Takeda Pharmaceutical (OTCPK:TKPHF) F4Q2013 Earnings Call May 9, 2013 8:30 AM ET
Christopher Hohman - SVP of Corporate Communications
Yasuchika Hasegawa - President and CEO
Tadataka Yamada - CMO and CSO
Frank Morich - CCO
Masato Iwasaki - SVP of the Pharmaceutical Marketing Division,
Iwaaki Taniguchi - SVP of the Corporate Finance and Controlling Department
Anna Protopapas - President of Millennium
Please note that this telephone conference contains certain forward looking statements and other projected results which involve known and unknown risks, delays, uncertainties and other factors not under the Company's control, which may cause actual results, performance, or achievements of the Company to be materially different from the results, performance, or other expectations implied by these projections. Such factors include economic and market conditions, political events and investor sentiments, liquidity of secondary markets, level and volatility of interest rates, currency exchange rates, security valuations, competitive conditions and size, number, and timing of transactions.
During the presentation from the Company, all the telephone lines are placed for listening mode only and the question and answer session will be held after the presentation. This conference call is being broadcasted live on the internet but only for listening mode.
With that we would like to begin the conference. Mr. Christopher Hohman, please go ahead.
Thank you very much and thanks everyone for joining us today for this conference call for overseas investors to cover Takeda’s financial results for the fiscal year 2012 and our mid-range growth strategy. My name is Chris Hohman as introduced; I am Senior Vice President of Corporate Communications. I would like to quickly introduce the panel here today with me. First of all Mr. Yasuchika Hasegawa, President and CEO, Dr. Tadataka Yamada, Chief Medical and Scientific Officer, Dr. Frank Morich, Chief Commercial Officer, Mr. Masato Iwasaki, Senior Vice President of the Pharmaceutical Marketing Division, Mr. Iwaaki Taniguchi, Senior Vice President of the Corporate Finance and Controlling Department and finally joining us from Cambridge Massachusetts, Ms. Anna Protopapas President of Millennium, the Takeda Oncology Company.
We will first have opening remarks from Mr. Hasegawa followed by Mr. Taniguchi and Dr. Yamada and then we will go into the QA session.
I hope that you are aware of financial information that was announced by Takeda today. If you go to Takeda.com, the investor section has all of the presentations and press releases that we issued today. So, if possible please access these materials. So first of all, as I mentioned, I’d like to get started with opening remarks from President Hasegawa.
Hi this is Yasu Hasegawa President and CEO of Takeda Pharmaceuticals, thank you for joining our annual earnings report conference call. Assuming you have reviewed our announcement materials, I’d like to just make two comments one is related to the operating margin gap in the year 2012 between our regional announcements of ¥1600 versus year end closure of ¥1,225. There are three key factors contributing to this gap, number one is a long-term investment based on the Phantom Stock option that we offered to the overseas employee, our senior employees, management employees.
Ever since second term, our administration started with December 26 last year, all the situation macroeconomic policies and Japan Central bank policies and stock market have changed dramatically. Due to this for example, Takeda stock price increased significantly during the course of first quarter from beginning ¥3,855 past year to ¥5,030 past year, 30% increase in one quarter. That contributed more than ¥100 incremental PL hit due to the Phantom Stock option they’ll be offered to the overseas senior management employees.
Secondly, accelerated generic penetration for the end of the fiscal year particularly happened in the first quarter due to the Abe Administration's encouragement for the cost reduction in medical expenses to promote generic use more so than before.
And thirdly, corporate side, a misjudgment on the last quarter sales and the spending based on the past historical pattern we have accomplished. We made a judgment on the corporate side, there might be upside in sales and there might be a downside in spending, but that judgment was incorrect and in the end modest sales was as projected and the spending was as projected. So those three factors contributed the gap between the original announcement process year-end closures. So we have learned our lessons and we had in-depth discussion among senior management leader team, not to repeat, never repeat the same mistake in the future again.
And because of the increasingly uncertain economic and the market situation, we decided not to disclose three-year MRP in detail instead we decided to disclose current year detail plan plus indicative numbers such as top line growth and the bottom line operating margin increase in the manner of complete and compound annual gross rate for next five years.
