UQM Technologies, Inc (NYSEMKT:UQM)
Q3 2016 Earnings Conference Call
February 04, 2016, 04:30 PM ET
Joseph Mitchell - Chief Operating Officer and Interim President and Chief Executive Officer
David Rosenthal - Treasurer and Chief Financial Officer
Harold Weber - Wells Fargo
Thurman Willis - Private Investor
Bruce Kureski - Private Investor
John Ward - CRT Capital
Joe Vidich - Manalapan Oracle Advisors
Irving Reifman - Reifman and Altman
Patrick Attard - Private Investor
Good afternoon, ladies and gentlemen. Welcome to the UQM fiscal year 2016 third quarter earnings call. Today's speakers on behalf of UQM are President and CEO, Joe Mitchell; and our CFO, David Rosenthal. [Operator Instructions] I will now turn the conference over to UQM's Chief Financial Officer, David Rosenthal. Please go ahead.
Good afternoon, everyone. Thank you for joining us on UQM's conference call to discuss our third quarter results, and thank you also for your patience during the technical issues that we were having last few minutes.
Before we get started, I'd like to review our Safe Harbor statement with you. This conference call may contain statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. These may include statements regarding our plans, beliefs or current expectations, including those plans, beliefs and expectations of our officers and directors with respect to among other things, gaining required certifications, new product developments, future orders to be received from our customers, sales of products from inventory, future financial results, liquidity and the continued growth of the electric-powered vehicle industry.
Important risk factors that could cause actual results to differ from those contained in the forward-looking statements are contained in our Form 10-Q filed today and our Annual Report on Form 10-K for the fiscal year ended March 31, 2015, both of which are available on our website at www.uqm.com or at www.sec.gov.
And now, I'd like to turn the call over to Joe to begin the discussion.
Thank you, David, and good afternoon, everyone. I want to start by welcoming all of you and thanking you for joining our earnings conference call today. I'm going to provide an overview of our fiscal third quarter 2016 performance and also discuss activity and current market condition. David will then review our financial results in more detail. When David concludes, we'll be happy to take your questions.
First, I would like to state that we continue to execute on our strategic focus on the commercial transportation market in China, and we are very encouraged by our progress. Despite the current turmoil in the Chinese markets, we remain confident that the government's focus on reducing emissions remains a priority, and the electrification of commercial vehicles is a key component in that effort.
The Chinese government has prioritized efficiency and reliability, as components in their subsidy plan. And we believe that our technology has significant advantages on those metrics compared to the incumbent solutions on the road in China today.
As we noted in our press release earlier this week, we have successfully completed the initial shipment of our PowerPhase Pro 135 systems to ITL Efficiency Corporation in China. As previously discussed, these systems are part of the 10-year supply agreement between UQM and ITL.
The systems will be used to begin the test and certification process for the 6 meter to 8 meter bus market in China. We believe the testing and certification process remains on track and we expect to have results available late this summer, followed by initial commercial shipments in early 2017.
As many of you are aware, key members of our executive team, including myself, completed our visit to ITL's facilities in China, along with visiting one of ITL's bus customers at their factory in November. The meetings were very productive, and I am confident that our relationship is progressing well.
We also met with other potential partners and I believe by striking the deal with ITL, it has provided even greater tailwind in our business and developments in China. Overall, we came away from our China trip with a stronger conviction that we are moving in the right strategic direction and we look forward to forming partnerships with additional Chinese customers. I also want to reiterate that we are confident about our investment in business plan and long-term outlook in China, despite the current economic slowdown in the region.
China has about 20% of the world's population and the fastest growing economy around the globe. The Chinese government has recognized that the resource intensity of its country is not sustainable, both economically and environmentally, and is increasingly encouraging growth driven by energy efficiency gains, technological innovation and renewable energy.
China has formalized its effort to mitigate climate change in recent five year plans. For example, as part of the 12th five-year plan for 2011 through 2015, China has invested significant resources in clean energy and greenhouse gas emission control. It established a binding target of a 17% decrease in CO2 emissions per unit of GDP from 2010 levels by the end of 2015.
The plan includes several policy measures, such as establishing carbon emissions trading systems overtime. And China State Council also announced that annual coal consumption will be capped at below 4.2 billion tons until 2020. All of these speak well to help us, as we continue our entry into this market.
