LifeVantage's (LFVN) CEO Doug Robinson on Q3 2014 Results - Earnings Call Transcript

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 |  About: LifeVantage Corporation (LFVN)
by: SA Transcripts

LifeVantage Corporation (NASDAQ:LFVN)

Q3 2014 Earnings Call

May 6, 2014 4:00 P.M. ET

Executives

Rob Cutler – General Counsel

Doug Robinson – President and CEO

David Colbert – CFO

Analysts

Alec Jaslow – Midtown Partners

Steven Martin – Slater Capital Management, LLC

Operator

Good day and welcome to the LifeVantage Third Quarter Fiscal Year 2014 Conference Call. Today's conference is being recorded. At this time, I would like to turn this conference to Rob Cutler, the Company's General Counsel. You may begin, sir.

Rob Cutler

Thank you. Good afternoon, ladies and gentlemen, and welcome to the LifeVantage Corporation fiscal third quarter 2014 conference call. On the call today representing LifeVantage are Doug Robinson, President and Chief Executive Officer; and Dave Colbert, Chief Financial Officer.

By now, everyone should have access to the earnings release which went out this afternoon at approximately 4:00 P.M. Eastern Time. If you've not received the release, it is available on the Investor Relations portion of LifeVantage's website at www.lifevantage.com. This call is being webcast and a replay will be available on the Company's website as well after the call is completed.

Before we begin, we'd like to remind everyone that the prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and, therefore, undue reliance should not be placed upon them.

These statements are based on current expectations of the management and involve inherent risk and uncertainties, including those identified in the Risk Factors section of the Company's most recently filed 10-K and 10-Q. These risk factors contain a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements.

This call also contains time-sensitive information that is accurate only as of the date of this live broadcast, May 6, 2014. LifeVantage assumes no obligation to update any forward-looking projections that may be made in today's release or call. Based on the number of participants on today's call, during the Q&A session, we ask that you please limit the number of your questions to three.

Now I'll turn the call over LifeVantage's CEO, Doug Robinson. Go ahead, Doug.

Doug Robinson

Thanks, Rob and good afternoon everyone. Our third quarter results demonstrate the progress that we've made to our business. Across all aspects of our company, we have been acting with a sense of urgency to reignite growth. Our improved revenue in the third quarter combined with a number of important recent announcements underscores that our business is moving in the right direction.

In the third quarter, we generated sales of $55 million, a 9.3% increase compared to the prior year period. This is the highest quarterly revenue in the company's history. The growth was driven by higher sales in the Asia Pacific region reversing a trend of sales softness in this market, in the first half of the fiscal year.

As in recent quarters, our top line results were negatively impacted by foreign currency fluctuation namely the devaluation of the Yen. In order to help offset further Yen devaluation and adjust for recent consumption tax change. We implemented a price increase in Japan, which was effective April, 1.

We announced this to our Japanese distributors and preferred customers in the third quarter and we believe that our third quarter results did benefit from some customers accelerating their purchasing in advance of the price increase, with that said the underlying trends in the Pacific region are very encouraging, as we increase spoken number of distributors and preferred customers in that market.

Historically, this has been a great market for us and we feel confident that with more work and effort. We are on track to achieving long-term growth in the region. We also improved our operating income in a quarter by over 13% on a year-over-year basis and our operating margin by 30 basis points.

We invested in sales and marketing, which is important to fuel future growth. Our general and administrative expenses were relatively flat highlighting management's continued focus on fiscal discipline and illustrating operating leverage in our business. Year-to-date we have achieved of $158 million. Our revenue guidance range is $208 million to $215 million for fiscal 2014.

In our earnings per diluted guidance range is $0.09 to $0.11. As we begin our final quarter of this fiscal year. We are encouraged with the overall position of our business. We feel that we are developing positive momentum that will carry into the coming quarter and lead to future improvements in our financial performance.

Our focus continues to be on the execution of our three key strategic growth initiatives. These include one; investing in and strengthening our sales and marketing efforts. Two; new product innovation and three; expanding our reach geographically. I'll touch in each of these areas. Regarding our sales and marketing efforts, on our last call we introduce Dave Phelps, our Chief Sales Officer.

