A. H. Belo's (AHC) CEO James Moroney on Q2 2016 Results - Earnings Call Transcript

| About: A.H. Belo (AHC)

A. H. Belo Corporation (NYSE:AHC)

Q2 2016 Earnings Conference Call

August 2, 2016 10:00 ET

Executives

Katy Murray - SVP & CFO

James Moroney - Chairman, President & CEO

Nicki Purcell - Chief Digital Officer & SVP, Consumer Sales

Analysts

Barry Lucas - Gabelli and Company

Chris Mooney - Wedbush Securities

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. [Operator Instructions]

At this time, I will turn the conference call over to your host, Senior Vice President and Chief Financial Officer, Ms. Katy Murray. Please go ahead.

Katy Murray

Thank you Tony. Good morning, everyone. This is Katy Murray, Chief Financial Officer of A. H. Belo Corporation. Welcome to our second quarter 2016 conference call. I am joined by Jim Moroney, our Chief Executive Officer, who will assist me in leading today's call; Grant Moise, Senior Vice President, Business Development and Niche Products, is also available for Q&A.

Before the market opened this morning, we issued a press release announcing our second quarter 2016 results. We have posted this release on our website under the Investor Relations section. Unless otherwise specified, comparisons used on today's call measure second quarter 2016 performance from continuing operations against second quarter 2015 performance from continuing operations.

Our discussion today will include forward-looking statements. Forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those statements. The Company assumes no obligation to update the information in its communication except as otherwise required by law. Additional information about these factors as detailed in the Company's press releases and publicly available filings with the FTC. Finally, today's discussion will include non-GAAP financial measures. We believe that non-GAAP financial measures provide useful supplemental information to assist investors in determining performance comparisons to our peers. Reconciliations to the most directly comparable financial measures presented in accordance with GAAP are provided on our website under the Investor Relations section.

I will now turn the call over to Jim Moroney.

Operator

Pardon me, we have lost Mr. Moroney's line.

Katy Murray

I will go ahead and start. I am going to speak on behalf of Jim Moroney. First I want to start by saying how pleased I am with our second quarter results and that we delivered a $3.1 million improvement in our reported adjusted operating income versus the same time last year. This improvement is due mostly to revenue gains attributed to our marketing services segment which helped mitigate the ongoing declines in the print publishing segment, and through our ongoing forward focus of aligning expenses with available revenue. This quarter's results reflect our ongoing strategy of revenue diversification and our consistent effort to practice prudent expense management.

Now some specific financial highlights from our second quarter. For the second quarter we reported GAAP net income attributable to A. H. Belo Corporation of $700,000, or $0.03 cents per share, an increase of approximately $0.06 per share compared to the second quarter of 2015. On an adjusted basis, operating income, excluding depreciation expense, amortization expense and severance expense, was $5.8 million, a significant increase of $3.1 million over the $2.7 million reported in the second quarter of 2015.

James Moroney

Katy, I'm here.

Katy Murray

Okay, Jim.

James Moroney

Turning to revenue highlights, a total net revenue of $66.6 million recorded in the second order of this year is basically flat to the total net revenue of $66.7 million reported in the second quarter of last year. Excluding the revenue relating to the business lines that were discontinued in January of this year, total that revenue of $66.6 million reported this quarter reflects a $1 million or 1.6% improvement.

Advertising and marketing services revenue of $38 million reported this quarter is basically flat when compared to the $38.3 million reported in the second quarter of last year. When compared to the second quarter of last year, excluding the revenue relating to the business lines that were discontinued in January of this year, total advertising and marketing services revenue up $38 million reporting this quarter reflects an $864,000 or 2.3% improvement.

The growth in our digital and marketing services advertising revenues continues to accelerate and for the second quarter of this year, total digital advertising and marketing services revenue was $12.1 million, an increase of $555,000, or 4.8% over the $11.5 million reported in the first quarter this year, and a $2.1 million or 20.9% increase from the $10 million reported in the second quarter of 2015. In addition, the $12.1 million represents 31.8% of our total second quarter advertising and marketing services revenue compared to 26.1% for the same period in 2015, a 570 basis point improvement.