In that respect, we announced today for next five year compound growth rate of top line sales will be a mid-single digit and also the bottom line operating margin will be 20 plus percent in compound annual growth rate, and on top of that based on these trajectory, we project, we decided to payout the dividend maintained 100 ADM per share for next three years namely 2013, 2014, and 2015.
And with regard to 2013 operative margin, when we announced midyear a midrange plan last year about same time, last year, we mentioned that this year means 2013 fiscal year operating margin will be ¥2250 but we ended up announcing today this year’s bottom line operating margin will be ¥1400, this is primarily due to the sales decline in different various part of world starting from Japan. We have compared to the last year plan more than ¥200 down sided primarily due to the little bit too aggressive sales projection on diabetology product like Nesina and several others due to the quicker and original anticipated generic penetration as I mentioned.
With regard to the United States due to the voluntary withdrawal of the OMONTYS caused and other product shortfalls so last year’s plan caused more than ¥500 shortage and the EU closely 200 and other as a region 280, so combined we have ¥1400 shortage in the sales compared to the previous year announcement. But on the other hand of course shortage of the sales we have about ¥400 billion cost of goods reduction, and also at same time we reduced SG&A by ¥250 billion on net we have ¥750 billion now, negative impact on the bottom line operating margin. Those are the primary reasons of the GAAPs on the operating margin between last year announcement amounts versus this year’s plan amount. That’s the opening remarks I would like to make and now I would like to turn the microphone to Iwaaki Taniguchi who is going to talk briefly about numbers more in detail.
This is Iwaaki Taniguchi, Head of Corporate Finance Control at Headquarters. I will walk through our financial platform of fiscal year ’12 and outlook for fiscal year ’13 together with guidance for our sustainable future growth. Please move to the presentation page 2, which presents the result of the fiscal year ’12.
Let me quickly introduce key figures for ’12. First of all our net sales is ¥1.557 trillion which is 3.2% increase from previous year. Then operating income is ¥122.5 billion which 53.8 decrease. For your information operating income excluding special factor is ¥267.5 billion which is 35.5 decreased. Finally net income is ¥131.2 billion which is a 7.1 billion increase from previous year.
Let me deep dive into each component of finance from the next page. Here I want to explain the breakdown of sales increase by business segment. First one is Ethical Drug segment in Japan. Also our new product lines including Nesina and Azilva have made a good stead and good contribution. It was not sufficient to offset decrease of major acquisition in products like Actos and Biopress, which were impacted by late 5% cutting in the listing price by Japanese government.
Overall reserve is a ¥3.8 billion decrease from previous year for this segment. As for overseas ethical drug segment, we recorded ¥46.8 billion increases due to improved 12 months counting of legacy Nycomed product portfolio, as well as new acquisition such as URL and Multilab in Brazil.
Please move on to the next page. This page shows breakdown of net sales increased by product. As you can see although we experienced decrease in Actos and other three major products, we had a significant increase of ¥94.4 billion in new product category which were launched after 2009. Plus, we had a benefit of free accounting on legacy Nycomed product in 2012 compared to only six months in previous year. Please also note that Velcade have experienced steady growth.
Please move on to next page. This chart shows a breakdown of sales increased by region. Thanks to broader business footprint of Nycomed, we experienced significant increase in Europe Asia and Middle East Oceania and Africa.
America’s increase over existing portfolio such as Velcade, Dexilant, Uloric combined with our new product acquisition of URL and Multilab have significantly offset the effect of the patent expiry of Actos. As a result, decrease in Americas was limited around 9%.
Please go to the next slide. Then this is a status of emerging market which is the most important growth driver to Takeda. As of fiscal year 2012, emerging market represents roughly 15% of our net sales in ethical drug segment which has increased 190% from previous year.
Even if we exclude FX effect and also if we make up our to acquired company’s annual rate base sales we also recorded ¥25.6 billion increase which is a 14 increase from 2011.
Please turn to next page, now I am walking through contributing factor of operating income. Mainly due to avoidance of previous year’s one time Nycomed acquisition charge and inventory step up growth profit have increased by ¥33.9 billion. However, because of a three year consolidation of a cost associated with Velcade Nycomed, 12 month basis and also increase over amortizations related to our new acquisition like URL which is roughly ¥43 billion, FDA expense overall have increased by ¥134 billion.
