximately $6.5 million of revenue per billable day.

And in the first three weeks of April, our average per billable day was just slightly higher. Although too early to call this a definitive trend, we are encouraged that the market for temporary staffing maybe somewhat firming.

For the first quarter, total company revenues declined 16% sequentially, about double the historical pull back we have usually seen from the fourth quarter to the first quarter reflecting the significant economic slowdown at the end of 2008 and into 2009.

Our team began additional cost adjustments in late January and we will fully realize these savings in the second quarter. EBITDA in the quarter was slightly positive, but below our targeted level. However, I believe that our cost structure is reasonably aligned with the current levels of business and if current revenue per day trends are maintained, we have a good shot at achieving a 2% EBITDA level for the total of the remaining three quarters in 2009.

We will continue to optimize cash flow, paying down debt and preserve adequate and flexible liquidity to maximize our options in this uncertain environment. Our first quarter loss from continuing operations was $0.12 per share compared with earnings of $0.04 last year.

This loss included a restructuring charge of $0.04. Year-over-year revenue were down 26% and we were down across all service lines and skills reflecting a broad decline in the overall economy.

On a positive note, I was encouraged that our F&A and IT businesses held up relatively well on a sequential basis compared to other recent public reporting. As you might imagine, we are watching our sequential trends very closely and have some optimism regarding these recent trends.

We are still seeing opportunities for new business as our clients consolidate their spend and look for better value and service. But pricing pressure is extreme and demands for rebates or contract renegotiations are common place.

Our Staffing Service segment in particular has been especially impacted by these trends as pay bill spreads contracted both sequentially and year-over-year and statutory increases are very, very difficult to pass through and are increasing at a state level basis.

We are combating this trend through consolidation and streamlining of our large account delivery and focusing more sales resources in regional and local markets. Despite this poor environment, we are making investments in market segments that we expect to see short and longer-term growth.

Currently, the mortgage refinance market is expanding and we are placing increasing numbers of professionals and clerical individuals in that area. Additionally, our initiatives targeting the TARP funding are developing in general accounting, portfolio management, loan work-outs and the technology and deployment of digital medical records.

Overall, our business strategy will continue to emphasize professional services, account diversification and mid-sized deals in commercial staffing. Professional service revenues are 43% of total company revenues and generate 58% of gross profit margins despite perm placement being down 63%.

Today, our balance sheet and liquidity remains strong. Free cash flow has been reasonable. Clients past due over 60 days are at a historical low and our capital expenditures are at minimum levels.

With continued efforts in these areas, we should pay down all our debt before the current revolving credit facility renews in 2010.

Before I turn the call over to Mark to review in more detail our financial results for the first quarter, I want to thank our entire team for their solid performance in these very difficult times.

Sacrifices have been made at all levels of our business with an understanding that these sacrifices will make us stronger as the economy improves. Mark?

Mark Smith

Thanks Roy. I’m going to go through our segment results and then talk a little bit about balance sheet cash flow and some April trends.

So, let me start with our Professional segment where revenues were $182 million or 42.7% of total company revenues. Revenues were down year-over-year and compared with the fourth quarter across all skills areas.

Sequentially, our F&A, finance and accounting temp revenues were flat, that's again on a sequential basis. IT temp revenues were down just a little bit less than 10% and our total temp revenues excluding RPO which is now classified in Professional were down sequentially about 10%. Of course, perm is being impacted due to the economic environment and was down 62.7% year-over-year.

On an intra-quarter basis, professional revenues were down year-over-year at 30.1% in January, 27.9% in February and 28.6% in March.

Moving onto margins, gross profit margins were 26.6% in the first quarter, down from 27.1 in the fourth quarter of '08. About 30 basis points of the 50 basis points sequential decline in gross profit margin was due to the reduction in the permanent revenue mix.

Perm was 2.8% of revenues this quarter compared with 3.3% of revenues last quarter. The remaining decline in gross profit margin was due to higher state unemployment taxes and other burdens partially offset by higher pay bill spreads and higher RPO margins.

SG&A in the segment declined by 26% year-over-year and 6.5% sequentially. Segment operating profit margin was 1.5 this quarter, down from 5.4 last year in the first and 3.4 in the fourth last year.

Move on now to Staffing Services, where revenues were $244 million or 57.3% of total revenue, down 24.3% year-over-year and 19% sequentially.