Our revenue results this quarter reflect our ongoing efforts to accelerate the growth in our digital and advertising marketing revenues. This acceleration is a direct result of the organic growth of marketing services revenue from DMV and Speakeasy against the second quarter of 2015, DMV revenues grew $1.7 million or 90.9% and Speakeasy revenue grew $149,000 or 15%.

The Dallas Morning News sales team generated 137 sales to DMV and Speakeasy in the second quarter of this year. This compares to 121 sales generated last quarter of this year and 84 in the second quarter of 2015. These results are further evidence that our strategy of building a marketing solution ecosystem is showing results for us and for our customers.

Turning to circulation revenue in the second quarter, we reported $19.8 million in circulation revenues, representing a $995,000 or [1.8%] [ph] decline compared to the second quarter of 2015. Lower home delivery and single copy volumes were offset by an increase in home delivery subscription rates. We launched our meter on May 15 of this year on dallasnews.com and [sportsstadiumseven.com] [ph], and while it is still early in the implementation, we are pleased with the number of consumers who are choosing to sign up for a digital subscription.

We reported $8.8 million of other revenue this quarter, which reflects a $1.2 million increase, or 15.4%, when compared to the $7.6 million reported in the second quarter of 2015. Approximately $1.1 million of this increase is related to Crowdsource, our event marketing business, which hosted Savor, a four-day celebration of food, wine and spirits in Dallas. Last year, this event was held in the first quarter; this year, the event was held in April. For the six months ended June 2016, other revenue of $15.7 million is up 3.3% or $498,000, from the $15.2 million reported for the same period in 2015.

Total consolidated operating expense of the second quarter was $64 million, a decrease of $3.2 million or 4.8% compared to the prior year period. Excluding the severance expense of $300,000 and depreciation and amortization expense of $2.8 million, adjusted operating expenses were $60.9 million, a decrease of $3.1 million or 4.8%, compared to the $64 million of adjusted operating expenses reported in the second quarter of last year.

Total consolidated operating expenses for the six months ended June 2016 was $128.2 million, a decrease of $9.5 million or 6.9% compared to the prior year six months ended June 2015. Excluding severance expense of $1 million and depreciation and amortization expense of $5.7 million, adjusted operating expenses were $121.5 million, a decrease of $9.6 million or 7.3%, compared to the $131.1 million of adjusted operating expenses reported for the six months ended June 2015. This is a significant year-over-year reduction in operating expenses as a result of our ongoing management of discretionary spending and our cost reduction initiatives initiated in the second half of 2015 and at the beginning of this year. As of June 30, we had 1,132 total headcount, which reflects a net reduction of 99, or 8% from the 1,231 we had at June 30, 2015. Excluding hiring at DMV in both quarters of this year headcount would have declined 123, or 10.4% from the 1,184 at June 2015 to 1,061 at June 30 this year.

I'd like to take a minute and call out the performance of our entire organization and especially our newsroom for their work in providing in-depth reporting on the tragedy we experienced in Dallas on the evening of July 7. We provided Dallas and the nation with the most comprehensive storytelling about all aspects of this tragic event. We continued to file reports long after the other media had moved on from this story. Still today we've tried to continue to answer questions like what does this mean for the people who live in north Texas and what does this portend for the future of Dallas. As you might imagine our reporting distributed through dallasnews.com experienced tremendous traffic growth on that Friday night.

Our normal average on a given day is 475,000 unique visitors. On that Friday, we had 1.7 million unique visitors. Our normal average is 875,000 page views on a given day, and on that Friday, we had 3.8 million page views. It is unfortunate but accurate that most of the time our best work is done during and in the aftermath of a tragic event. That certainly holds true for this day of this -- for that day of this tragic event in Dallas and for the weeks that have followed.

In closing we could not be more pleased with our second quarter and our first half performance this year. We feel that we're well positioned, both operationally and financially, as we approach the back half of the year and we look forward to continuing to lever against our strategy for excellence in journalism, revenue diversification, and profitability.

And with that, operator, we are now ready for questions.

Question-and-Answer Session

Operator

Thank you very much. [Operator Instructions] A question comes from Barry Lucas with Gabelli and Company. Please go ahead.

