Astral Media CEO Discusses F4Q10 Results - Earnings Call Transcript

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 |  About: Astral Media Inc A (AAIAF)
by: SA Transcripts

Astral Media Inc. (OTC:AAIAF) F4Q10 (Qtr End 08/31/10) Earnings Call October 27, 2010 2:00 PM ET

Executives

Andre Bureau - Chairman

Ian Greenberg - President and CEO

Claude Gagnon - SVP and CFO

Robert Fortier - VP, Finance

Jacques Parisien - Group President, Astral Radio and Astral Outdoor

Sylvia Morin - VP, Branding and Corporate Communications

Analysts

Paul Steep - Scotia Capital

Adam Shine - National Bank Financial

Drew McReynolds - RBC Capital Markets

Peter MacDonald - GMP Securities

Scott Cuthbertson - TD Securities

Tim Casey - BMO Capital Markets

David McFadgen - Cormark Securities

Colin Moore - Credit Suisse

Operator

Welcome to the Astral Fiscal 2010 Fourth Quarter and Yearend Financial Results Conference Call. At this time all participants are in a listen-only mode. I would like to remind you that after the presentation the analysts will be invited to ask questions first followed by the members of the media. Instructions will be provided at that time for you to jump for questions. I like to remind everyone that this conference is being recorded on Wednesday October 27, 2010 at 2:00 p.m. Eastern Time. (Operator instructions)

It is now my pleasure to introduce Mr. Andre Bureau, Chairman of the Board of Astral. Please go ahead, sir.

Andre Bureau

I am Andre Bureau, Chairman of the Board of Astral and I’m joined this afternoon by Ian Greenberg, President and Chief Executive Officer, Claude Gagnon, Senior Vice President and Chief Financial Officer, Robert Fortier, Vice President, Finance, Jacques Parisien, Group President, Astral Radio and Astral Outdoor, and Sylvia Morin, Vice President Branding and Corporate Communications.

On behalf of all of us here in Toronto, I would like to welcome you to this fourth quarter and year end conference call for fiscal 2010. During the course of this call, Ian and Claude will give you an overview of the results, after which we will proceed with the question and answer period as usual. We will take questions from analysts first followed by questions from the media.

Ian Greenberg

Good afternoon everyone and thank you for joining us this afternoon. Fiscal 2010 was a solid year for Astral and it marked our 14th consecutive year of profitable growth. If we exclude the impact of the retroactive Copyright Board tariff increases a 56th consecutive quarter. I am particularly pleased with the results delivered by each of our business unit. Each of these units posted solid performances in a challenging economic environment and they recorded revenue gains for both the quarter and the year as a whole.

In fact, fourth quarter performance has showed encouraging signs of recovery for the advertising market, building momentum into the first quarter, the new fiscal year and hopefully beyond.

For fiscal 2010 Astral’s overall revenues totaled 961 million up 6% compared to last year. Excluding the impact of the Part II license fee accrual reversal and the Copyright Board tariff increases, EBITDA rose 5% to 307 million versus 293 million in fiscal 2009. Net earnings for fiscal 2010 totaled a 175 million or $3.11 cents per share for increases of 13% and 12% respectfully. These also exclude the impact of a future income tax recovery recorded this year and an impairment charge booked last year.

Now let me briefly turn to the 2010 fiscal and fourth quarter performances of each of our divisions. Our television group recorded revenue growth of 7% for the year and 8% for the quarter. For the year, revenue growth stemmed from an overall prime and subscriber revenues of 6% and the robust 11% increase in advertising revenue. For the fourth quarter, subscriber revenue rose 5% and advertising revenue rose 25%.

On the pay TV side the number of subscribers for the movie network and Super Écran grew by 89,000 to 1,848,000 a solid 5% increase year-over-year. Overall, the performance of the pay TV group was lifted by the launch of new high quality television series and exclusive programming, HBO Canada, as well as the continued expansion of digital distribution, high definition service, and online offerings. More recently and with a view to broadening the reach of our content, we signed two agreements with Rogers, first for the distribution of several of our TV services such as TMN, HBO Canada, and MoviePix on the Rogers on-demand online platform, and second to add the distribution of Playhouse Disney through the Rogers on-demand and online packages.