On a monthly basis within the quarter, year-over-year revenue comparisons were as follows, down year-over-year 24.4 in January, 23.2 in February and 25.1 in March.

Gross profit margins in Staffing Services were 14.2% compared with 16.3% last quarter, fourth quarter of '08. The sequential contraction of 210 basis points is primarily attributable again to higher state unemployment cost which accounted for about a 160 basis points of the 210 combined with lower pay bill spreads and slightly less perm.

We were negatively impacted on several fronts related to pay bill spreads and staffing services. For example, small account revenue mix was down about 250 basis points from being 45% of revenue in Q4. Industrial revenue mix was down about 500 basis points from 38% of staffing services revenue in Q4.

And then we just saw general rate contraction in most customer segments due to the economic environment. SG&A and Staffing Services declined 28.1% year-over-year and 19.8% sequentially. And segment margin was negative 1.7 this quarter compared with negative 0.4 last year and a positive 0.2 in the fourth quarter of '08. Because of SUTA resets in the first quarter, it is always the most seasonally challenged quarter from a profitability point of view.

Moving on, our unallocated corporate costs were 3.2 in the first and we should see about 16 million of unallocated corporate for all of 2009. Amortization was 1.6 and should be about the same each quarter through the year. Interest expense was 800,000 and I would expect about the same in the second quarter. A couple of comments about our tax rate which was 39.5% this quarter.

Looking forward, it will be difficult to predict the tax rate for the second quarter due to the volatility of the impact of non-deductible expenses on earnings at the levels that we are at. But as you build your models, you can assume 39% statutory tax rate plus an additional $500,000 quarterly impact from non-deductible expenses and fixed state taxes.

We did record a charge related to our cost reduction actions in the first quarter and the amount of $3.8 million. As a result of these actions and the actions taken in 2008, we expect that at the current level of business volume, we should have total 2009 SG&A expenses that are $105 million lower than the $448.6 million of SG&A that we reported for all of 2008. This is an approximate 25% reduction in SG&A year-over-year.

At this level of projected expenses, we would expect that second quarter SG&A would be about $2 million less than the first quarter level. And then of course, we will continue to adjust operating expenses based upon customer demand, if necessary and may incur furthering restructuring charges.

On the restructuring charges, that we took in the first and fourth, let me give you a little bit of cash flow information. So, we took $3.8 million charge in the first and $9.5 million in the fourth for a total of $13.3 million of charges.

Of the $13.3 million, $800,000 was non-cash bringing the cash charge to $12.5 million and then by quarter we spend $800,000 of the $12.5 million in the fourth quarter of '08.

In the first quarter of '09, we spent $4.3 million. In the second quarter we expect $4.5 million, third and fourth we will have roughly $700,000 to $800,000 per quarter and the remaining $1.5 million will be expensed kind of ratably in 2010 and 2011.

Move on to the balance sheet and cash flow now. Our ending net debt was $24 million compared with $31.7 million at the start of the year. Cash flow from operation was $11.9 million and of course reflected the usage of $4.3 million of restructuring cost.

Unused availability on our credit line was $55.5 million at the end of the quarter and we continue to be focused on paying down debt as we move through the next several months.

DSO at the end of quarter was 53 days and up four days from the end of the year. Overall as Roy alluded to overall credit quality remained strong in the portfolio and we actually saw our percentage of AR over 60 days old, hit a quarterly low based upon at least the last four or five years of history.

We did see however pressure on payments terms and customers generally slowing within the more current aging categories. And of course in this environment, we continue to keep a very close eye on credit quality. CapEx was $800,000 and should be about the same next quarter.

And then finally let me provide some guidance related to our second quarter trends. Revenues per billable day in the first three weeks of April which includes the Easter Holiday are down from the first quarter total average by 1% with Professional being up 2 and staffing being down about 3.

But as Roy previously mentioned temp staffing revenue trends in April are up slightly from the March average revenue per day of $6.5 million and we are assuming 63.5 billing days in the second quarter.

We should see sequential improvement in gross margins in the second quarter by about 100 basis points, just about the same improvement we saw last year and this is due to the capping of the state unemployment taxes.

SG&A as I said before should be down about $2 million due to cost actions we have been taking and then finally I would expect adjusted second quarter EBITDA to move closer to our 2% target as a result of the reductions in SUTA and SG&A.

With that, I will turn it back to Roy.

Roy Krause

Thank you, Mark. While the results of our last several weeks have been more encouraging. The overall employment market remains weak and most clients have not begun rehiring. Our industry faces difficult market conditions with a very limited forward visibility.