Barry Lucas

James, good morning, how are you?

James Moroney

Good morning, Barry

Barry Lucas

I may be a lonely voice. I have a couple of quick questions, if I may. And one has to do with the -- with the really terrific job you continue to do on the cost side. I just wonder how sustainable or how much room do you have in the back half of the year, since you're lapping the initiatives from the middle of 2015, and you had some new programs put in place. So what do costs look like in the back end of the year?

James Moroney

Let me -- let me let Katy address that. I think she could probably address that best. Katy, do you want to take that?

Katy Murray

Sure, hi Barry. So not only did we take out costs, and we talked about this that $12 million in the second half of last year, we took out an additional $10 million when we started this year. So if we continue to look at the second half, I think expenses are going to come in favorably to where what we've seen over this first half. There is no significant expense increase on any of the lines that we are planning and so again as we're thinking about the 2017 planning that we're already into, part of that is the second half and ensuring that we've got a good line of sight on our expenses as we think about the 2017 plan. So, again, I think you're going to see expenses in line with the first half.

Barry Lucas

Okay, that's great, Katy. So now, as we start to see DMV, and Speakeasy and the newer businesses contribute, that would certainly indicate to me that we've got some favorable operating leverage coming through as well. I just was hoping to have a little comment or color on that, Jim.

Katy Murray

I can add a bit and I'll turn it over to Jim. I think that right now, Barry, I think the thing that we still have to manage through is and you know this, we've been seeing some nice signs on the revenue side even around the print. However, if something were to change on that and we were to see any kind of an increase in the decline rate, obviously that decline really kind of offsets the growth on the marketing event management services side quickly. But to your point right now our focus is on accelerating the growth that we're seeing in DMV and Speakeasy and especially as you saw in the numbers on the lead, and the sales that are being pushed over from the Dallas Morning News team right now, that continues to be our focus and to your point, it continues to give us some opportunity on the operating leverage. Now I'll turn that over to Jim.

James Moroney

Yes, I really don't think I can improve on that, Barry. I think Katy is right and if we continue to see the synergy around DMV and Speakeasy and our then more traditional marketing channels, I think you can continue to see strong revenue growth out of our marketing services area which I think is the big story for the first half of the year. So if we don't see the climbs or accelerations in rates of decline in other areas over the first half, then I think we're in real good shape to take advantage on both the top line and through expense management.

Barry Lucas

That's great. Last item for me and I'll jump back into queue. It'd be an update on the real estate and how you might think that kind of softness in the oil patch has impacted your ability to monetize those assets.

James Moroney

Let me take the first part -- I mean the second part and I'll turn it back over to Katy. You know, Dallas is really, and continues to be a very hot real estate market. I think there's been reports from one or two different national companies that do these kind of surveys of hottest residential markets in the country. Maybe even a little bit overheated and Dallas's made that list, which I guess is sort of both good news and sometimes could be considered you know not so good news because you don't want to get too overheated. But that can also -- spills over into the commercial area that continues. You know, it's almost back to that day when we said our national bird was the crane. There are just cranes all over Dallas, so right now, Barry, Dallas does not seem to really have taken much hit from the whole sort of oil downturn and I think that's a lot due to the fact that Dallas has over the last two or three decades really diversified itself away from the petroleum industry, and it is really more tied to the general U.S. market. Katy, do you want to talk about the middle stages, or do I specifically?

Katy Murray

Yes, I think, Barry, consistent with the past, we've got a few lots for sale in Rhode Island and then again the parking lots in Dallas are operating cash flow positive for us. So at this time, basically no changes in our real estate and you know nothing that we are actively looking to change on that front.

Barry Lucas

Okay. That's helpful. I'll pass the baton and jump back into queue.

Operator

Thank you very much. [Operator Instructions] Next in queue is Chris Mooney with Wedbush Securities. Please go ahead.

Chris Mooney

Good morning. Still related to real estate since we can finish this off. Any update on the status of the corporate headquarters and potential search for a new location?

James Moroney

Katy has been heading up that project for us, so Katy, you want to take it?