Also speaking of other partnerships, we had the pleasure to host the KESHI team in our Longmont facility for a full week, last December. The KESHI team was in our facility for training and preparation to take on the explosion-proof component that they will be responsible for in the final assembly, those explosions [indiscernible] as well as we were working on executing the certification plan.
As a direct result of last quarter signing of the supply agreement with ITL, we recognized the growing interest level in our products, and have hosted numerous meetings with potential partners and customers at our headquarters. We strongly believe that by continuing to execute on our strategic plan, we will further draw traction and attention to our strong business plan and high-performance of our quality products. Moving forward, we will continue to work and execute on our plan for certification of our products in China, as we move forward towards our localized production that we look to launch in 2018.
Our shareholder base remains very important to us, and we are taking steps to keep you updated on our progress and increase awareness of UQM. The UQMonitor through EnergyTech Investor is currently being filed to the U.K. on full distribution list, while simultaneously being upload and made available through our website at www.uqm.com. We believe that as part of our success to keep our valued shareholders up-to-date, with industry news delivered together with various UQM updates.
Recently, Jay Leno featured UQM in his car show, Jay Leno's Garage, which will be a preliminary view to what would be a longer-term full video on an electric vehicle that he is developing. In that video, Jay mentioned that UQM's propulsion systems are best-in-class in the industry. This video had received a great deal of attention, and we want to directly communicate these special highlights to our shareholder. We also will be in New York next week talking with a number of investors and giving them the UQM story.
Now, I would like to mention a couple of highlights in the quarter for each of our company's focused areas; first, on propulsion systems; secondly, auxiliary products; and third, on our engineering services. Starting with propulsion systems. We are happy to announce that we continue to see growth in our propulsion system business with follow-on orders from both Proterra and Zenith, and with delivery starting as early as the first quarter of calendar year 2016.
A new purchase from Proterra for the UQM PowerPhase 220 motor and controller system was received in November. These units will be used for the Proterra Catalyst Bus Program for fulfillment of current orders and for this new state-of-the-art UQM powered bus.
The Proterra Catalyst conquered a 15.5% grade, which is unprecedented in this type of market for an electric bus, making it an ideal zero emission option to serve metropolitan areas with challenging topography in the West Coast, such as San Francisco and Seattle. In addition to new records, Proterra recently announced the completion of over 1 million customer driven miles for the exclusively UQM powered bus fleet and forecast continued sales growth.
And we continue to actively look for new applications, and a good example of this was Kalmar, which we recently announced, which is using our systems in airplane pushback tractors and they have a number of major airlines as customers. And as we move -- and there is a greater electrical adoption of this type of product, we will see further success and growth in this market.
On to auxiliary. As we stated last quarter, we continue to see growth within the auxiliary sector, particularly with our fuel cell compressor modules. During the fiscal third quarter, we received follow-on orders for production from Air Comm for a 4.5 horsepower air condition compressor and motor systems. And these systems will be delivered through calendar year 2016 for use in aviation applications.
We pride ourselves in having Air Comm as a loyal customer. Their products are known throughout the industry as high-quality durable products that provide reliable, efficient and effective performance under all operating conditions.
The UQM permanent magnet system has proven unique capabilities within the aviation market, and we hope to see additional growth in this area. We also received and delivered an additional follow-on order from Ballard Power during the fiscal quarter, and this was key, as we continue to move and try to expand into these fuel cell compressor market.
Now, moving on to our engineering services. Our engineering services continue to have a renewed focus within the company and we are actively pursuing new opportunities, as we move into calendar year 2016. We have seen a slight increase in revenue from the DOE for our non-rare earth project and continue with the remanufacturing efforts for RTD, Ballard and Air Comm.
There are a number of opportunities for UQM from both privately-funded engineering and government research project perspective. And we will continue to pursue these opportunities, where they make sense for us as a company and that they will support our product roadmap and overall technical strategy.
In summary, we continue to execute on our strategic plan with a focus on commercial volumes and a great emphasis on that Chinese mass transportation market. With the current ITL project on track, we move into calendar year 2016 with an increased interest and awareness of our products around the globe. Continue to receive follow-on orders from new and from key existing customers, and actively pursuing new opportunities and applications.