Now, let me turn to our radio group. Over the past year radio revenues grew 3% ending the year at 334 million. Fourth quarter revenues climbed 7% over the corresponding period last year, another illustration of a strengthening advertising market. All of our 83 radio stations websites have now deployed the new MS interactive platform. This provides our stations with the desired flexibility to develop local online content that can more effectively engage the listening audience with both advertisers and on-air personalities.

Finally, let me briefly cover our out of home group 2.57, it reported revenues of 77 million a solid 10% growth over last year, and for the fourth quarter out of home saw a healthy increase of 19%. Both our new digital outdoor advertising network in Montreal, Vancouver and Toronto as well as the Toronto street furniture program contributed to this solid performance. I will now ask my colleague Claude Gagnon to give you a more detailed overview of other financial information for the quarter and the year.

Claude Gagnon

Thanks a lot, Ian. Just a couple of quick notes, with regard to our cash flow or cash generation, in Q4 we reimbursed the $10 million of our bank dept which bring the total reimbursement for the year to $105 million and since we booked that in October 2007, we’ve now have reimbursed a total of $235 million which brings our bank debt balance down to $590 million. That leaves us with a comfortable net debt to EBITDA margin of 1.9 and subsequent to year end in fact this week we repaid another $10 million of our bank debt.

Another cash flow item that you like to focus on is capital expenditures, you will see that we finished the year at about $69 million of disbarment on capital expenditures and intangible and other long term assets. At this point, we figure that that number should be somewhat lower next year to the $60 million range. You heard and read about the recent decision of the Copyright Board with regard to increased tariffs. The result for Astral is pretty well as advertised in Q3 in the subsequent event note and they resulted in a total charge of $9.7 million in fiscal 2010, $5.9 million of that amount relates to fiscal ‘08 and fiscal ‘09 and $3.7, $3.8 million the amount relates to fiscal ‘10. On an ongoing basis, going forward we estimate that the increased charges will be $4.2, $4.3 million a year.

Final point with regard to income taxes, you will know that the effective rate in Q4 is unusually low at 24% and you will find an explanation of that matter in the MD&A on page 13, which states that we reversed about $3 million, a provision of roughly $3 million for a contingent tax matters which are now settled. That accounts probably translates to about $0.05 a share and we had a similar item recorded in Q4 of last year. On an ongoing basis going forward, we figured that our normalized income tax rate should be roughly 29.5% to 30% in fiscal 2011. Ian.

Ian Greenberg

Before moving to the question portion of the call, let me sum up the year in a couple of words. In fiscal 2010 our focus on programming and branding initiatives continued in order to further strengthen our portfolio of assets. In the second half of the year all our business posted solid revenue growth as the advertising market showed signs of recovery.

Looking forward, we are in a low visibility environment and advertisers’ investment decisions continue to be last minute decisions. However, we remain hopeful that we can continue to build on the momentum we developed in the second half of the past fiscal year.

Andre Bureau

I would now like to open up the call to questions from the analysts.

Question and Answer Session

Operator

(Operator instructions) First question comes from Paul Steep of Scotia Capital. Please go ahead.

Paul Steep - Scotia Capital

Ian, maybe the first one would be on your online product, maybe you can tell us what is left in terms of contents that migrate on to either your own platform or the various BDU platforms and when you think that sort of takes place.

Ian Greenberg

We now have arrangements in place with Rogers with Videotron and with Bell that pretty well all our services are available online which means any subscriber to theses BDUs can get our programming online anywhere they are in Canada.

Just another way of delivering what I will promise which is to get people what they want, where they want it, and how they want it. There is not much more now that Rogers has come on stream in October of this year actually, that just all our major distributors will have all the programming online to all their customers.

Paul Steep - Scotia Capital

Actually one clarification, 90% sure there, but just to be safe, you had mentioned TMN, I assume that includes HBO Canada within that on the Rogers deal?

Ian Greenberg

Absolutely correct.

Paul Steep - Scotia Capital

Just to be safe on that. Second one, either you or Andre maybe the impact or view on sort of pick and pay when we get to that world, the end of the 2011 broadcast year, do you guys have any take on or thoughts on that so far?