Katy Murray

Oh, absolutely. So, Chris, you're correct. We came out, we talked about we were looking at an opportunity for moving from our headquarters. That process is still going on; probably a little slower than we had initially expected. We are looking at a number of properties in central business of Dallas. On the highlight, again, the real factor for us in making this decision to move is that it really has to make sense financially. Looking for an opportunity to reduce our operating expenses; as you can imagine the corporate campus has more square footage and expenses than we need. So we're still moving forward on that. I'm optimistic. I think that there are potential opportunities for that but at this point, not ready to make a definitive that we've made the decision to move yet, but we're continuing to look at it.

James Moroney

Yes, I think that's -- Chris, that's the real answer. And if we can find enough operating expense savings in making a move, then we'll make one. We've just not quite through with our due diligence yet.

Chris Mooney

No, great. No, take your time, from my perspective. So is there an active real estate market in downtown Providence?

Katy Murray

Well, do you know anybody who'd like to buy some property in Rhode Island? I've got a few lots. So there -- unfortunately for us, the lots are in an area where there is some construction, there something's going on that should be wrapping up in the second half of this year. So hopefully we'll start seeing some more activity. But they're three small lots, it's not a significant cost to maintain those lots, some property taxes and mowing. So, we're okay right now, but if you know anybody, I'm happy to talk to them and introduce them to our broker.

Chris Mooney

I wish I did. Sort of somewhat related to Barry's last other question. In expenses, is there anything unusual in this quarter? I mean, you had $5 million plus in I guess the EBITDA that would keep that from being just a sort of baseline going forward. Was there anything unusual either in the expense or the revenue side?

Katy Murray

I'll take that and then Jim can add some color. I think a couple of things: one, we had a strong revenue quarter. I mean look at the revenue consistency quarter over quarter is an apples to apples comparison; DMV is in both quarters. So I think, one, you're starting to see some revenue acceleration. Obviously that's a trend that we hope to continue to see. But we also, on the publishing side, things could change, and that could change the quarter. But on the expense side, what I will commend the team on is there is just a real focus on expense management, spending, headcount and all the things that we can control so that part is not going to change. But again on the revenue side, just really focusing on the areas of revenue growth and trying to ensure that we can maintain the publishing revenue as thoroughly as we can and continuing to focus on that as well.

James Moroney

Chris I don't think -- to echo Katy, there really are no significant one time revenue new or onetime expense savings items in the second quarter. It was really just our normal operations, but I think well done on the revenue and expense side. But nothing that gave us a sort of a onetime lift in either direction.

Chris Mooney

Very nice thing to see as a shareholder. The McClatchy folks mentioned an entity called Nucleus in their conference call and I guess you all are a part of it? Would you enlighten us to what that is?

James Moroney

Grant, do you want to take that?

Grant Moise

Sure, I'd be happy to. Nucleus is a national selling agent that is going to represent the top 30 markets in the U.S., regardless of the ownership of the newspaper company. So we did join that; we are an official -- they're an official reseller of ours, we're what's called an affiliate market and so they'll really be representing us to the national brands. So if you think about the AT&Ts and Verizon's and Wells Fargo's of the world, they can represent us and provide a meaningful -- really a meaningful market group that can be bought through one point of contact with one order and one bill and we all decided that you know as the national business gets more complicated by making it easier for them to have one point of contact for that type of national selling, I think it's better for the advertising agencies and advertisers and it's better for us as.

Chris Mooney

Is it flexible enough that they could come to whoever is running Nucleus and say I want to do something in the western regions well? Or is it just national?

Grant Moise

No, absolutely. If they want to break the markets down they can do that as well. We've put in a -- really if they're going to buy less than a handful of markets, then they're going to still work with the newspapers individually, but if they wanted by like you know really ten or more markets in the United States, it will make it easier for them by allowing them to work through Nucleus rather than each paper individually.

Chris Mooney

That's great. On DMV and the sales effort by the Dallas Morning News sales folks, can you give us just a couple of really quick examples of what they're bringing, what type of business they're bringing to DMV?

James Moroney

Grant?

