The Marcus Corporation F1Q10 Earnings Call Transcript

| About: Marcus Corporation (MCS)

The Marcus Corporation (NYSE:MCS)

F1Q10 Earnings Call

September 17, 2009 11:00 am ET


Douglas Neis – Chief Financial Officer

Gregory Marcus – President, Chief Executive Officer


David Loeb – Robert W. Baird

Andrew Whiteman – Robert W. Baird

[Marla Factor – Hudson's Research]


Welcome to The Marcus Corporation first quarter earnings conference call. (Operator Instructions) Joining us today are Greg Marcus, President and Chief Executive Officer and Doug Neis, Chief Financial Officer of The Marcus Corporation. At this time I'd like to turn the program over to Mr. Neis for his opening remarks.

Douglas Neis

Welcome everybody to our fiscal 2010 first quarter conference call. As usual, I need to begin by stating we plan on making a number of forward-looking statements on our call today. Our forward-looking statements could include but not be limited to statements about our future revenues and earnings expectations, our future rev par, occupancy rates and room rate expectations for our Hotels and Resorts division, expectations about the quality, quantity and audience appeal of products expected to be made available to us in the future, expectations about the future trends in the Business Group and Leisure Travel Industry and in our markets, expectations and plans regarding growth in the number and type of our properties and facilities, expectations regarding non operating line items on our earnings statement and expectations regarding future capital expenditures.

Of course our actual results could differ materially from those projected or suggested by our forward-looking statements. Factors, risks and uncertainties which could impact our ability to achieve our expectations are included in the risk factor section of our 10-K and 10-Q filings which can be obtained from the SEC or the company. We'll also post all Regulation G disclosures when applicable on our web site at

With that behind us, let's talk about our fiscal 2010 first quarter results. Once again, we have two different stories to tell. Our Theater Division reported another strong quarter, just missing last year's record results while the Hotel and Resorts Business continued to be impacted by a very challenging lodging demand environment.

Before I get into the operating results, let me first briefly address any variation in the line items below operating income versus last year. As you can see, investment income was down slightly from last year as expected due to lower interest rates and a continued reduction in our remaining time share notes receivable.

Assuming interest rates remain low in future periods, we'll likely continue to track slightly lower in this line item during future periods as well. Having said that, I must remind you that last year during our fiscal second quarter, we reported over $2 million in unusual investment losses, so we will likely have very favorable comparisons to last year on this line item when we report our second quarter results this year.

Meanwhile, our interest expense was down another $825,000 during our fiscal 2010 first quarter compared to the prior year, due to the reduced borrowings and lower short term interest rates. Depending upon the actual timing of our future capital spending, and assuming that short term rates remain low for the foreseeable future, we could continue to see our interest expense run lower than the prior year in future quarters.

As you know, during the summer we are at our peak as far as our cash inflows, while at the same time we generally refrain from significant capital spending. So as in the past, we're likely to see our debt level rise in the future periods now that the summer is behind us.

Our overall debt to capitalization ratio at the end of the quarter was a very strong 42%, down from 44% at our recent May year end due to the aforementioned strong cash flow summer for us.

Continuing down the earnings page, we had relatively little activity or change this particular quarter this year and last year on our gains from disposition and equity earnings and loss lines. I think it's possible that we'll report some level of gains and sales during the remainder of fiscal 2010. We do have a couple of asset sales under contracts in the due diligence portion right now, but as always, the timing of such gains is always difficult to pinpoint.

Looking ahead to next quarter, I would be remiss if I didn't remind you that last year during our second quarter, we reported a $1.1 million loss related to our investment in condominium units at our Las Vegas property, so in our year to year comparison in our second quarter, keep that in mind.

And finally, our effective income tax rate this quarter was 36.5% which is slightly lower than the normal amount due to a decrease in the amount of unrecognized tax benefits, and this is a result of a lapse of some applicable statute of limitations.

I current expect our tax rate for the remainder of the year to be at our historical 38% to 40% range, pending any further lapses in statute of limitations or completion of tax examinations by taxing authorities.

Shifting gears, our total capital expenditures during the first quarter of our fiscal 2010 totaled approximately $5 million compared to just over $9 million last year. Over $4 million of this year's amount occurred in our Hotel Division and relates to the ongoing renovations at our Grand Geneva and Hilton, Milwaukee properties.