Ian Greenberg

We’ve had pick and pay in Quebec for many, many years now. Frankly as long as we have the ratings that we presently enjoy with all of our services, those are the services people want. And when we went from a fixed package to pick and pay a few years ago in Quebec, we did not see any dilution of subscribers.

We have confidence that all our services are well appreciated, they have excellent ratings, they are enjoyed by consumers, and whether its pick 10, pick 20, or pick 30 that we will be able to maintain the kind of penetrations we presently have.

Operator

Next question comes from Adam Shine of National Bank Financial. Please go ahead.

Adam Shine - National Bank Financial

Very quickly, Ian, may be two or three items. The pay-TV trend sort of moved up nicely on a seasonal basis in Q4 after the usual dip in Q3, and certainly performed better than Corus out west. Was there anything related to maybe a marketing initiative that was successful, or frankly did the BDUs perhaps step up a little bit in terms of up-selling the product for you?

Ian Greenberg

It’s from quarter-to-quarter and then season-to-season, we always say you can either be a head of the curve behind to be a promotions by our distributors and there is no question that we’ve had tremendous campaign with Rogers as an example getting ready to go online for the services. There has also been some excellent program. It’s a combination of the programming we advertised early in the game, the coming of the (inaudible) Empire and we have also as I said been active in the market with our distribution partners and that took place early in the fourth quarter and we’re seeing results for it.

Adam Shine - National Bank Financial

Just looking out, building on Paul’s question in the context of the digital transition next year I mean, can we assume that there will be a more stepped-up effort in the context of those peripheral homes that will be migrating to digital, and certainly you can upsell them on the pay package post August next year?

Ian Greenberg

All I can say is our plans call for our penetration rates through remain stable as we have this transition. We will do everything in our power to make sure that our high penetration rates remain there.

Adam Shine - National Bank Financial

Just flipping may be to the dividend question. I know this is an issue that the Board deals with around the AGM in December. Does anything sort of change as part of the thought process going into this December in the context that there continues to be a real hunger for yield in the marketplace? Corus just popped their dividend up rather meaningfully today, and now sits at about a 3.5% yield. Any changes to sort of the historical perspective?

Ian Greenberg

We are cognizant of the investor’s desires and the fact that at the present price obviously our dividend is got one of the yields and so we are taking a very close look at it and we will make a final decision by the year end meeting in December.

Adam Shine - National Bank Financial

Maybe just lastly, just in the context of -- I know you discussed visibility or the fact that things are still very much last-minute. Can you talk at least in terms of early Q1 trends, both in regards to especially television, given the strength we just saw in Q4, and on the radio front?

Ian Greenberg

Yes, Q4, that number is not sustainable. We were hopeful in TV in the first quarter from what we see now somewhere in the low double-digit and in radio in the mid-single digit.

Operator

Next question comes from Drew McReynolds of RBC Capital Markets. Please go ahead.

Drew McReynolds - RBC Capital Markets

Just a strong theme of the transition to digital, may be just another kind of a follow-up. Ian, just remind us when you look across your specialty properties, are there any wholesale rates that you have at the moment regulating that effectively become deregulated in 2011 or are you largely on negotiated agreements as we stand today?

Ian Greenberg

They are all negotiated.

Drew McReynolds - RBC Capital Markets

Obviously, no change from that perspective. Shifting gears, maybe a couple of minor items, Claude, for you. Just on corporate costs for 2011, can you give us a sense of what we would expect there?

Ian Greenberg

Roughly around we’re excluding the stock-based compensation just like the some more between $20 to $21 million going forward.

Drew McReynolds - RBC Capital Markets

Just on the outdoor business, Ian, have you kind of discussed what your kind of endgame is in terms of footprint? Obviously, you have sizable position in three of the major markets. Can you kind of just give us the color on what you ultimately see maybe over the next two to three years?

Ian Greenberg

Let me say this sure. If we don’t make an acquisition, our footprint is pretty well-established in Quebec, Ontario and British Columbia. Obviously, if we would have make an acquisition of that was do well in the future and they were cross kind of players and obviously we have a cross kind of the platform. It all depends whether than an acquisition is durable. If it’s not durable, we will stick to the three markets we’re presently operating.