Grant Moise

Sure. Happy to handle that as well. I think one of the areas where we've been extremely successful for example is with elective surgery. I think it's a great example in Dallas where if someone was getting Lasik surgery or bariatric surgery in the past they would have only utilized maybe our print product for that site and we have taken those types of advertisers and helped them by using both DMV and Speakeasy and our digital and print assets. We've helped many of these surgeons increase their number of patients and surgeries on a monthly basis. In some cases we've helped them double their business. And when we've seen that not only be successful for us but also for our clients, that's when we know that the momentum is extremely strong because ultimately if the clients aren't seeing the results, we're not going to see it either. So that is a great example of an area where we've had success.

Also with our auto dealers. The auto dealers and the ability to use search engine marketing/search engine optimization and what DMV brings to the table in terms of expertise in this region and our partnership directly with Google has been something that separated us from many of what I call the second tier search engine providers in the region.

James Moroney

And Chris, I'd add to that, a lot of this is becoming more and more sort of ROI-based. They want to actually see the person making the call, booking the surgery and they're evaluating how we perform on that basis not just well, you reached so many people so many times and for us we think that's a good differentiator in the marketplace because if they're seeing on all our lives directly from what we do we get away from talking about how expensive the marketing is, what share of the marketing we're getting. They just want to continue to give us as many marketing dollars as we can put into the marketplace and get them a good our ROI and it becomes more about investing their dollars instead of spending them and that's a great conversation to have with your customers.

Chris Mooney

And will attract more customers, I would think.

James Moroney

It does and we've been able to take some of these sort of ways we learned to drive calls to, say, these surgeons for instance and replicate that even in some other markets beyond Dallas. Because the marketing solutions in this case may not and in this case does not include the newspaper, then everything else that we do is replicable outside of the Dallas market so we have some business that we've done successfully in Houston and in Phoenix and -- Grant, I don't know maybe a couple other places.

Grant Moise

Yes. Houston, Phoenix, Indianapolis, and really we've started yet being able to spread geographically quite a bit.

Chris Mooney

Tremendous. Y'all, I didn't get into -- didn't get a chance yet to get into the detailed look at the balance sheet, but your cash is pretty substantial versus the market cap. Any new thoughts of what you plan on doing with the cash?

James Moroney

You know, Chris we're still in the sort of same place. We're going to be careful with the cash. We continue to look all the different options, investing in dividend -- special dividend pensions, and so forth. We have that discussion literally at every board meeting and we'll continue to have it, but at this time we feel good about where we are we don't have any near-term plans in place to, say, make any acquisitions as we've talked about we're really looking at this year as a way of consolidating what we do with our sales and marketing efforts and I think that's paying some dividends in the way that you've seen our sales and revenue in this quarter and even in the prior quarter. We don't have any new products or new businesses the first half of this year like we did last year with the DMV; we're only doing better with the things that we have and I think that's a real important indication that sort of taking a little time out consolidating how we do what we do is I think been a good decision for us.

So I think for the balance of this year, you're most likely to see us just sort of stay on course on how we're operating and what we're doing with our balance sheet cash.

Chris Mooney

Okay. And there was another 8-K filed this morning related to the pension plan. Katy, can you kind of enlighten us what that was?

Katy Murray

Sure. It's actually not -- it was not related to pension plan one or pension plan two which are our main pension plans. This was a -- really called a restoration supplemental plan that was put in place at the time of the split in 2008. There were a handful of participants and so total assets that were involved in the distribution were a little over $11,000. This was a legacy plan that, by termination, we take one thing kind of off the administrative checklist and save some administrative fees and we just made the distribution. So nothing related to pension plan one or pension plan two, but a legacy small little supplemental plan.

Chris Mooney

Okay, great. And Savor was, I guess, a fairly nice contributor in the second quarter. Are there similar events coming in your future? In that side of the business?

James Moroney

Chris, I don't think for the second half of this year, there may be one that is necessarily generating the kind of revenue savings being the single biggest event during the year. We'll have some other events, but maybe in total, they'll come up somewhere around what Savor did, but we don't have a single event planned for the balance of the year of Savor's size, with Crowdsource. We have a lot of smaller events planned.

Chris Mooney

Thank you much. I'm done.