We've recently seen the positive impact of his significant network marketing experience in both the United States and internationally. For example, in the six months Dave has been with us. He's travelled to every market we do business in and he's actively led three quarterly events. Not to mention, participated in countless training's and opportunity meetings.

Needless to say, Dave is getting to our know distributor base and field advisory boards very well. Finally in this short amount of time, he and his team have made a significant impact on our sales and marketing organization as demonstrated best by our overall successful skin care regimen launch.

Additionally, if the Major League Soccer Season now underway. Our Jersey-Front Partnership with Real Salt Lake is in full effect. We've already seen a positive response from the increased exposure of the LifeVantage brand and it serves as a great talking point for distributor of all levels, when they work on educating and expanding their customer base.

Overtime, we believe that this market investment will have a meaningful impact on our business. Our second key initiative is introducing new products. I'm pleased to say, that this is an area where we have made significant and tangible progress. Our goal is to continue to produce products that make people feel better, look better and perform better.

In January, we hired our new Chief Science Officer, Shawn Talbott. He was also introduced to you in February on our last earnings call. Since then, like Dave Phelps, he has participated in three quarterly events, built a stronger R&D team, played a critical role in the launch of our new skin care regimen and scheduled product releases throughout the coming year.

In addition to Shawn's R&D efforts. He participated in a 20 City National Radio Tour marketing our products and brand. This national media tour reached approximately 2.5 million listeners and as a side note, in addition to all he has done for LifeVantage. We'd like to congratulate Shawn for finding the time to complete a 17 Ironman competition just this past March.

As many of you are aware, at our Annual Global Convention. We officially launched our new TrueScience skin care regimen. These products leverage our significant research on Nrf2 and combating oxidative stress. The regimen went through extensive testing through third party clinical studies. The result showed that the products reduced the visible signs of ageing and skin care damage caused by oxidative stress making the skin appear renewed, brighter and more even toned.

Importantly, these products were launched globally. We also recently announced, that we acquired a new product line from Wicked Fast Sports Nutrition. This acquisition includes three supplements in one powered drink mix all of which are formulated to help individuals, feel better and perform better.

These products were designed and tested by Shawn Talbott prior to his joining our company. We are now in the process of conducting additional research and testing on the supplements and we plan to rebrand certain of the products in preparation for their official launch in fiscal year 2015.

This acquisition marks our entry into the larger market of sports nutrition and allows us to enter that market more quickly and if we were to create the products from scratch. We are extremely excited about this product line, as part of our expanding product portfolio. Our team continues to work diligently on further product innovation with a goal of expanding our product portfolio such that our customers feel better, look better and perform better.

We've already seen many benefits of Shawn's leadership and expertise in this first four months with our company. Investing in product development is a critical aspect of our growth strategy. We are now more efficient with the dollars we spend in this area. Year-to-date, in fiscal 2014 our R&D spend is down versus prior year like new product development and scientific research initiatives are accelerating.

Now turning to our third initiative; expanding our geographic reach. With respect to our newest markets namely Hong Kong, the Philippines and Canada. We have been performing in line with our expectations. Our successful launches in Hong Kong and the Philippines have led to our decision to further expand our sales and marketing support in these areas.

Over the next three quarters. We are planning to have meeting spaces and offices coupled with sales personnel in both of these markets and given the proximity of Canada to our corporate headquarters. We will strengthen Canadian sale support with our US base personnel.

In addition to strengthening our markets. We continue to look for future expansion in the Asia Pacific region and the Americas. In summary, we are pleased with the progress that we are making. We continue to stay focused on our three growth strategies. We believe tactical execution on these strategies will create a path to long-term shareholder value.

Now I'd like to turn the call over to Dave Colbert, to discuss our financial results in more detail.

Dave Colbert

Thank you, Doug and good afternoon everyone. As Doug mentioned, in the third fiscal quarter of 2014 we recorded the highest quarterly revenue in the company's history. Net revenue was $55.1 million, a 9.3% compared to $50.4 million in the same period in fiscal 2013.