Drew McReynolds - RBC Capital Markets

In the past, you’ve alluded to consolidated outdoor margins somewhere in the low to maybe mid-30s. Just given all the moving parts in that business, is that something that we should expect over time as still reasonable?

Ian Greenberg

Yes, sir

Drew McReynolds - RBC Capital Markets

Just a final question, with respect to the online radio platform, just wondering with the investment that you’ve put into that, what your strategy is there for monetization. Do you see this becoming a meaningful part of the radio contribution, or is it just a part of the platform that you have to be involved with just to operate radio in Canada?

Ian Greenberg

Jack Parisien, President of our aerial division just the (inaudible) asking to answer that.

Jacques Parisien

It’s a mix of both obviously we see this adding value to the listener so, it will probably help us retain listeners and increase our total participants listening and also it is much more feeling to advertisers, we’re now in the training process with our sales people across the country and all of a free stations and that will so foremost of Q1 and hopefully I will see the results coming in Q2 and going forward.

Drew McReynolds - RBC Capital Markets

If I can just slip in one final one for you, Claude, just the timing of the $10 million in the contingent payment, that was supposed to come by the end of calendar 2010. Is that correct?

Claude Gagnon

That’s still like that estimate it’s a bit of a (inaudible) situation and to we get our final bill from this year here with regards that the new peak which should be sometime in November from my understanding, it won’t be able to figure out the amount that we have to pay on a contingent basis back to standard. Assuming we do get our billing in November we should be able to set all the contingency by calendar US.

Operator

Next question comes from Peter MacDonald of GMP Securities. Please go ahead.

Peter MacDonald - GMP Securities

A couple questions, follow-ups first. The comment that you made about a potential acquisition in outdoor, are you implying that there is one on the table, and should we expect something in the next 12 months?

Ian Greenberg

The answer is there is nothing on the table. I talked about a potential acquisition in outdoor for few years and the reason I talk about it, one of our desires is always to be number one, the number one radio or number one in pay or number one is French specialty and if there was an opportunity, we’d like to become one in outdoor. However, you’ve going to have willing to seller and it’s got to be the price where it’s going to be (inaudible). Those conditions as I speak to you today are not in place.

Peter MacDonald - GMP Securities

On the TV everywhere push that you are doing right now, should we be looking at the business plan as really to attract customers and maybe increase the stickiness of the customers, or are there revenue opportunity that we should be starting to consider with respect to that?

Ian Greenberg

It’s more of the formal than the lateral.

Peter MacDonald - GMP Securities

The last question is maybe you can just give us your thoughts on Netflix and the impact it might have on your business, maybe looking out a little bit further than just this year.

Ian Greenberg

Our job is to make sure that we have first one content that consumers want and that means the programming fund, HBO, the programming from show time and most of the great majority of the major US studios. As long as we’re able to satisfy customers by giving them that kind of programming which they will not be able to get on any other platform. I’m not saying there is not a place for Netflix, but I don’t think it will diminish our growth, we’re looking for growth in fiscal 2011 about the same range that we had in fiscal 2010, which is another 5% knowing full well, but Netflix is there.

Peter MacDonald - GMP Securities

Do you have full content exclusivity with the HBO and Disney in Canada including the internet.

Ian Greenberg

While you say the internet you mean for online?

Peter MacDonald - GMP Securities

Yes, is there potential that somebody could go over the top on you with respect to those, if they change their business plans?

Ian Greenberg

No.

Peter MacDonald - GMP Securities

What’s the contract length each content?

Ian Greenberg

First of all, they vary and second of all, that’s not something we disclose.

Operator

Your next question comes from Scott Cuthbertson of TD Securities

Scott Cuthbertson - TD Securities

I just wanted to ask sort of a big picture, Ian. Obviously, there has been a lot of activity in this space recently, with consolidation and such. I just wondered how do you see the world these days, and do these recent moves cause you to rethink your strategy at all or make any tweaks on that.