The successful demo of the Kalmar Motor with the airline industry, serves as a testament to our technology and leadership in the commercial traction and electric motor and controller system market, and we continue to see broad end-market potential with our quality products.
Now, I'd like to turn it back over to David to review some of the financial results.
Thank you, Joe. I am very pleased to announce that our total revenue for the quarter was $1.3 million, a 59% increase compared with $800,000 in the same quarter last year. Product revenue for the quarter was $1.1 million, up 81% compared to the prior-year period. Revenue increase was primarily the result of increased shipments of fuel cell compressors, PowerPhase HD and PowerPhase Pro propulsion systems.
Revenue from contract services was $202,000, down approximately 16% when compared with the same period last year. The decrease was primarily due to lower levels of customer-funded research activities, which vary from quarter-to-quarter.
Gross margins during the quarter were 36% versus 21% in the prior-year quarter. Product margins were 41% versus 38% in the same quarter last year, primarily due to product mix. We expect that margins will continue to vary quarter-to-quarter depending on mix.
Total operating expenses for the third quarter were $1.8 million compared to $1.5 million in the same quarter last year. But excluding the DOE reimbursement of $557,000 that we recognized in the third quarter of last year, our operating expenses were actually $260,000 lower than last year. We continue to maintain a streamline infrastructure and look for other efficiencies, as we move forward.
We recognized net loss for the third quarter of $1.4 million or $0.03 per common share. This is flat compared to the same period last year of a net loss of $1.4 million or $0.03 per common share. We ended the quarter with $8.7 million of cash and no debt. We are pleased with our current cash position, given today's volatile market conditions.
As a reminder, we completed the $5.8 million capital raise through institutional investors, last November. In hindsight, we feel fortunate to have completed the deal during a period of time, when the market was more stable. Current volatile market conditions would not have made it possible to complete such a successful capital raise.
The balance sheet, as of December 31, 2015, has a new line item, non-current inventory. As a result of our recently announced supply agreement with ITL, we now have a firmer forecast on the timing of shipments of our PP 135 motor controller systems. Accordingly, we have reclassified some of this inventory as non-current, meaning that it is expected to convert to cash more than 12 months from now.
We are still very confident that we will sell this inventory and this reclassification does not in any way question the viability of the PP 135 inventory, nor does it have any effect on our statement of operations. We continue to be very excited about the traction that we are seeing in China and with new applications domestically, and we are looking forward to new customers, higher production and additional revenue streams in calendar year 2016.
Now, at this point, I'd like to turn the call back to the operator for questions. Operator?
[Operator Instructions] Your first question comes from [ph] Johnny Ellis with EMA Enterprises.
Do you anticipate domestic/U.S. growth in contracts in the future?
Yes, as we have mentioned before Johnny that that is a key focus area for us. And from the contract engineering a number of new, what they call, FOAs from the Department of Energy that really fall in line with really our product portfolio and roadmap. And we also continue to talk to a number of customers to look at funded development programs, and that's say really a renewed focus for us to zero-in on that area that UQM used to do, probably more of them we have in the last few years.
Your next question comes from Harold Weber with Wells Fargo.
I'm a bit curious, so you guys haven't commented anything about what's happening with some of the extensive previous automotive potential customers, as well as the energy management's product that we talked about last year a whole lot, and you didn't mention anything about that. Could you please give us some update about that?
So on the energy management, as we stated last quarter, we've been working with them, they're on a program that's running an advance prototype that's running on some delays that had really nothing to do with our product, some other technical issues and discussions. They tell us that they are trying to get back on track, and when we start to see traction, we will definitely keep the shareholders posted on that.
Previous automotive business, there's been a lot of discussion of things that were done many years ago, and I think you're probably referencing Audi and Saab. And so with Audi, they continue to run that fleet that we have. And one of the areas that -- and we'll continue to keep in contact with them for other opportunities, but nothing has come forward that we've closed on.
And then with the Saab announcement, moving into China, where they've forecasted some very large volumes. We've reached out to them and we definitely want to be included in that, but it's going to be a competitive bid program. And with us getting our presence in China, we will be working hard to be a candidate for those programs.