Revenue for the quarter was negatively impacted by foreign currency fluctuation of $2.3 million or 4.6%. Sales in the Americas versus the prior year declined slightly by 1.4%. The decline in the Americas was more than offset, a year-over-year revenue growth in Asia Pacific of 29.8% or $5.2 million.

The increase reflects a 25.6% revenue growth in Japan as well as $1.1 million or 90% increase in sales from Hong Kong. Based on preliminary unaudited April results, Asia Pacific revenue in the third quarter benefited by approximately $2 million from customers accelerating their purchasing in advance of price increases that went into effect on April 1.

Also to note, our recurring revenue for the quarter was 55% of overall revenue similar to last year. Gross profit in the third fiscal quarter of 2014 was $46.6 million compared to $43.5 million in the same period last year. Our gross margin in the third fiscal quarter of 2014 was 84.6% compared to 86.4% in the same period last year.

A year-over-year decline in gross margin was primarily due to a $500,000 insurance reimbursement benefit in the prior year related to our product recall. Operating income for the third fiscal quarter of 2014 was $4.5 million for an operating margin of 8.1% compared to $3.9 million or 7.8% in the same period last year.

Our core infrastructure cost primarily general and administrative remained relatively in the quarter. Going forward, our investments will be in sales and marketing initiatives. The operating leverage in our business will be seen specifically in our G&A line, as we closely manage our core infrastructure spending, had another way we will invest selectively at our infrastructure while focusing primarily on sales and marketing initiatives.

For modeling purposes, it's important to note that in the third fiscal quarter of 2014. Our interest and other expense increased to $1.3 million which compares to interest in another income of approximately $100,000 in the same period last year. The changes due to interest payments made on our term loan, which we did not have a year ago.

Net income for the third quarter of fiscal year 2014 was $2.5 million or $0.02 per diluted share. This compares to net income of $3.4 million or $0.03 per diluted share in the prior year period.

Turning briefly to our year-to-date results, we reported revenue of $157.9 million compared to $156.7 million in the prior year period. Revenue for the first nine months of fiscal 2014 was negatively impacted by $9.8 million or 6.2% of currency fluctuation. For the first nine months of fiscal 2014 revenue in the Americas increased 3.9%, while sales at the Asia Pacific region decreased 4.4% reflecting softness in the Japanese market in the first half of fiscal 2014.

Operating income for the first nine months of fiscal year 2014 was $14.7 million or an operating of 9.3%. This compares to operating income of $11.8 million or 7.5% in the prior year period. During the prior year, operating income included approximately $5.6 million of one-time cost associated with the company's product recall.

Fiscal 2014, year-to-date net income was $9 million or $0.08 per diluted share compared to prior year net income of $7.8 million or $0.06 per diluted share including one-time cost. In the third quarter, we announced that our Board of Directors approved an initial $6 million that will be used for a debt pay down and common stock repurchase program.

We will fund up to $3 million in stock repurchases with the remainder being used to accelerate the pay down of debt. We will utilize cash on hand and future cash flow from operations to complete this program, which began in early April.

We continue to have a strong cash position as we ended the third quarter with $35.7 million of cash on hand. We are continually evaluating the best uses of our cash and remain focused on buying back shares with the goal of reducing our share count to between 70 million and 80 million shares outstanding being mindful of our working capital requirements and new product and global expansion initiatives.

We recognize and understand the importance of reducing our debt balance and we will continue accelerated debt repayments when possible and with that operator, I'd like to open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Alec Jaslow with Midtown Partners.

Alec Jaslow – Midtown Partners

I was wondering, if you can talk a little bit more about the Wicked Fast Sports acquisition, maybe a little bit more about their products, are you reformulating them and how do they compare like an Herbalife or other competitors products?

Doug Robinson

Well, thanks again for your question. We are very excited about the acquisition of the Wicked Fast products, they really fall in two of our three categories. Specifically feeling better and performing better with really the emphasis on the latter, performing better. These are products that Shawn Talbott, our Chief Science Officer developed over the last few years in particular for the individual that's looking for renewed energy, energy boost. Maybe the weekend warrior type athlete or maybe all the way up to the triathlon type athlete.