Ian Greenberg

Firstly, let me make a sort of general statement. I am frankly very pleased by the consolidation taking place and I will tell you why. The concern that we have had going you know upon the past is that content can be available on platforms which do not of key put in the Canadian Broadcast system and through traditional BDU. If you look at what’s happened after the consolidation between Rogers, Videotron, Shaw and Bell, and then you take the two large independent players Corus and ourselves, we control well over 90, I say 95% or 98% of all the most popular content that people want to watch.

It’s healthy for the Canadian broadcast system. It’s in our interest to have the present ecosystem continue. I saw a great line from an invest banking firm in the States that said, "The only thing we have to fear is stupidity itself." In Canada we have a good shot at keeping this ecosystem going to keep get consumers what they want, how they want, where they wanted and yet have the product through a Canadian broadcast system as we know it.

We have the best of all worlds and a lot of that sort of solidified by the consolidation that has taken place this year namely, Shaw’s purchase of Canwest and Bell’s purchase of CTV. From that point of view frankly I am very optimistic, its great for the Canadian broadcast system and for the consumer.

Scott Cuthbertson - TD Securities

It doesn’t change the way you do business at all?

Ian Greenberg

It doesn’t change. I mean you look at pay-TV we always been offering the best, all of HBO, all of Showtime and the great majority of the major US studio products. That’s going to continue and what put us in the good position to have the best offering for consumers and that will continue for the future in that way make us very relevant to consumer needs and wants.

Scott Cuthbertson - TD Securities

A couple others. Just wondered, Claude, on the interactive radio initiative, the expenses on that were running sort of CAD2 million or so a quarter. That is still ongoing for 2011?

Claude Gagnon

Yes.

Scott Cuthbertson - TD Securities

Maybe Andre has a view on this. I was just wondering, this darned tariff came in and it is certainly not a positive thing. Now, we’ve got C-32, which is, I gather, up for another reading. I just wondered what the timing is on government taking a look at that bill? Without second-guessing the commission, of course, what do you think the chances are that there could be a favorable decision with respect to tariffs in this area as a result of that?

Andre Bureau

First of all on bill C-32 that we support. We don’t know because the agenda is in the hands of the government. We hope that it will be addressed very soon and that it would be accepted in the coming months. We believe that from an international point of view because of the agreement that were that we have signed in the past I mean Canada’s signed, its time move on this one, and we hope that they will do en-cash quickly as possible.

On the question of tariff, so you’re C4 carriage or value for carriage?

Scott Cuthbertson - TD Securities

No, no, I was mixing my metaphors. I meant all the C-32 stuff. Is there any way to take a shot at if you got a favorable ruling, what that would mean in terms of savings?

Andre Bureau

No, I don’t have the numbers in front of me. I am sorry, we could provide you with that later on but I don’t have it now.

Scott Cuthbertson - TD Securities - Analyst:

Just the last question was, I know all faces aren’t created equal, but you’ve been pretty active in the out-of-home business, and especially with this digital initiative, and you are going to be spending more money in 2011. Just wondering, can you help me out at all with how about the increase in inventory that you are going to have next year and how that could translate into revenues in that business?

Ian Greenberg

First of all, the expansion problem in digital has been very successful for us, which is obviously why we are continuing the plan for fiscal 2011. They are not that many cases per se, by adding as an example 20 faces but of course you got the opportunity to have the increased revenue first faces because of the 6 ads per minute. Digital helps us to keep the growth rates up; traditional media on billboards has not been growing that much and the most part of the growth your seeing at Astral comes of other two areas and that is digital board and Toronto street furniture. Otherwise, the industry itself is not been growing.

Scott Cuthbertson - TD Securities

Just the last thing, just remind me, there is a couple of things there for tender in Montreal and Ottawa, I believe, in this space. Are either of those in 2011?

Ian Greenberg

No, first of all, in the case of Montreal, the base are earliest that would be for 2012. Insofar as Ottawa, we mentioned it last time, Scott, that the city put down certain criteria of minimum expenditures and minimum rent and frankly they were not attractive to us and when didn’t bid. Yes, I don’t think they had any other bid that qualifies so they at point are going to come back I don’t know when it will be it, 2011 but frankly Ottawa compared to a city like Montreal and Toronto is not that significant from the point of view of the size of the contract.

Operator

Next question comes from : Tim Casey of BMO Capital Markets. Please go ahead.