Progress on any other automotive domestic or foreign, maybe we're doing with many companies.
I think we like to talk about things that we've accomplished versus the things that they we're working on. And so the team is working very hard I'd say on multiple opportunities. I really want to stress that we're at a strong UQM niches is on the commercial vehicles that we've done so well with Proterra, and with Venus with their DHL fleet, and those were the products where we're seeing the immediate interest and a very large market in China. So that again is the key area where we see more of the near-term growth and revenue potential.
I understand it. But for example, you're bringing up the issue with regard to Jay Leno, and then talking about a vehicle, that's a car. How come you really getting no traction on this?
Again, it's a challenging market to go into the mainstream automotive and margins are low. You've got a lot of the major players and the major Tier-1s that deal in those markets. And we really see as our key and our niche being into the commercial market that has a better fit with us today.
The Chinese market is another one, where there is a number of automotive opportunities that are coming forward. And we'll say we've been speaking with and our trips over there, a number of potential candidates. So again, we're not giving up on that market.
I would hoping to hear something about something maybe domestically.
Sorry, I really can't give you anything, this update, this concrete. We're not going to speculate on things that we would be bidding or pursuing.
Your next question comes from Thurman Willis, Private Investor.
I wanted to thank you for you keeping us updated as investors relative to what's going on within the company. I also want to congratulate you on the fact that you'll be going to New York next week to tell the story and to get new investors. Also, I think it's very important that you pull the shelf to allow The Street and other investors to know that we won't be doing any pipes in anytime in the near future.
Also I'm a firm believer insider buying, and I think all management and the board should buy stock in the open market and just not depend on the options as given by the investor. So thank you and thank Chairman, Vanlandingham, for this previous quarter for buying stock in this particular quarter.
My first question, and then I have a short follow-on, is to respond to the gentlemen's question. I keep up with MullenUSA.com that it has taken over the CODA vehicle. And keeping up with their website and their news releases, it appears with the two people that they've hired and with discussions with them that this could possibly turn out to be a good fit for us, as we try to move our older inventory. Can you comment on Mullen, please?
Yes, definitely. I mean, if Mullen is successful, it's obviously good for us, Thurman, and that the powertrains and CODA are UQM powertrain. So we would love to see them get on track and be able to start moving that. And anything I would say regarding their success would be pure speculation on my part, and their success will definitely fit in well with us.
And then my follow-on question is, as we talk about insider buying, I was wondering, there was this comment from a caller last quarter that when the previous CFO purchased stock in the open market, market value have increased quite significantly, and I just wonder with all the good news and the China news and all the announcements that have been made, not to put Mr. Rosenthal in the spot, but he is the CFO, and I think that he ought to buy stock in the open market. Would he buy in responding to that, please?
My personal finances are not open for discussion. Operator, would you please go on to the next caller.
Our next question comes from Bruce Kureski with a Private Investor.
I'm very happy with the state of progress, sounds very good. My question was answered, so I'll get out of the queue.
Your next question comes from John Ward with CRT Capital.
Wonder if you could give us some thoughts at all on what revenue guidance may or what you can provide for 2016 and 2017, because I mean looking at the timeline on ITL, which to me looks like that's pretty much right on target with where we were before, that you potentially took commercial production in first quarter 2017? But if I'm looking at the potential for KESHI revenues, Proterra revenues in 2016, can you comment on that at all?
Yes, I can give you, I guess, really some insight as to where the customers are. I think your first statement about ITL being right on track, and that as far as where we see the significant revenue growth coming, I mean they're obviously number one on the list. And we are very encouraged to see them take some units before Christmas for the certification. And then the order was completed in early January, so that has been right on track. And I was speaking actually with their executive team last evening in China making sure things were moving. And again, I'm very pleased to report that everything we stated is on track. So that is one of the main focuses.
The other one, you mentioned with the Proterra's and the Zenith and the others, there's information that they've made available that they are starting to see ramps and increases in volume with the acceptance rate, and so with each one of the vehicles they sell with our powertrain, it's positive for us.
The challenge that we have in this market is to give very firm numbers, because we do get a lot of batch orders in that as they build and sell versus what would be more of an automotive serial production. But I guess I'm encouraged that the trends we've had year-over-year compared to last year and this year are getting back on track, and hopefully heading in the right direction, as we see the customer starting to get a better acceptance of those products. Dave, anything else you would like to add on that?