So we think that the products fit very well into our categories. With respect to part of your question around reformulating. We don't think there is going to be any need for reformulation that said however, we do need to integrate those products into our manufacturing processes and certainly are marketing and regulatory approval process.

So for those reasons, we have been quite clear that throughout fiscal year 2015, this is when we plan to introduce these products into our network marketing distribution channel. I think the last part of your question, is how they might stack up against some other products from other companies.

I'm going to refrain from going there right now. I think, when we do introduce these products with a regular cadence over the coming year. You'll see a, quite a run up of information on the products, what they're designed to do, the marketing materials, the education materials, etc. so I guess that's a long-winded way Alec of saying, stay tuned.

Alec Jaslow – Midtown Partners

Okay, yes that's helpful and maybe if you can talk a little bit about your take on the performance and activity independent distributors and the Americas. You think it's more a sense of the environment in direct selling or specifically more market share loss or just so we can understand the results better?

Doug Robinson

Well you know, in the last year alone our distributors, the count of active distributors is up 13% year-over-years so it is growing. We are at a point I think and our maturation as a company, where new products are critically important to us. The education around our products, the R&D that is brought forth with our new Chief Science Officer, Shawn Talbott is something critically important to our distribution channel.

Not only our incumbent distributors but then attracting new distributors to LifeVantage critically important. So I think all in all, we are poised not just here in the Americas and specifically the United States but really throughout, in all the markets that we are doing business and we are poised for growth.

Alec Jaslow – Midtown Partners

Okay, yes and then – I think okay I might have meant that preferred customers was down slightly but yes that's helpful, did you have any take on why preferred customers were down?

Doug Robinson

Well not necessarily other than, those that build our business, are business building distributors and those are people growing on other business building distributors are also our preferred customers. And as we have renewed growth in that business building distributor category. I think you can also see and be poised for and expect growth from our preferred customers as well.

Something that's critically important to keep in mind, when looking at our company is the scientific validation of our products. We've enjoyed since the company's inception a rather high percentage of people coming to company as preferred customers. I think that speaks volumes for our – the efficacy and the scientific validation of our products.

Our commitment back to your previous question around the Wicked Fast acquisitions. These are scientifically validated products. All of our products on a go forward basis will be very efficacious, scientifically validated and we think that will bode very well not only for the growth of distributors, but also preferred customers.

Alec Jaslow – Midtown Partners

Great, thanks. We enjoy hearing the story. Thank you.

Doug Robinson

Thanks for your questions.

Operator

Our next question comes from Steven Martin with Slater Capital Management.

Steven Martin – Slater Capital Management, LLC

Hi guys, good to see the top line -- moving again.

Doug Robinson

Hi, Steve. Thanks.

Steven Martin – Slater Capital Management, LLC

Couple questions, can you comment first on the stock buyback I know it didn't start until the end of the quarter, but if my calculations are correct and based on the disclosure and the 10-Q. it looks like, you only bought back about 250,000 shares in the last three weeks?

Dave Colbert

Steve, this is Dave. The buyback didn't begin until early April so it won't be reflected in the 10-Q. As we have discussed in the 10-Q, this is a 90-day program and it will run out into June and we are currently in the middle of this particular program and when the program ends we will go ahead and disclose the results of the buyback, but the specifics are it's a $6 million program; $3 million dedicated to equity and what isn't committed to equity will be applied towards accelerating our debt payment.

Steven Martin – Slater Capital Management, LLC

Right, actually it is in the 10-Q because on the front cover you give the share count as of May 1.

Dave Colbert

Oh! Got it, yes you're correct.

Steven Martin – Slater Capital Management, LLC

That's why I came up with my 250,000 shares. Back to follow-up on your comment about the $6 million. You've got – I know you talked about cash, you got $35 million in cash, you've got debt and you're paying fairly hefty interest rate on the debt. Is there any reason why you wouldn't be even more aggressive on both sides of that their pre-payment restrictions or can you just pay back chunks of that debt?