At this early stage of our fiscal year, I've no reason to adjust our previous estimate for capital expenditures for fiscal 2010 of an amount in the $50 million to $70 million range. We're still finalizing the scope and timing of the various requested projects by our two divisions and several additional projects would need to be approved in order for us to end up at the higher end of that range.

The actual timing of the various projects currently underway of proposed will certainly impact our final capital expenditure number as will any currently any unidentified projects that could develop during our fiscal year.

Now before I turn the call over to Greg, let me provide a few additional financial comments on our operations for the first quarter beginning with Theaters. Our box office revenues were up 1.4% during the first quarter as you can see with concession revenues down 1.9%. Now that we have owed the seven Nebraska theaters for over one year, these year over year comparisons are pretty close to being apples to apples.

We did close three lease theaters with 16 screens last year, one of which was a Budget theater; but closing these theaters had minimal impact on our comparable operating results.

Our total attendance at our comparable theaters decreased 4.9% for the first quarter which can be attributed almost entirely to the summer weeks when we were going up against the Dark Knight last year. The impact of our overall attendance decrease was partially offset by an increase in our average admission price for these theaters of 7.2% for the quarter, an increase in our average concessions and our food and beverage revenues per person of 3.7%.

Premium pricing for our digital 3D attractions and ultra screens contributed to the higher average admission prices and our expanded food and beverage offerings at our newly renovated North Shore Cinema contributed to our increased average concession per capita. Our operating margins for this division decreased to 24.4% compared to 25.2% last year, due to the impact of reduced attendance on our fixed costs, and due to a slightly higher film cost.

Shifting to our Hotel and Resort Division, our overall hotel revenues were down 19.2% and total rev par was down 21.1% during the quarter compared to the same period last year. As we noted in the past, our rev par performance did vary by market and type of property, but all eight company owned properties were down this quarter.

According to data received from Smith's Travel Research and compiled by us in order to match our fiscal year, comparable upper upscale hotels throughout the United States experienced fairly similar decreases in rev par during our fiscal 2010.

Our fiscal 2010 first quarter overall rev par decrease was the result of an overall occupancy rate decrease of 8.7% and an average daily rate decrease of 11.1%.

With that, I'll now turn the call over to Greg.

Gregory Marcus

I'll begin my remarks today with our Theater piece. As Doug shared with you, our attendance decreased this quarter compared to the same quarter last year due entirely to the impact of the Dark Knight which went on to post the second best box office results of all time after Titanic. That's a tough act to follow.

Yet, despite the difficult comparison, we were able to match last year's record revenues and come close to matching last year's record first quarter operating income. The reason we were able to do that becomes evident when you take a look at how the movies performed during the rest of the summer.

If you would exclude the three weeks in mid July, early August that corresponded with the opening three weeks of the Dark Knight, our comparable box office totals were up double digit percentages over the prior year during eight of the remaining ten weeks of our fiscal first quarter. While our best movie this year produced box office results over 30% lower than the Dark Knight, there was a great deal of depth to this summer's product.

After the Dark Knight last year, we only had one other film product box office receipts of greater than $3 million for our circuit. This year, we had four films reach that level, three of which reached the $4 million level.

In addition, as our press release notes, and Doug expanded upon, our strategic initiatives to expand our digital 3D footprint, increase our number of screens with related reserve seating and expand our food and beverage offerings, paid dividends this quarter as we were able to make up for some of the reduced attendance with increased per capita revenues.

This of course was all accomplished during a continued period of economic challenge and uncertainty and we don't take that for granted. We believe we continually need to focus on providing the best possible value proposition to our customers, especially during these difficult economic times.

Providing value can be accomplished several different ways. In addition to offering state-of-the-art amenities such as the aforementioned digital 3D, seven D plus foot wide ultra screens, reserved seating with accompanying food and beverage vouchers and theater dining, and the convenience of food and beverage outlets like Shapiro's for before and after show dining, another cornerstone of our success can be found in our innovated value oriented trademark promotions.

Our family orientate Kids Rule program in the summer and Frosty Flicks in the winter are two such examples, along with our popular Young at Heart program for seniors and Spotlight Movie Night. All of these promotions provide opportunities to see films at reduced prices, resulting in an average ticket price that remains an outstanding value compared to any other form of out of home entertainment.