No, I think that was [ph] significant part.
And then if I could on the non-current inventory classification on the PP 135. So we've got $5.8 million on the balance sheet now in that category, which I mean is -- should we assume, I never like to use that word, but should we assume that that is something you moved over there, as you guys indicated earlier to recognize potentially. Should we think that that's a book value number that you're going to be able to recognize that kind of value before yearend 2016?
John, we made that decision to reclassify that portion of the inventory largely based on the contract that we have with ITL and our expectation of when we're going to be shipping the PP 135s in large volumes to them. So we have very, very high confidence that this inventory is realizable, that we'll be able to sell it.
But Generally Accepted Accounting Principles require that we classify assets to non-currents, if they're not going to convert to cash within a 12 month period. So this reclassification only says that our expectation is that that inventory is going to convert to cash in a period greater than 12 months from now.
And again, I think you indicated on the last call that that was part of the process, so good, and thank you.
Your next question comes from Joe Vidich with Manalapan Oracle Advisors.
I guess I wanted to just find out a little bit more about the other Chinese bus manufactures that you've been having trials with? It is my understanding that you had several trials ongoing prior to the LTL deal, and those have been going on -- or ITL deal, those have been going on for at least 12 or over 12 months. I just wonder if you could just talk a little bit about that.
There was a couple of other customers over there that were running our products in a very early stages, and again, we continue to pursue them and talk to them on a regular basis. I think, say, the one we've really kind of pushed off of the side, we're not seeing the progress we'd like to see, and mainly I think from the types of buses that they're running and looking for that high-quality product they were maybe on the lower end, so again, once we have our presence in China, they maybe more of a viable customer.
The second one is going through a number of financial acquisitions and trying to build up their business. Again, they had trials running right now, and I'd say they're a little bit further behind the curve than ITL, as far as getting the commercial realization.
The big thing that we've learned over there is you really have to, to get you all the certification process, to get a presence in China, you've really got to be an establish company and have the right partners, and that's why I think the strength of ITL with their ownership structure and having the three bus factories that they have today with Yangtse, Speka and Yixing having that key market.
One of the things I mentioned when we were over in China, we spend a day at the Yangtse bus factory, and that factory has a state-of-capacity of about 10,000 buses a year and they are doing nothing but electrics and hybrids. So we did see the actual products that our products -- our powertrain will be going into.
So again, that's why we have such a strong feeling of confidence that ITL really is the right partner and where a lot of focus is and we want to make these other customers who we're talking our be successful, but they also have to get through the hurdles of moving into the China bus market and getting their batteries lined up and getting all the other components beyond just the powertrain, so really being an established business company is key in that area.
And then you mentioned that you're working -- you've got other potential Chinese customers, so these are different, the ones you just talked about?
These are all definitely all incremental. And again, the nice part with that announcement with ITL is definitely brought a lot of publicity to our powertrain. And as I mentioned previously the success of the Proterra fleet, when the why see the performance that it's getting, definitely fits right into to helping us in those areas.
Another thing we mentioned, I know its complicated, is the incentive structure in China is changing and it was going more from just putting the any type of electric business out there in the market to where now the incentives are being changed that there is a factor what they called is EKG, which is really a measure of efficiency and range.
And so putting in a more superior powertrain is what's going to maximize the incentives that these various bus companies are going to get, and that fits perfectly in with our powertrain, the need to move into a higher quality product. That's why, again, we are so confident that this is the right market and the right strategy and moving very aggressively to establish our presence there.
We will take the next caller, [ph] Josh Barney, Investor.
My question is relatively simple, and you sought of answered it and touched on it over the last few minutes. But I'm curious a little bit about the pipeline for expansion domestically for especially considering the expansion of the EV market in public transportation. Do you have a pipeline built up of potential customers that may see realization this year here in the United States as well?
We continue, I mean as we announce new customers, as we get them, Josh. I mean that's key. I think in the near-term, I guess, if we look at revenue, where our growth is going to come from are the ones that are already established and have production programs going, that being the Proterra and the Zenith. If we start to see others, then obviously we've got to go through the launch and certification process that Proterra and Zenith have gone through in the past few years, so you would not really see a big increase from new customers here in this current year.