Dave Colbert

There are no hefty or expensive pre-payment restrictions other than a 1% pre-payment penalty for the first year of the debt, but as I mentioned in my prepared remarks. We are going to continue looking at accelerating our debt pay down and the programs we put in place. So I guess, well I'll just say there is stay tuned as we run out this program. We are going to continue looking at best ways to deploy our capital, whether we are doing acquisitions, sales and marketing, new country launches or buying down debt in an accelerated fashion.

So we are weighing all uses of our cash, but we constantly talk about the debt. The debt amount that we have.

Steven Martin – Slater Capital Management, LLC

Turning to the income statement. Most in the categories of expense have been pretty level G&A was $7.4 million in the first quarter, $7.56 million in the second quarter and it jumped to almost $8.5 million in the third quarter what was in that. I mean, I know you did acquisitions you've done a whole bunch of other things and what should we expect of that category going forward.

Dave Colbert

You expect about the same level of spending, where we are at today going forward. It's a culmination the investments that we've made up to this point to-date in either systems or resources but at this point. We see that and I've mentioned it also in the prepared remarks, we see that our spending in G&A is going to level off going forward and if we do invest incrementally, it's going to be in line with any type of revenue growth that we have so we want to see the operating leverage in the business being reflected through our G&A line.

Steven Martin – Slater Capital Management, LLC

Okay and now that R&D, you made some comments about R&D, now that R&D you've got these products launched and you purchased the Sports Nutrition product, what should we expect from the R&D category going forward?

Dave Colbert

Almost the same thing, is what we're going to see in G&A. with Shawn leading the R&D Team, is actually brought on some additional resources, some additional spending and professional services and so that spending is being rationalized. It's going to be it about the same level as it was historically.

So I don't anticipate seeing spike or dramatic increase in the R&D line in the near future.

Steven Martin – Slater Capital Management, LLC

Okay, thanks a lot.

Dave Colbert

Thanks, Steve.

Operator

Our final question today comes from [Araya Cole] from [Cole] Capital

Unidentified Analyst

Good afternoon and again best of luck on a go forward basis. I'm encouraged to hear all the changes taking place the company. Handful of question there quickly. Regarding Japan, can you kindly clarify what the price increase was in local Yen terms be on April 1?

Dave Colbert

We mentioned in the 10-Q, it's a 20% price increase roughly in line with what the devaluation of the Yen was a year ago, this past January which was about 20% Yen devaluation. There was also effective April 1, an increase in the consumption tax in Japan as well from 5% to 8%, so the price increase was also to help mitigate the impact to that.

Unidentified Analyst

Can you explain how really that works? I'm going to make up numbers, they're not the correct numbers. If someone was paying 100 Yen for a product, you raised the price to 120 Yen, but how does – can you just explain how the consumption tax fits in there and to what degree part of the price increase to an essence passing on to the government through the consumption tax?

Dave Colbert

You're correct, it would go from 100 Yen to 120 Yen. The consumption tax is going to be on the price that we charge and we withhold it. So it's going to go from 5% of the purchase price to 8% of the purchase price and it's that amount that would be remitted.

Unidentified Analyst

Fine. During the past, if your price was 100 Yen, 5 Yen was remitted to the government now with 120 Yen, you're remitting 8% of that.

Dave Colbert

Correct.

Unidentified Analyst

Okay, understood. Thank you. Second question, regarding your active independent distributors. Often times the results from the convention, in this case I know one, that had a great motivators in terms of giving your distributors excited and engage regarding the company in where it's going, can you give us some tangible numbers in terms to what degree you saw a movement in the pendulum in terms of recruitment success?

It wasn't here in the March quarter then what you see maybe in the month of April or other things. They would suggest that your convention result, this year totally seemed to have more of an impact that maybe you had last year or a year before?

Doug Robinson

This is Doug, [Araya] thanks for the questions. You're absolutely right and that not only our global convention which occurs every April but the other quarterly events what we call our Elite Academies are absolutely motivating events, not only leading up to the event because a big portion of the event themselves are in distributor recognition.