As for R&D expenditures, due to good progress of a clinical study in late stage pipeline, it has increased ¥42.4 billion this year as a result operating income in 2012 was ¥122.5 billion which is 53.8% decline from last year.
Please move on to the next slide, this is showing breaking for net income from previous year after, our net income for ’12 was ¥131.2 billion which was ¥7.1 billion increase from previous year let me explain some backgrounds; first of all, we recorded ¥34.4% billion increase in the net extraordinary income segment which I will deep dive to on the next page. Secondly, we experienced a significant decrease in tax which is ¥129.9 billion this refund is related to a Prevacid transfer pricing settlement from Japanese tax society this is a major reason, this is also combined with natural decrease of tax due to lower pre-tax income level compared to previous year.
The chart in the next slide is showing breakdown of those extraordinary income and loss items. The total of extraordinary income was ¥95 billion but there was extraordinary loss on the other hand at ¥78.5 billion the net amount is ¥16.5 billion extraordinary income which is ¥34 billion increase from last year.
And let me explain a little bit about the impairment loss the biggest item is the write-off of roughly ¥33 billion intangible assets related to taxes which was generated through acquisition of Nycomed. Our main factor is we are using our failed forecast for this product reflecting more stringent reimbursement environment in major European countries as these.
Please go to the next page which represents a cash flow situation so this is the cash flow description for fiscal year ’12 the net increase in cash is ¥91.3 billion overall our cash balance at end of the fiscal year is ¥545.6 billion which is roughly ¥90 billion increases from previous year.
Please turn to next page, now I would like to explain about comparison with financial forecast back in February which was already explained Mr. Hasegawa yes he explained actual net sales sunk through appreciation of Japanese yen against other currency final figure recorded ¥7.3 billion increase compared to February announcement however due to further increase of cost items our final operating income was ¥37.5 billion short of ¥160 billion target. Major reason of cost increase was both translational effect of overseas cost item denominated in non-Japanese yen combined with increase of equity-based compensation due to increase of stock price in Japan. Bottom line we regenerated extraordinary income by selling a portion of our marketable securities. But due to newly added impairment to those items our final net income is short of target for ¥23.8 billion.
The next stage shows our discussion towards the future. Let me move on to fiscal year ’13 financial forecast page which is page number 13, here I am showing the fiscal year financial forecast for ’13, for your reference our currency rate assumption this time this fiscal year is ¥90 per dollar and ¥120 per euro. For next year we expect ¥1,590 billion which is ¥32.7 billion increase from last year. Our FX among this sales increase is roughly ¥80 billion.
We will maintain ¥300 billion on our R&D expense as a source for sustainable future growth. And for SG&A expense, we have started the company-wide initiative to establish more robust and efficient operating model and we are now focusing on the cost efficiency by eliminating all expenditure items.
Needless to say it is very important to maintain critical investments for our future rapid growth in the emerging country as well as penetration, preparation for product launch. However we are determined to eliminate any cost item wherever possible. So anyway as a result we expect to achieve ¥140 billion for operating income which is 14% increase from previous year, fiscal year ’12.
So this is the fiscal year 2013 forecast, let me move on to the next page. So now I'd like to explain the comparison between the new financial forecast as of today and that in our previous meetings from indeed domestic and international environment for pharmaceutical business have drastically and rapidly changed. This have resulted in our downward adjustment, for net sales we have taken accounting to a more stringent reimbursement and continued competitive environment both in Japan and Europe, furthermore we have also factored in sales decline caused by a withdrawal of some products from the market.
For cost side as I have mentioned earlier, we will maintain all the core investment related to new product launch so that we can accelerate our sustainable growth from now on. Having said that, we will monitor across the all cost item; maintain a cost label lower than our previous mid-range plan without considering FX affect.
The next page illustrate our new accounting standard IFRS. As we have indicated previously in order to increase compatibility with other international competition, we will migrate to IFRS accounting standards from end of year 2013 this quarter. So, for our investor reference purpose, we are here in disclosing IFRS based financial focus for us 2013 here.
Over operating emerging IFRS is roughly ¥15 million higher than that of current Japan Yen base number mainly due to above Yen's of amortization of a goodwill. If you need further a breakdown, please take a look at page 23 over Appendix.