Tim Casey - BMO Capital Markets

Ian, can I just follow up on Adam’s question on dividends? If you could educate us on how you are approaching share buybacks as well, given the outlook for the leverage ratios on your balance sheet? Second question, could you talk a little bit about what you are seeing in terms of geography? Is the outlook for the radio business the same across the country, or is there still some significant differences when you go east to west?

Ian Greenberg

I will handle the first one, Tim, and then I will Jacques to answer about that geography in radio. We’re responsive to share holders and when you look at the dividend ratio were paying out we and look at the free cash flow and you look at the benefits of the share buyback, without knowing for sure what’s going to happen, my own thinking here is that will take a more aggressive stand in both those areas. I increased the dividend and becoming more aggressive when the share buybacks. I don’t know of that makes it clear for you or?

Jacques Parisien

Lets cross the country starting out west we have seen good results out of BC, the industry and ourselves. Alberta has been good even though Calgary and Edmonton have new incumbents who are coming in the last two, three years and it sort of rocked the markets a bit, but none the less we’re expecting that to come back to where it was previously. The Prairies is doing okay, Toronto has definitely shown some good strength in last quarter and we expect that to continue. Southern Ontario is suffering a bit from the recession, but than it was. Quebec is pretty flat and so are the maritime.

Tim Casey - BMO Capital Markets

When you say good, do you mean revenue of 5% or revenue of 10% ?

Jacques Parisien

Low singles.

Operator

Next question comes from David McFadgen of Cormark Securities. Please go ahead.

David McFadgen - Cormark Securities

A couple of questions. First of all, just a clarification. The CAD10 million contingent payment back to standard, that is outside of the CAD 60 million of CapEx, right?

Claude Gagnon

Absolutely its part of this, it will go into the purchase priced equation of the standard asset, its completely outside of that.

David McFadgen - Cormark Securities

When you talk about CAD60 million in CapEx, can you give us a breakdown on how much of that would be for Outdoor?

Claude Gagnon

Roughly half.

David McFadgen - Cormark Securities

What are your plans to put your channels and your content on wireless platforms?

Ian Greenberg

The online on the laptops and the computers is obviously our first objective. I don’t think the potential, you have to look at the kind of content we have. I mean, things like sports are very practical on mobile. I am not quite sure how many people want to watch a full movie or a drama series on mobile. We’re working on it but doubt that to be a significant offering to our consumers as regular online platforms.

David McFadgen - Cormark Securities

If you were going to get more aggressive there, do you think you would need to acquire something, or you can just do it in-house?

Ian Greenberg

I don’t think we have to make any acquisition for that purpose.

David McFadgen - Cormark Securities

Sorry, I don’t know if you answered this one earlier, but when you look at the fourth quarter, your TV ad growth was 25%. You said that it’s going to slow down, although still be pretty good in Q1. Why was it so high in the fourth quarter?

Ian Greenberg

How about having very good programs and a great sales force?

Operator

The next question comes from Colin Moore of Credit Suisse. Please go ahead.

Colin Moore - Credit Suisse

I just have one question remaining. It’s actually just on the TV advertising. I was wondering if you could compare the upfront for 2011 versus last year. I understand there is a lot of advertisers, and the agencies don’t have a ton of visibility. Just wondering how they approach this upfront purchase buying on the spot, and how that may lead into how you are managing your inventory this year? You clearly did a good job last year.

Ian Greenberg

Upfront especially is not the same as upfront in conventional. As I said earlier, beyond first quarter there is very, very little visibility. It’s the same situation we faced last year and then obviously in the fourth quarter things changes dramatically. The first quarter, as I said, looks like at this point is best we can see low double digits. The upfront is not the same meaning in our world as it is in the conventional world.

Operator

(Operator Instructions).

Andre Bureau

Are there any questions from the media?

Operator

There are no further questions at this time.

Andre Bureau

Thank you. I would like to remind those needing more detailed financial information that the complete audited consolidated financial statement with related notes and the MD&A is available in our website at www.astral.com, and if members of the media have any further questions please contact (inaudible) or Hugues Mousseau at 514-939-5000 following this call.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect your line.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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