So when our distributor rank advance prior to an event they recognized from stage for that achievement and it's something that's very motivating, but then really at the heart of your question is, once the event takes place and they back out in to the field with renewed enthusiasm and belief and energy. We should see a corresponding up tick if you will, I think those were your words and I agree wholeheartedly with them.

In the marketplace and ultimately in our distributor account. I'm given that the Annual Global event that you referring to took place just a couple weeks ago here in Salt Lake. It's really too early for us to certainly go public with what we are seeing in terms of an uptick, but we are watching that very closely.

I think the enthusiasm that we are feeling, not just here domestically but the global convention we had several hundred distributors from throughout the world that joined us from our other markets. The enthusiasm and belief, that we witnessed over those three days was really at an all time high.

So we absolutely think, that now that they're back out in the field. They're going to take that enthusiasm, that belief, those commitments and grow their business and I think our numbers will reflect that going forward.

Unidentified Analyst

Okay, thank you and lastly regarding your new skin regimen for launching it. I've a two part question, you've been quite successful with Protandim in the past, as you've a lot of your representatives have used the television video footage of the product which has been helpful in their efforts to sell that product.

So what degree are you going to be having some sort of video, other sorts of support media for your representatives to help them be successful, with the skin regimen not just your most elite representatives would even younger rookies can be successful on that. And the second part of question was regarding selling of the – your skin care regimen often times the sales people in general are a little shy about trying to sell new products.

Often times, it's your nature is just kind of go with what you know, what is been successful. How are you going to try and make sure that your distributor force is very engaged and trying to sell the new skin regimen and that was kind of remain comfortable with southern part of Protandim products have sold before primarily.

Doug Robinson

Sure, great questions. Let me try that, touching all of them. First and foremost, we think that our new skin care regimen, the TrueScience skin care regimen is actually a product making category. I mean it is a full regimen that from our clinical trials that we've already conducted and the results from those clinical trials are quite spectacular.

Especially when stacked up against other popular brands that are sold through general retailer or through other network marketing companies and we are incredibly excited about the clinical results and even the early indications of all the new users of our skin care regimen. The feedback is been overwhelmingly positive, so to go off at that early belief in business building success.

We absolutely have to follow-up with appropriate marketing materials, appropriate reach and into the public markets and what have you so and with our marketing department, our sales department but also our research and development department and with our new Chief Science Officer, Shawn Talbott.

We are getting the message out in ways that we have never done before for our products other than Protandim, to the very heart of your question. So look for more that, in fact I mentioned in prepared remarks Shawn Talbott just completed a 20 city a radio tour, where he is talking about oxidative stress. Well our skin care regimen is really design specifically to attack the ravages of oxidative stress topically.

In way far beyond what our predecessor TrueScience skin care cream did, so we are incredibly excited for that. Your second question or the follow-on to that was our distributors and how they will bring these new skin care regime into their sales vernacular, if you will and again I think the burden is on our shoulders, here at corporate to build the proper materials from the marketing and sales standpoint and support standpoint.

We launched just this past year LifeVantage University, which is designed specifically to educate brand new distributors, not only brand new to LifeVantage but quite possibly brand to network marketing. Clearly this new skin care regimen will be integrated into that curriculum and as we launch new products in the future, they too will be integrated into that curriculum.

So that all of our distributors are armed appropriately and frankly equally across all of our products because we believe so strongly in them.

Unidentified Analyst

Okay, thank you.

Doug Robinson

Thank you very much or your questions and thank you everyone for all of your questions and thank for joining us today. Over the past nine months, we have made significant improvements to our company. We have added talented leaders in science and in research and development, in sales and marketing and we've made strategic investments into our sales and marketing efforts, which in turn are further inspiring and uniting our distributor base.

Our product portfolio has expanded and we continue to work and further innovation and we look forward to updating you on our progress, in our future calls. So thank you again for joining us today. Thank you for your support with LifeVantage.

Operator

That concludes today's presentation. Thank you for your participation.

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