Of course, good movies contribute significantly to the customer's sense of value and Hollywood has overall had more hits than misses during the past year. We've been in this business long enough to know that you'll always go through stretches when the misses outnumber the hits, but we're built to ride those periods out as well.

September, typically our slowest month of the year, is running ahead of last year so far. We hope that is a sign that Hollywood is hearing the calls from exhibitors to provide a more even distribution of quality films throughout the year, not just during the summer and holiday periods.

While it is nearly impossible to predict how upcoming quarter's slate of films will perform, our press release attempted to highlight some of the films being released in the coming months that are currently receiving the most buzz within the industry.

So while we eagerly await each Friday to see if that next hit will show up on our screens, we also continue to execute on the many strategies we have highlighted in our recent annual report and prior communications with you. Our press release mentioned several of these.

We continue to be pleased with the customer response to our renovations and pizzeria and bar at the North Shore Cinema in Wisconsin, and we currently have up to three more ultra screens on the drawing boards for other existing locations.

We also noted in the release that in November we will be opening and operating under a management of Mutual of Omaha, a unique upscale, four level, five screen entertainment destination in Omaha, Nebraska which will provide us with an opportunity to offer in-theater dining in a multiple screen setting for the first time.

So, as I wrap up my comments on this division, I think it is probably pretty evident that we remain excited about the theater business and the opportunities it provides to increase value to our shareholders in both good times and bad.

With that, let's move on to our second division, Hotels and Resorts where the story is not as upbeat in the near term. On the one hand, after four straight quarters of worsening rev par trends during the fiscal 2009, we are pleased to report a slight improvement in that trend during the fiscal 2010 first quarter.

But let's not kid ourselves. We're still down 21% during what is typically our best quarter of the year. So this is a tough time to be in the lodging business. I want to acknowledge the outstanding work of our management team to minimize the impact of this revenue decrease on our bottom line in very difficult circumstances.

Our team was able to see that only 44% of our decline in revenues dropped to our operating income line, while still providing the excellent service that our guests have come to expect from Marcus Hotels and Resorts. In general, in this industry, anything less than 50% flow through is very, very good.

As Doug shared with you, all of our properties reported reduced revenues this quarter compared to the prior year, but the amount of the decrease certainly varied by market and type of property. As we've indicated in the past, in general, the group business segment remains the most challenged and properties that rely on that customer segment the most have generally been the most impacted during the past year.

In addition, properties that serve destination travel markets or are perceived to operate close to the luxury end of the hotel spectrum, have also seen a greater proportion of the decline in business travel demand. During the recently completed summer quarter, the one twist to these ongoing generalities was the impact leisure travel may have had on a particular property.

While business travel remains very soft, leisure travel was much better on a relative basis, so properties that could back fill their business customer void with attractive value packages for the leisure guest were able to perform relatively better this quarter.

Our Grand Geneva property is an example of this dynamic. They were able to minimize their occupancy declines from reduced group business this quarter with increased stays from the leisure segment, albeit at a lower average rate in order to reduce their rev product lines better than the average.

In fact, just as I discussed, the value proposition in our theater division, our hotel sales efforts this summer placed a significant emphasis on operating value packages to our guests in order to drive demand. This doesn't necessarily mean a significantly reduced average rate, although clearly rates have decreased. It also can mean offering packages that include added amenities such as breakfast, spa treatments, etc.

Regardless, it is clearly a buyers market right now and will likely remain so until we see an increase in business travel demands. With that in mind, we certainly are encouraged by some of the recent economic news that suggests that better times lie ahead. We feel we are starting to gain some traction from in the individual business traveler, although the booking window remains very short.

If this recovery unfolds like others have in prior cycles, it will likely take business longer to return to normal levels as companies typically take a very cautious approach to these expenditures before restoring the appropriate budgets.

In the meantime, comparisons to last year will begin to get a little easier in subsequent quarters. So if demand does not erode further, we would be in a position to continue to see improvements in the rev par trends in the future.

You know, in our movie business, everyone likes a story with a happy ending, so when I started this story on the hotel business, I would be remiss if I didn't end it with the inevitable opportunities that can arise out of these difficult times.

You've heard us say this before, but it is even more true today. We've built our company to withstand the tough times like these. Our balance sheet remains in outstanding shape and has allowed us to continue to reinvest in our hotels when others are worrying about just making their debt service payments.