Being consistent with IFRS migration, we need also disclose core earnings as a key performance indicator which is pretty common among our international competition. Our expected core earnings in ’13 is a ¥280 billion which is approximately 18% of our net sales.
Next page shows our midterm financials target or guidance, up until 2013 for your reference. So as Mr. Hasegawa mentioned, we are expecting net sales increase around mid-single digit for next five years of compound annual gross ratio basis.
Same for 20%, at least, for operating income for next five years, 20% of CAGR. And dividends to be maintained at current rate for the next three years and we also expect R&D spending around ¥300 billion levels.
Please move to the next page which describes a Project Summit for our future operating model efficiency. So, ultimate goal of this project is increasing operating income levels through creating more robust and efficient operating model on global basis. They exists some functional subcategories which has its own agenda and goals. For sales and the marketing, we are aiming at more integrated marketing strategy and sale support activities amongst global, regional and country so that we can create much energy in this respect.
For manufacturing and supply chain, we intend to leverage more on existing, very broad global network on the infrastructure of our legacy Nycomed, who are on the very further increase the efficiency of that on activity and carry on optimal investment to create innovation. For general administration, we have increased efficiency by further integrate and unify current dispersed and diversified the end rate operation and procedures. Throughout these activities, we’re targeting 25 core earnings to be achieved by fiscal year ’17. This is end of my presentation. Thank you very much for listening.
Thanks you and finally Dr. Yamada will give an update on R&D activities.
Thank you very much Chris and thank you all for listening. I know you have copy of the presentation so I am going to truncate my presentation somewhat and jump around a little bit. Going to Phase III, Phase III points out, we had a very good year and FY12. We had many important approvals and filing, just on the approval side I should point Nesina was approved in the U.S. Adcetris was approved for relaxed refractory Hodgkin lymphoma and ALCL in Europe but it is not shown on this page as the recent approval of tofacitinib which we have in license from Pfizer in Japan.
On the registration and filing side, there are four products that we just like to highlight that would present important launches in FY13 going to FY14, one is Brintellix next model antidepressant partnered with Lundbeck, Contrave which is obesity product, Vedolizumab which is monoclonal antibody against alpha 4 beta 7 integrin for ulcerative colitis and Crohn’s disease, and lurasidone for treatment of schizophrenia, lurasidone being launched in Europe. One other item on the filing side just to take note of there is BLB-750 which is our pandemic influenza vaccine, this is important given its potential adaptation to an H7N9 vaccine should that be required.
Going to page four, the next page we have a very strong Phase III program you’ve heard much about this so won’t comment more other than to say that we have seen important and revolutionary products here, TAK-875 for diabetes, chief amongst them but in addition Orteronel TAK-700, MLN9708 which is called as Ixazomib and an interesting compound called Lansoprazole or TAK-438 potassium competitive acid blocker, primarily developed in Japan.
On page five, we note some important partnerships that we have developed in the past year, I would like to highlight two: one is LigoCyte which is an acquisition of vaccine company to support our emerging vaccine franchise, this company provides us not only with VLP technology on which to build other vaccines but brings to us a Phase II asset in the norovirus vaccine, norovirus diarrhea being the most common cause of epidemic diarrhea in the world and a major cause for morbidity and mortality both in the developing world and in the developed world.
The other partnership, I would like to highlight is Advinus which is an Indian company that has partnered with us to develop new R&Ds, we developed this relationship as a competition between our internal programs, our internal capability and Advinus an external capability competing with the same targets developing them in a race to make R&Ds.
The critical element shown on slide 6 is measurement of R&D productivity, when they came into a decade, just two years ago as a space with the graph on the left which was an assessment done by PCG or productivity amongst companies in the pharmaceutical industry, it’s really based upon ENPV of products in the clinical stage against, change in ENPV against in an investment in R&D and as you can see on this analysis, it looks like Takeda is second from the bottom although cohort that was examined in terms of change in ENPV as a function of R&D investment, it look like Takeda was losing $0.50 on every dollar invested in R&D.