But we remain committed to an operating structure which delivers positive operating cash flows. We know that maintaining our financial flexibility will allow us to capitalize on customer and industry opportunities as we progress through this economic downturn. Our teams performed well and we expect to take advantage of future improving market conditions as a more balanced and efficient operating company. With that, I would like to open the call for your questions.

Operator

Okay and you are ready for questions.

Roy Krause

Yes.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Jeff Silber of BMO Capital Markets. Please go ahead.

Jeff Silber - BMO Capital Markets

Thanks so much. Roy, I think in your prepared remarks, you were talking a little bit about some of the pricing pressure you’re seeing and it seems to be driven mostly from customers.

Can you just talk about the competitive environment out there, what are your competitors doing from a pricing perspective.?

Roy Krause

Well, it is really competitive, okay. I haven’t been as happy with our performance over the last two quarters, especially in our mid-market and retail redeployment pricing, but we’ve done a good job on our retail pricing.

The new accounts coming in are at a credible margin, just enough of them to offset some of the accounts that are going out the door on a decreased volume basis. So I think we can do a better job there, but on national accounts, it's clearly very challenging.

I will give you just a quick example of one that just happened the other day. We were in competition for a decent sized piece of business, a national competitor has it. We both lost, we came out 36 lowest price on the list and the client excepted the top eleven.

We believe they are all local regionals that are pricing at just extremely low levels that just aren't going to allow the quality of delivery that this client has been used to in the past.

So there is two nationals that got knocked out by locals and that is pretty common. We are seeing clients trade-off what I would say quality for price. Going to people who in all candor probably can't deliver to the same level as some of the nationals, but clients are willing to do it.

So, I don't think that's going to stop in the short run, but it's challenging and so we have walked from the business. We probably will walk for more business before this is over.

Jeff Silber - BMO Capital Markets

And thank you for that anecdotal comment. It's actually very helpful. I mean did you see anything like that in the last cycle as or this cycle just much worse at least in terms that aspect.

Roy Krause

I would say, it's much worse. There’s always pricing pressure in a down market. There’s always pressure period. Okay, everybody’s trying to do a better deal. I think the procurement area has much more influence in this recession than it's ever seen before, than we’ve ever seen it before.

We’ve seen people take down pay rates and want margin contraction. So, pay rates are being moved down 5% and 10% to 20% at one instance so I know of where people were taking $10 rates down to $8 rates.

So, pretty substantial decreases and asking for margin mark up considerations. So I think it's procurement driven. I mean I know it's procurement driven that’s where we’re seeing it. And I think all our competitors are seeing it.

Jeff Silber - BMO Capital Markets

Now, with that being said, I think Mark in your prepared remarks if I understood it correctly that you saw in the Professional services area, a higher pay bill spread. Are you not seeing those same kind of pressures in that division?

Mark Smith

Well in professional, we don’t do nearly as much large account businesses. It’s much more of a retail mid-market business. There is some specially in technology and clearly there's re-pricing pressure and we walk from a large, very large technology opportunity and in fact, I think just about all the nationals did.

Just because, it was priced at rate that we just didn’t think was appropriate. So I think in technology, in big accounts you’re seeing it. Again in accounting finance, we just don’t have that much of a large account business.

So, I think we're looking at every placement, every redeployment. We will watch our pricing very, very carefully and we want to get everything we can and trying to get it out of the pay rates if possible, if a client needs to have a reduction.

And that’s expected to an extent by the candidate base because there's certainly more candidates out there than there was, but it hurts us on an absolute dollar gross profit generated.

Jeff Silber - BMO Capital Markets

Sure and one quick follow-up question. I know you guys aren't giving official guidance for the second quarter. But more based on what you were seeing, if we can just get a little color by the segment at least in terms of margin. Should we see same kind of commensurate sequential improvement in each division?

Mark Smith

Yes, I think a couple of comments on that; I would expect about the same. I would expect perm which is primarily a professional area. So to be about the same percentage of revenue in the first or in the second compared to the first. And then from a cost point of view looking at total segment margins, the improvement that we are looking for in the second of $2 million I would say it would be about ratably split between the two segments.

Jeff Silber - BMO Capital Markets

Okay, great. I will let somebody else jump up.

Roy Krause

Thanks, Jeff.

Operator

Okay. Thank you. And the next question comes from the line of Mark Marcon of R W Baird. Please go ahead.