When the business rebounds, and it will rebound, we will be poised to continue to increase our market share and provide the best hospitality experience to our guests, and with a 42% debt to capitalization ratio, over $110 million in revolving credit availability as of quarter end, and a $150 million universal shelf registration statement on file and effective with the SEC, we have tools in place to explore and develop potential growth opportunities that may arise during these difficult times.

In November, The Marcus Corporation will begin its 75th year of being in the people pleasing people business. Those of you who have invested in The Marcus Corporation know that maintaining a strong balance sheet and focusing on long term growth are philosophies that have defined our company throughout these years and we remain just as committed to these basic tenants today as we were when my grandfather, Ben Marcus started the business all those years ago.

We look forward to continuing to creating value to our shareholders, customers and associates in the months and years ahead.

With that, at this time, Doug and I will be happy to open the call up for any questions you may have.

Question-and-Answer Session


(Operator Instructions) Your first question comes from David Loeb – Robert W. Baird.

David Loeb – Robert W. Baird

Greg, particularly in theaters, it sounded from the press release like 3D is becoming a much more important driver of revenues, the number of more impactful films were 3D. Can you talk a little bit about how important 3D, food and beverage, other new amenities are and how you might see the expansion opportunities for those amenities into other locations and what kind of capital might be required for that?

Gregory Marcus

Let me start with 3D. It is becoming more important. It's still just one screen in every one of our complexes, but it's an important screen and tend to be ten full films in how we're investing the money in the 3D process. And they put it in the films that they think will have the best draw.

The reason it's becoming more important as well, they're running about an average of one a month, so we are actually now at the point where we can devote a screen, at least one screen, in some cases two screens in each complex to 3D. And what that involves is putting an additional projector, putting up a silver screen, and then a special 3D component for the electronics.

The capital that it requires, we don't disclose the specific cost of the capital, and it changes because the deals with Hollywood are changing and aren't fully settled. Basically what we do is, we look and say okay, how we think it's going to perform. We run it through our investment committee process and if we see the right return on capital, whatever capital it might take, and as I said, the situations really differ each time, especially given the tightness of the financing markets for digital equipment.

But if it meets our hurdles, then we make the investment, and we continue to see it growing in importance. I don't have a crystal ball to tell you how long it will last and how different films have performed differently.

David Loeb – Robert W. Baird

How many complexes have 3D today?

Gregory Marcus

We have 27 at the moment. We've indicated that it's likely we will be adding some additional ones in time for some additional pictures that are coming out in the near term. But at the moment we have 27 screens, 27 theaters that have them. So it's over half of our theaters.

The big one is Avatar in December that everybody is got their eyes. That's where the eyes on the prize are. That's the Jim Cameron. It's his first film in a decade.

David Loeb – Robert W. Baird

So just to expand on that a little bit, if you were to roll this out over the next several years to all locations, are we talking about single digit millions of capital or into the double digits?

Gregory Marcus

Here's why it's hard to tell you that, because what I can't tell you is, because one of the main components of it is the digital projector. If digital rolls out as it looks like it's happening, and it's starting to happen across the country, and it will happen, if you have a digital projector, you really don't have a significant capital cost to add 3D to that.

So what is the incremental cost of 3D? We've looked at it, and to look at one we make the investment, we realize that eventually digital is coming and the money we spend on the projector will ultimately be part of a larger digital program. So it's really hard to answer that question in isolation, because as I said, if we end up in two years with full blown digital roll out, and I'm not saying we have.

I'm not going to put a time line on it. That's just a hypothetical. You wouldn't have to spend much more to have 3D.

David Loeb – Robert W. Baird

So basically the message here is, this is a growth opportunity. It's a high return opportunity and it's sort of an open question as to how much capital will be required depending on where digital comes to the 2D films.

Gregory Marcus

Yes. And by the way, to further obfuscate the answer, is that Technicolor just recently is promoting, and I don't know if they're going to get anywhere with it, a film version of 3D where it's got a very low capital investment and you don't need the digital projector. And they're saying it should be a temporary solution until the digital roll out occurs everywhere, and they say it's very quality. I haven't seen it, but I've heard good things. But it really will depend on whether Hollywood accepts it or not.