Moving forward, two years have reversed the slide, we are now second amongst the industry compared to group we returned $1.04 on every $1 invested in R&D and indicates very substantial improvement in current activity I would like to move forward to R&D initiatives in the mid-range growth strategy and I would like to move to slide 11. We basically have three approaches to improving R&D productivity short term mid-term and long term in the short term shown on slide 11 we leverage our advantage of a rich late stage pipeline for this we want to make sure that our successful programs move forward to approval vortioxetine, ventilex is a brand for depression contra for obesity, vedolizumab for ulcerative colitis and crohn's disease and lurasidone for schizophrenia we will focus attention on our exciting Phase III programs including fasiglifam TAK-875 for diabetes vonoprazan TAK-438 for acid peptic disorders ixazomib 9708 as a follow on protease inhibitor for oral protease inhibitor for multiple myeloma and TAK-700 orteronel for prostate cancer.
We have also some very important assets moving forward in the late stage our diagnostic therapeutic combination for treatment of Alzheimer’s disease using a TOMM40 biomarker and a Norovirus vaccine in the mid-term we are going to fill in the mid stage portfolio and to do this we are going to push forward our promising preclinical and clinical assets they include TAK-385 which is a LH-RH antagonist for uterine fibroids 8237 an Aurora A kinase inhibitor 4924 a NEDD8-activating enzyme inhibitor and two very unusual and exciting compounds in AMPA potentiator and CD38 receptor antibody we have also had this project to basically look through our AD-08 defined assets which could be used for additional indications and have new programs that we will be talking about in the future in diabetes NASH asthma idiopathic pulmonary fibrosis, and schizophrenia. In business development, we focused on assets at earlier stage, even the richness of our late stage portfolio, compounds that are ready for proof-of-concept experiment. And in this regard on the next page, we show an acquisition that was just announced yesterday we acquired Inviragen, a vaccine company that has a Phase II asset for Dengue and other vaccines for EV71, hand foot and mouth disease, and chikungunya.
This acquisition complements our VLP technology acquired with LigoCyte in providing expertise in Like-Virus vaccines. These two acquisitions form the cornerstone for an outstanding vaccine franchise in evolution. On the next page we will focus on improving R&D productivity in long term by strengthening our research competitiveness and productivity, just to give you some example of what we did last year that we will continue on moving forward.
We decreased our cost per drug candidate by 40% last year in our discovery group and in the progress of candidates to IND. We decreased the time from what was a non-acceptable 31 months to 12 months. It was a very good collaborative joint effort. And we will put forward these kinds of initiatives to continue improving our discovery research capabilities.
Finally on page 16, we show a pipeline that’s moving forward in the FY13, ’14, ’15, and ’16; we have a full and rich and deep pipeline in all the regions in the world and then we feel therefore, we have a very bright future on the basis of our outstanding late-stage portfolio. Thank you very much.
So with that we would like to commence the Q&A session, so I request that callers limit themselves, kindly to two questions each and to ask a question please follow the instructions of the operator. Operator, please?
(Operator Instructions) The first question is from Ms. (inaudible) from Platinum, please go ahead.
First I wanted to clarify the 20% operating profit growth which you forecast for ’13 to ’17, is that based on the reported Japanese GAAP the adjusted GAAP or on IFRS? And the second question is the new core earnings, is the new core earnings the same as the old operating income excluding special factors or is that the new net, adjusted net earnings number?
Let me answer to your question. So 25% increase per year, average year is related to core earnings up no, no, no 25% operating margin to be achieved by 2017 for core earnings, but we also expect the increase over operating income at the rate of 25% for next five years as well. I mean.
25% operating margin on the core or so basically on all the adjusted and also 25% growth on average per year on core earnings?
No, no, no, 20% annual growth for operating income for next five years on average basis.
But what operating profit is that?
It’s Japan GAAP, yes but we are migrating to IFRS, from March next year, but for 2013, we will make announcement on the Japan GAAP, so operating income wise please understand this is a Japan GAAP-based number, 20% CAGR.
And 25% the core earnings, the ratio against sales is to be achieved by 2017. The core earning is the same concept, very close concept as of the operating income without special factors.
Thank you very much. Next caller please.
The next question is from Ms. Amelia (inaudible) from Hunter Fitzgerald. Please go ahead.
I was actually going to ask about the sort of profitability margins for your emerging markets business. You’ve previously said that it was down for around 30% and you are looking for a shift in line at around 40%, I was just wondering if you could give us an update of where it stands now whether that guidance still holds. And then secondly, I might have missed it during the presentation but wondering what sort of extraordinary related expenses we need to expect from Omontys next year.