Mark Marcon - R.W. Baird

Good morning. I was just wondering if you could give a little more color in terms of the areas where you are reducing your SG&A expenses and how do you think that’s going to impact your service delivery and the competitive position put you really to deal with some of those logical smaller clients.

Roy Krause

Sure. Well, obviously the majority of our SG&A cost are people cost and so that’s where the biggest area and we decreased the amount of people that we have in a branch or we haven’t decreased significantly our footprint.

We have consolidated a few branches, but not a significant reduction I don’t think. We put back people. We change the way we do business on some of these very low margin accounts to a lot more centralized recruiting where we get a little more efficiency and we can deal with the volume shifts.

So a lot of the recruiting is being down on a centralized locations, which we think we get more efficiency on allowing the branches to hopefully spend more time developing regional or local context, retail type business, that’s an evolving process within our company.

But it’s the only way we can deliver. I believe we can deliver to these lower margin account. So if we can’t deliver out of the central unit and it gets down to a certain pricing point, then we don’t need to be in that account.

So, that’s kind of a philosophy on the commercial side. On the professional side, as Mark said, again we don’t do a lot of large account business on accounting finance.

We look at all those individual pricings on each assignment as we go through, so we pulled back in some of the areas because the clients needed us to help out, but we’re trying to maintain our margins and trying to push up into some other areas. Mark, to you.

Mark Smith

Yes and Mark, I guess, the only other thing I would add, it’s a precise exercise. We have really detailed productivity measures by most of the various areas of the company. So, you make the adjustments as you see productivity whether it be on an account management basis or recruiting basis or client service basis.

You make the adjustments in the areas where you start to see the productivity declining, so that you bring the productivity levels back up to, an appropriate level based upon the business volume that is coming through to the business.

It's hard work because you need to be careful about making the changes in the right places because our quality measurement process and philosophy is -- we are still upholding it and we are still showing it to our customers, and it's still an important part of what we do which we think will help us win longer term.

Roy Krause

Clients are generally understandable that you have to make changes in the delivery structure. You have to prove it to them that you can still deliver but, they understand that to get savings at certain levels, you've got to change the way you’re doing business.

And that’s why I am positive about coming out of this. I think we learned some good lessons. I think we changed the way we do business in certain areas. And as the business improves, as the market improves I think we’ll participate in the recovery at a better level than we did last time.

So, I think we’re structured better and I think I’m positioned better to come out of this.

Mark Marcon - R.W. Baird

And then on the staffing services what would the goal be, however you would like to express it in terms of your SG&A as either a percentage of revenue or gross profit?

As your thinking, ideally given this environment and I don’t know if your assumption is that this is going to be V-shaped recovery or this is going to be a bit of a longer slog, but based on your macro scenario how are you thinking about that ?

Roy Krause

Well, we don’t have a target for SG&A and the reason we don’t, is that it really depends on how you deliver to the customers. I mean clearly there is more SG&A out of the retail business, but there's more to gross profit. So, we are really looking to can we deliver return to the bottom line and work on our product mix and change.

We have done a good job. The last report I saw that our large accounts are now under $10 million in average balance across the whole accounts. So, we continue to work on account diversification. Some of it -- the pull back has happened just because of the economics, but on the other hand I feel a lot less at risk on a $10 million account than I did when I used to have $70 million, $80 million, $90 million and a $100 million accounts.

So, not like I want to lose any account or any customer because they're marginally contributing obviously to a cash flow as long as they are positive cash flow.

But we can now. At one time I don’t think we could. So, I think we are much better positioned in commercial staffing. I think we are working on segmentation in certain markets where certain branches are dedicated to retail and mid-market accounts that’s working better.

It's tough and we are not going to see any magic change, I don’t think in the short run. So, the goal for commercial staffing is to keep it cash flow positive, keep our cost adjusted to wherever our gross profit goes to and right now we are looking for gross profit dollars and we will continue and we will probably end up with more large accounts like Mark said than we would as a percent of our mix have targeted, okay?

In the past we wanted to get the small accounts way over 50% or up to 60%, that hasn’t been possible because the large accounts have held on better than the smaller accounts.

Mark Marcon - R.W. Baird

Can you talk a little about that just in terms of like what has happened to the small accounts or they’re just pulling back in terms of their usage?

Roy Krause

Well, I think, yes. I think it is absolute usage. When we only had 10 there, they have none. Okay? Whereas on some of our larger accounts, temporary help and flexible staffing is a way of doing business.