As we've said, we have one screen for each of these 27 locations. Now I will tell you that the next wave that we're looking at, we might have for the first time add a second screen at least one or more of our busiest locations to be able to hold pictures over at the busiest places, but right now, how the number have penciled out, you still basically need, given the product at one a month, you basically just need one auditorium dedicated to this and the capital is not significant.

David Loeb – Robert W. Baird

I guess where I was going was trying to assess is, is this a continued growth opportunity and is it a manageable capital expense and the answer to both is yes.

Gregory Marcus

I would agree to that answer.

David Loeb – Robert W. Baird

The second half of that question related to the other amenities, food and beverage, things like that. Again, that's a major growth opportunity, also requires some capital and you're going to continue to evaluate, is that fair?

Gregory Marcus


David Loeb – Robert W. Baird

What do you think of the landscape today for acquisition opportunities? You talked about capital availability. In the release you specifically called out both internal investment opportunities as well as the potential growth opportunities that may arise in this environment. What are you seeing in terms of growth opportunities and when do you think you'll see more of those?

Gregory Marcus

I just read your report, and I'm waiting for the addendum for the change in the CMBS tax laws that they just announced a few days ago. Your report said a lot and there's a lot coming down the path. I think it really depends, and there's a lot of factors that are coming to play. The issue of extend and pretend.

I actually heard a great one the other day, a rolling loan gathers no moss. To the extent that these things, your report said it; there's a lot of properties that have a lot of trouble meeting debt service. To the extent that these become available, and we continue to see things, like the pig and the python, we're still waiting for it to come to our part of the snake, I guess.


Your next question comes from Andrew Whiteman – Robert W. Baird.

Andrew Whiteman – Robert W. Baird

I wanted to get a little bit of a view as to the hotel business coming up here in fall and winter. You mentioned that comps get a little bit easier. As you look ahead, do you think that the rev par mix goes more towards occupancy or rates from this point? Can you talk about how that might impact your margins if it's one or the other?

Douglas Neis

We did put, and hopefully it's helpful to everybody, is that in our recently filed 10-K, in the ND&A section, we kind of reminded everybody of what the trends were last year. So on the first part of your statement, yes it's true that comps get easier, particularly in the second half of the year.

As a general rule, as you know the industry started feeling this as the second quarter, our second quarter went along. So in October/November it kind of became a little more obvious that there was going to be some pain, but our rev par was only down 6.8% for that second quarter for example.

Then it was down 13.5% in the third quarter and it was down 23% in the fourth quarter. So it's going to be kind of a progression here as it relates to the comps is to keep that in mind.

As it relates to the rate/occupancy issue, also clearly if you look at that trends and you just noted that, the same chart that we put in there notes that even when things first started happening, the rates didn't change very much, but then it accelerated to it was down 2% in the third quarter, down 9.4% in the fourth quarter, and now here today we reported it was down 11%.

So clearly that impacts the margins and you've seen our results track accordingly. Still, as Greg noted, it's still a tough rate environment and likely will be for the near term. It's not just a buyers market for the leisure traveler. Right now as rates are coming up for renewal, corporate rates, it's a tough environment and so we don't certainly expect the rates to rebound very quickly and that's going to impact the margins a little bit.

Having said that, as Greg did note, on the occupancy side, that's where we're hoping, I mentioned we're started to see a little traction on the individual business traveler. Still, the lead time is so short that it's so hard to project out any time period. But at least we're starting to see some of that travel return.

The group business still is not, and until the group business which in general, make a generalization of our hotels, we're pretty reliant on the group business traveler. They pick up the space that in turn then allows the rates everywhere else to go higher so that's really going to be the key.

Andrew Whiteman – Robert W. Baird

On the corporate negotiations at this point can I get some color there? Specifically, we've heard other people say that they ask right now, at least from the hotelier side is that they're looking for flat over last year. Does that kind of jive with what you're seeing in these early days of next year's negotiations?

Douglas Neis

That the ask is flat?

Andrew Whiteman – Robert W. Baird

Your starting point is, you're going in and offering for 2010 what you offered for 2009.

Douglas Neis

Negotiations are ongoing right now. Since we're having negotiations, I don't believe it's appropriate to tell you, to discuss what we're, where we are in terms of what we're offering or where we would negotiate to. But what I would tell you is that I think as a strategy we've got, is that to the extent, given the economy looks like it's getting better, and that the hotel business as you all know a bit of the lagging indicator, that we're trying to lock ourselves into anything long term.