Your next question comes from Irving Reifman with Reifman and Altman.
In previous calls you've mentioned that you would expect to be manufacturing in China, and in the recent press release you mentioned that again. Do you envision of taking over an existing facility? Developing one from scratch? What are the financial considerations? Can you touch that briefly?
Yes. We actually have a very detailed plan with a few options of how we would go into China. One of the things we're obviously looking for would be a strategic partner. And that's a lot of the discussion that we've been having lately as we've gone over, and there is many different options.
And I can kind of reiterate the timeline that these decisions have to be made to support the 2018 launch is from what we've looked at from our time to go in there, to select the site, to purchase the equipment and be up and running. And with the ITL launch taking inventory on the 135 system from 2017 from the Colorado factory, that's a lot of what would fund this expansion.
So the timeline is by this summer, we really need to determine the site of where we're going to be, have we aligned with any type of strategic partner, or are we going to out alone on that. And then there is many, when I've been over there, there's many open spaces, there's an awful lot of incentives, I mean people want this type of technology in China.
So we are really looking at the company's best interest and what is going to be most economical for us to go in there and set up to support the growth. And the other part is obviously is the supply chain. Because from a capital side, it's not a huge investment, because mainly what we're going to be involved in is the final assembly of the product and the test similar to what we do here.
So it is aligning these key suppliers, which we already had, and a number of them from the quota program in China and resurrecting those, with things like laminations and from our castings and from machining sources and electronics and so on to be able to support that. So by this summer, we should have the plan in place, so where we're going to be and start to move forward to that 2018 launch.
Will it require additional capital raise by UQM?
Yes, the plan right now is if ITL stays on track that we don't foresee having to do that, but a lot of it is going to depend on what the size of the factory and other factors come in from the growth side of it. If we see that there is even a greater opportunity that may require additional capital, we would look to that side of it. And the other element is going to depend on identifying a strategic partner and what they would bring into this equation.
For a second question, there has been talk by investors that are going to reinstitute the Fisker Automobile and a new company in Nevada not too far from Faraday. Do you have sales reps talking to either of those groups to see if there's any opportunity?
Like I said earlier, we are talking to many, many people. And again, we don't want to say directly who we're speaking with. We're obviously very aware of their activities. And again, we're going to pursue all opportunities that make sense for us.
Your next question comes from Patrick Attard, a Private Investor.
My question was just answered right now by the last fellow that was asking questions, because I was curious as to what your plans were for the production of the new factory and whether or not you were going to be buying one of these factories that are closing over there. There's lot of factories that are closing up right now?
Yes, there is an amazing amount of real estate and over building there, as we look at the incentives to being quoted very heavily, as to where we're going to establish this.
Now, were you beginning any moneys from China itself from the government there for bringing in production over there? Will they be giving you any incentives?
Well, again, we're going to work, and again, finalize whatever the best deal possible is and that's going to be key for us.
Your next question comes from [ph] Lou Wolfe, a Private Investor.
Having entered the fuel cell compressor market, does UQM have any plans to adapt its controllers for fuel cells vehicles or fuel cell range extenders?
As I mentioned previously, I mean as we look for future customers, we are really agnostic to the energy source. So people that are doing fuel cell buses or cars could also use our other components for their powertrain. So as we've identified other potential candidates through our customers such as Ballard, we're definitely pursuing those, so it makes sense. So with the more content we can get on those fuel cell vehicles, the better for us, and so we're definitely looking at that.
There are no more questions. Mr. Mitchell, would you like to make any closing remarks.
End of Q&A
Again, I would like to thank everyone for their time. And as we've discussed, the macro conditions today are challenging around the globe, but we remained very optimistic that our sectors in the market have significant opportunities. We performed well during the fiscal third quarter and we continue to execute on our strategic milestones and build interest in our products and solutions. We're growing our market applications. We're expanding our customer base and we're pushing ahead into China.
And at this time, I really want to acknowledge the entire UQM team for their efforts, as people have been putting in an extraordinary effort to move us forward and also thank our shareholders for their support, as we take UQM at a next stage. And once again, thank you for your time today.
Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.
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