Even, they were on 80% perm, 20% temps and call centers or whatever as a matter of doing business, they may use less in the whole center because they closed the center or whatever and so we go down, but flexible staffing is a ingrained part of their business plan.

I don’t know that that’s always true in the small retail businesses. It's more replacement hires and expansion issues and we’re just not seeing it. Mark to you.

Mark Smith

Yes and Mark, just to give you some statistics on it and you know that our objective has been to move it, move the small mid-sized stuff up and at this time last year, we were about 50-50 split between large and small, remember our large is anything above 5 million in revenue. So we’re about 50-50.

That mix has slipped 500 basis point. So we’re at 55-45 now. The growth profile changed as we moved through this in the last twelve months with these accounts and like what I said, the larger stuff has just held on a little bit better than the small to mid-size.

Mark Marcon - R.W. Baird

Got it and is there a sense that it’s harder to approach, you know in terms of acquiring new small account, is that become more difficult?

Roy Krause

Well, yes I think the usage is not as big. The whole pie is shrinking, the whole market has shrunk, but we know that the vast majority of $100 billion of staffing in this country is in smaller and mid-sized companies that do it, okay.

Again when we look at all the name brand nationals, we are still only 20% of this huge market. So, we believe there's business out there.

It's harder to get it away from another local. It's harder to show your quality and your value point being available for expansion, been able to go to these other cities et cetera, et cetera when it's contracting.

So I think in the face of extreme price pressure by a local who may have cash flow problems, may have financing issues, trying to hang on by his fingers. It's difficult to show your value proposition.

Mark Marcon - R.W. Baird

Are you seeing signs of some of these local players falling by the wayside?

Roy Krause

We have heard anecdotal issues. I don't know of anything specific. I mean I just look at the pricing and I think it's irrational and I think that some of these people are going to bid on things that they probably shouldn't be bidding on I mean from the size and scale point of view.

Mark Marcon - R.W. Baird

Okay, great. Thanks for the color.

Roy Krause

Sure.

Mark Smith

Thanks Mark.

Operator

Okay. Thank you. (Operator Instructions). And we have question from the line of Ty Govatos of CL King. Please go ahead.

Ty Govatos - CL King

Besides you guys on the phone, is anybody else at corporate headquarters anymore?

You have talked about your changing core structure. Coming out of this, can you elaborate a little bit more on terms of delivery or have you layered the company differently in terms of what it looks like?

Roy Krause

Good question, yes we have layered the company differently. As we talked about the reduction in SG&A as a big number and it has come out of the backs of the upper end of the account of the other management issues.

We contracted the number of geographic units we have. We have been taken layers of management, as I said there has been sacrifices across the whole company but I think it's appropriate.

It’s a deliver model that we need to have relative to the kind of business and growth that this industry may have over the next couple of years. I don’t know if it will be a V-shaped recovery or not, but we are not going to staff for a V-shaped recovery.

And we will add resources as we see the revenue come in. We will continue to invest in businesses like the TARP recovery and stuff that we know we feel very strongly as it is going to be a good potential for us.

But we have changed the way we do business both in headquarters and in the field, but again we have in whole sale chopped up our branch network or exited major markets or anything like that.

So, again a lot of sacrifices but I think we got ourselves appropriately balanced to this current level of activity and as long as this is where we can stay for a while I think we will be in a pretty good shape.

Ty Govatos - CL King

Okay sounds good. Can you also elaborate on how successful the TARP has been so far?

Roy Krause

I will be honest, it’s been slow, okay. We have had a lot of meetings and a lot of discussions with people. Well we haven’t seen any buying yet. We haven’t seen the federal government buying very many loans or activity levels.

There are people ramping up. There are companies that are beginning to do it, but we are out there in the market and I think people know we’re in the market and we’re talking to the right people.

So I’m encouraged by it. The best business or the hottest business right now is the mortgage business. We went from loan origination to loan collection ends now, okay.

Mark Smith

And collection.

Roy Krause

And collection.

Operator

Okay, thank you and we have no further questions, so that concludes our conference call today. This conference will be made available for replay after 11 o’clock am today until May 30 at midnight. You may access AT&T executive playback service at anytime by dialing 1800-475-6701, entering the access code 995619. International participants dial 1320-365-3844 and again that access code is 995619.

Thank you for your participation in today’s conference call and have a great day.

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