I am answering your first question about the profitability of emerging markets. We have emerging markets that have profitabilities which in the area of 40% and for all of our business we can say that it seems to be a relationship between market share and profitability and we have of course strongholds where we have pretty strong market positions and other areas where we still focusing on growth and do heavily invest in growth. We, for the time being, accept lower margins but the goal is to bring the emerging markets business as a whole into the range of 35% to 40% which according to our understanding is in line with best practices. And the second question regarding to Omontys, I hand over to Iwaaki again.
So as per Omontys, we accrued all related in 2012 already; if there is no more expense related to this product in 2013.
I am just trying to sort of go back to emerging market question, not to be annoying but just wondering sort of on the whole where we are standing now given your sort of goal is 35% to 40%, I was just wondering, sort of merged average where we’re at the moment. I do understand but some are probably sort of already there.
We normally don’t give away these numbers. But I don’t think it make a big mistake if you just use the middle ground between the 40 and something that is between 20 and 30.
Thank you, operator, do we have another caller with a question?
Okay I understand there is one more question, so please go ahead.
Some stock options and they have been taking in the operating profit and they say that they are not a special item. They are basically taking in and then reported, is that correct?
That’s correct. Yes, although the stock option, phantom stock option related to expense, if accrued within the category of R&D expense for R&D people and in category of general anatomy for a set of marketing and G&A staff. Not in special category.
So basically this is also going forward. This is not only a one off, that is basically also in the forecast over the next year, so that’s a stable number.
Not necessarily, depending on the behavior of exercising, pattern of exercising and granting those situation that could be affected by growth factor.
So the other delta is kind of higher SG&A cost which continues in the next year. Can you just explain why the SG&A cost is so much higher, than you had anticipated?
Because as I mentioned in my presentation, we continue to make necessary investment for future growth such as new product launch preparation and expansion in the emerging countries. But as I mentioned also we try to maintain cost as much as possible, as soon as possible, so we don’t expect significantly increased results for ex-FX effects basis from current level.
But you invested last year than much more than you thought. So basically you start off a higher base but you continue it.
We would expect to have same level of SG&A at least next year. After 2014, it depends on the situation in our product launch and emerging country stations as well.
And can I just understand a bit more what's going on in the gross margins; so basically the gross margins will change significantly from here going forward or should they stay more flattish?
In terms of the cost of goods sold which is an important contributor of gross margin; we try to maintain all cost of goods sold as much as possible. Although that some necessary increase in consistent with the sales increase but the percentage of the core cost of goods sold against sale is decline so that we can increase our operating margin and gross profit as well.
So, the gross margin should go up over the next year is what you are saying?
Of course gross margin should go up because the sales increase will absorb the increase of costs of goods sold; so gross margin should increase for next, at least, three years, yes.
Do you have any other questions?
Can I just maybe ask another question?
Sure I think we have time for one more question.
Do you have a feel for what the tax rate will be this year? What are your assumptions in your numbers?
Yes, tax rate this year is very unique because we received huge refund from Japanese government related to operating settlement. From next year, we are coming back to the normal tax rate, corporate tax rate; marginal corporate tax rate like 40%; the lower 40% reflecting Japanese corporate tax rate for some non-tax deductible items; before taxing.
But this is much higher than most people think because the tax rate should go down in Japan in general? In you forecast you’ve got higher than 40% tax rate.
Because of the amortization of goodwill so this will negatively impact the corporate tax rate because this amortization of goodwill is not tax deductible item which will on surface negatively impact corporate tax rate at the confidential base.
I understand there is one more question on the line from the investors, Operator.
The question was from (inaudible) from Platinum. The next question is from Mr. Rogers from Private Investors. Please go ahead.
I have a quick question, I was just wondering if you could give us an update on Omontys? Thanks.
Omontys, the INDA and NDA have been transferred from Affymax to Takeda and Takeda has assumed all responsibility for subsequent investigation and the re-cost of the distributed product. We’re working directly with the FDA on this.
Just to follow, do you think it will make effect in the market?
I wish I knew the answer to that I can’t say.
Okay so with that brings us to the end of the call today. I would like to thank everyone for participating and for your interest in Takeda. Thank you very much.
Thank you for taking time to join us today. That concludes today’s conference call. You may now disconnect your line.
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