Operator

Thank you. [Operator Instructions] We have a call from Barry Lucas. Please go ahead.

Barry Lucas

Great, thanks so much. Katy, just a couple of housekeeping types; CapEx in Q2 in your best guess for the year?

Katy Murray

What I would say for the rest of the year, we had targeted around $6 million. I don't know if we're going to come in close to that or not. But, you know, we did make some investments in our production area of a couple million dollars that's already been spent. So that was a one time. So I would say for the second half of the year, you're probably looking at another $1 million to $2 million.

Barry Lucas

Okay. And some cash was brought up, looks like from 1Q to 2Q, the cash had a pretty nice balance, maybe more than the cable [ph]. Was there anything special in working cap that that helped you out in the cash line?

Katy Murray

I think it's a combination. One, we really would expect to see the cash increase and stabilize. One again, the revenue was really holding so you have that from the receivable side; it's been a real big focus on the push on, just AR and bad debt, and then expense management. So I think there really wasn't anything with the timing that I can necessarily say. Now we obviously have some timing around payroll and accounts payable but that that moves between quarters, nothing specific. Really, it's kind of across the board between revenue and expenses.

Barry Lucas

OK. And as long as the pension was a topic, the balance sheet liability dropped a couple million in the quarter of low interest rate environment, so anything special there on the pension?

Katy Murray

No, there's nothing special on the pension. You know, right now, obviously we had the successful cash out rollover last year. Nothing that we're planning on this year. Right now it's kind of what everybody else is doing and wait and see. And we have had what I will say from an investment perspective, our return on the investments has been strong; we are 50-50, when you look at asset versus liability. So we're seeing some favorability there. And then on the interest rate, we just continue to monitor, watch the market as everybody else and just true up the financial statements as we need to.

Barry Lucas

Okay. I want to ask the last one for me. I think it's more for Jim, but…New paywall. So what's different this time and maybe could you provide some early metrics om either sign-ups or what have you, Jim?

James Moroney

Well, I've got our export on this who heads up all of our marketing area as well as our Chief Digital Officer, Nicki Purcell. So, Mickey, do you want to take this?

Nicki Purcell

Sure. So let me start by just describing the difference between the paywall and the meter, which we launched in May. So the paywall itself is one in which we have to make decisions editorially which content is in front of the paywall and which is behind. Meaning, there's content that simply isn't accessible to those who don't subscribe to it. In the case of the meter, what we have is an opportunity for people to read so many stories and articles and then actually hit the limit and then be asked to subscribe or have to wait for a 30-month rolling reset.

So that is something that's not calendar-based. It's simply when they come in and they start consuming content on our site. And what we believe is that this is an opportunity for us to not see a dramatic increase in the number of unique visitors to our site [ph] use it or consumed. Then what we have is the opportunity to maintain those levels so we can continue to monetize those audiences through advertising and I think get those folks to subscribe once they hit the limit, and recognize that they are certainly moral readers of ours but so far we're seeing really good momentum. As mentioned, it's very early in the launch. I just passed the official for the two-month side and that we're seeing people really buy into that and start to generate some digital-only only subscriptions as a result of that. And we're pleased with the progress so far.

Barry Lucas

Great. Thank very much.

Operator

Thank you. At this time there's no additional questions in the queue. Please continue.

Katy Murray

Jim, do you want to wrap up?

James Moroney

Yes, so I want to thank everybody for being on the call. If you feel like we have a lot of momentum going into the second half of the year with a good first half of the year behind us and both on the revenue side and on the expense management side. And I want to commend my team for doing a great job in we'll hopefully continue the same kind of performance through the rest of this year. And again thanks everyone for taking time to be with us.

Operator

Thank you very much. And ladies and gentlemen, this conference will be available for replay after 11 A.M. Central Time today, running through August 9 at midnight. You may access the AT&T playback service at any time by dialing 800-475-6701 and entering the access code of 397086. International participants may dial 320-365-3844. Once again, those phone numbers are 800-475-6701 and 320-365-3844 using the access code of 397086.

That does conclude your conference call for today. We do thank you for your participation and for using AT&T's executive teleconference. You may now disconnect.

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