So to the extent of the group business, we're not locking up long term group rates at low rates if we can avoid it. We're waiting to see where that goes. Whereas corporate stuff that we have been negotiating now, we're going to negotiate as best we can.

Andrew Whiteman – Robert W. Baird

On Omaha, I'm just trying to understand the terms of that deal. You mentioned that that's going to be a managed theater. Is that fee based and is there any other things where you would receive a larger portion either through ancillary business that you set up around the theater management where you get a larger portion of the revenues?

Gregory Marcus

It's strictly a traditional management fee. I believe there's an incentive component just like in the hotel business, but it's a traditional management fee and it will show up. The revenues will not be grossed up in box office concessions. It will show up in the other revenue line.

Andrew Whiteman – Robert W. Baird

I'm not trying to get any guidance on a gain that might be recognized from the asset sales, but at least want to try to get an order of magnitude of the amount of capital that might come in. Are we talking $1 million, $10 million, $50 million here in asset sales? Just trying to get a view of what it might look like.

Gregory Marcus

Nothing material. Nothing that would probably impact the type of analysis you're doing. When I mentioned that, we're talking about a one off, smaller things, the same kind of stuff we've been trying to sell in the past as well. We still have a Baymont joint venture that's out there. We've indicated that that's on the block. We still have some miscellaneous real estate, some restaurants, some land, things along those lines. So it's on a smaller scale, but that's the type of thing I was referring to in my comments.


Your next question comes from [Marla Factor – Hudson's Research]

[Marla Factor – Hudson's Research]

Can you go into a little bit more depth on the 3D that you've installed in I think you said 27 of the complexes now. Are you seeing substantial variance in terms of when you have the same film playing in both 3D and 2D, are you seeing a substantial uptake on the 3D versus the 2D which I think would be consistent with what the industry is saying overall, and are you seeing any difference between your Dolby and well as some Real D. Are you seeing any differences in those two formats in terms of the, not the consumer preference, but in terms of your ability to manage the different format, specifically the returnable versus the disposable glasses?

Gregory Marcus

Two things; on the first half of your question, our experience has been very consistent with the things I read on a national level in terms of the difference in 3D versus 2D. In general, I think it's been two to three times on a per screen basis. To be fair about that, when you look at that over the life, you may initially start off with a film playing on two screens, 3D and a 2D screen, then as it holds over, the 2D screen might go away and you keep the 3D screen.

So when you look at the numbers you have to keep that in mind, but absolutely, we're still seeing that, and picture by picture is not always the same, but on average, we're certainly seeing that favorable variance in performance.

Of our 27 locations, I don't have the exact count but we are mostly today, real D. We do still have the active glasses. It's actually not the Dolby, it's a company called Expand. I will just say that the last way that we did was real D. I don't think anybody could say there's any customer differential at all.

Certainly the economics between the two, they're just different. With the non disposable glasses, you've got to deal with that so there's a labor component associated with that, and you've got to build that into the model, and with the real D, there's a silver screen that you've got to put in and you're got to build that into the model.

So there's different economics between the two.

[Marla Factor – Hudson's Research]

And the Technicolor technology that you mentioned, this is a technology that they've just launched. Are there any films that are coming up in this technology or this is sort of all on the drawing board state right now and hasn't really been launched commercially yet.

Gregory Marcus

All I know is what I've read in the press, and I assume that you read the same thing, is that they've got it. They're showing it to people. Whether anybody is going to buy on or not is your guess is as good as mine. And I think the one thing that I had read, and again, I have not talked to anybody from Technicolor. The one thing that I did read though was this is not being pitched as a permanent solution for 3D, that it was a very good polarized glass effect as opposed to the analog that they used to use, but it was still temporary until digital takes over.


There are no further questions. I'd like to turn the call back over to Mr. Neis for any additional closing comments.

Douglas Neis

Thank you. We certainly want to thank everybody for joining us. We hope to see some of you at our annual meeting on Wednesday, October 14 at the Fisher Hotel. For those of you who cannot attend, we will be webcasting the meeting as usual. We also look forward to talking to you once again in December when we release our second quarter fiscal 2010 results.

Thank you and have a great day.

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