AES Tiete's (AESAY) CEO Italo Freitas on Q2 2016 Results - Earnings Call Transcript

| About: AES Tiete (AESAY)

AES Tiete SA (ADR) (OTCPK:AESAY)

Q2 2016 Earnings Conference Call

August 05, 2016 11:00 AM ET

Executives

Julian Nebreda - President

Francisco Morandi - CFO

Italo Freitas - President and CEO

Ricardo Cyrin - Chief of Regulatory Issues

Analysts

Carolina Carneiro - Santander

Vinicius Canheu - Credit Suisse

Marcelo Sa - UBS Bank

Operator

Good morning, ladies and gentlemen, and welcome to the conference call held by AES Tiete Energia SA, operated by Chorus Call Brazil. During this conference call, we will discuss the results relative to the second quarter 2016 of the Company. AES Tiete's IR team would like to inform you that the earnings release can be found at the Company's URL at ri.aestiete.com.br.

All participants are connected in listen-only mode at this time. Later, we will have a Q&A session when further instructions will be provided. [Operator Instructions] This conference call is being recorded and is also being broadcast over the internet at ri.aestiete.com.br. On behalf of AES Tiete, we would like to inform you that forward-looking statements made during the call concerning the Company's business outlook, operating and financial targets will be mere predictions made on current indications. Those predictions might vary according to the industry situation, the country performance and so on. The presentation can also be accessed at the URL and will be conducted by Julian Nebreda; and also by the IR Officer, Mr. Francisco Morandi; and by the Company's President Mr. Italo Freitas. At the end, the executives will be available for question and answers.

I'd now like to give the floor over to Mr. Julian Nebreda. Mr. Nebreda, please have the floor. Thank you.

Julian Nebreda

Thank you, all. We will begin the results presentation for the second quarter of 2016 for AES Tiete Energia. With me today, we have Italo Freitas, who is Chief Executive Officer; Francisco Morandi, Chief Financial Officer and Investor Relations Officer; Charles Lenzi, Chief Executive Officer for AES Eletropaulo and responsible for the operations of the companies of AES Brazil; the Vice President of Institutional Relations, Communications & Sustainability, Paulo Camillo Vargas Penna; Vice President of Legal Affairs and Compliance, Pedro Bueno; the Chief of Commercialization of Energy, Ricardo Cyrin; the Chief of Regulatory Issues, Sidney Simonaggio, in addition to our team for Investor Relations.

I start the presentation on Slide 2 with the five main highlights for the quarter. In terms of hydrology, I would like to highlight the reduction of the effluents in the region South East and Centre West compared to the same quarter of last year. The effluents this quarter was 89.9% of the average of the long term, which is inferior to the 92.7% recorded in the second quarter of 2015.

Despite this, the level of reservoirs of the SIN system reached 53.3% in the second quarter of 2016, which is an improvement when compared to the 38.3% of the same period of last year. The reservoir levels for the Company also follow the same movement and closed the second quarter of 2016 at 91.6% versus 80.5% compared to the second quarter of 2015. As a consequence, our plans were more just passed by the national operator of the electrical system, and therefore the energy generated in the quarter had an increase of 130% compared to the same quarter -- same period of 2015.

However, there was a decrease in the level of the reservoirs in July, which was 49% and the statutory of reducing is probably expected to be maintained, consider the projection of the ONS of the effluents in August which was 74% of the MLP. As a consequence of the recovery of the level of the reservoirs, the increase in load and hydroelectrical dispatch, the lowering in the physical guarantee of the MRE presented a decrease in relation of the last year going from 89% to 10.1%. The lowest lowering associated to the price, reduced prices verified in the market in the short term for the quarter resulted in a significant decrease of our costs with the purchase of energy.

Concerning our strategy of commercialization, we have signed new contracts this quarter, and our contracting level totaled 88%, 70% and 38% of our conventional energy available for the years 2017, ’18, ’19 respectively. Concerning the energy prices, I highlight that the hydraology below the medium average since March and the potential of the review of the ONS uncertainties of La Nina and the reviews of the parameters in terms of risk aversion have pressured the energy price in the free market. Therefore, we have updated our expectations in terms of prices going from 140 to 170 megawatts hour.

In dividend distribution, the Board has approved the distribution of dividends totaling $118.7 million for the second quarter. This corresponds to a dividend yield of 2.1% and to a payout of 115% in the second quarter. Dividends will be paid on September 27, 2016. In new businesses and commercial platform, as I mentioned in this last quarter, we have two very clear objectives. The first one is the growth through diversifying our portfolio through non-hydraulic sources. The second one, which is not least important is to promote integrated solutions of energy for our clients. For this reason, we are internally -- restart training in order to take advantage of the platform that we have and therefore increase the products that we offer the market.

This new structure, associated to non-recurring factors and to the seasonality of some of our other maintenance, as Francisco will explain, led to a PNSO that was reported totaling R$49.3 million in the second quarter of 2015, an increase of R$5 million when compared to the amounts in the second quarter of 2016.

Before moving on to the next item, I would like to highlight that beginning of our commercial operation of our first project of generating/distributing solar of 6 kilowatt-total of capacity installed and the contract of 15 kilowatt-peak hours that is expected to be operating in October. Italo Freitas will provide more detail concerning the strategy and growth strategies of our business line.

Concerning the acknowledgements, we continue to improve our financial processes, operational processes and the management processes and this year the Company won again the transparency price given by ANEFAC, which is an important acknowledgement of the quality of our work.

I now give the floor to Francisco Morandi to continue the presentation.

Francisco Morandi

Thank you. Julian. Thank you very much. Good morning, everyone. I would like to start with slide 3, where you have the developments and evolution of the Brazilian reservoirs and thermal dispatch. As you can see to your left, there has been a development in the levels of the reservoirs in 2016 when compared to 2015. As you can see, today we have a much more favorable situation. However, we see a gradual reduction of the level of reservoirs of the SIN since March of 2016. This reduction of the reservoir levels in the SIN is a consequence of the decrease in the effluents of this quarter, which decreased by 18.7% in the long-term average when compared to the second quarter of 2016 with the first quarter of 2016. I also highlight that uncertainties from La Nina may impact the effluents during the drought period, which will pressure the conditions of the reservoirs and therefore the prices, as we will see below.

On the chart to your right, you see the evolution of the reservoir in compared to the thermal dispatch volume in the last year. As you can see, the dispatch in the second quarter of 2016 totaled 11 average gigawatts, which is inferior to 12 gigawatts recorded in the first quarter of 2016 and to the 16 average gigawatts recorded in the first quarter of 2015.

On slide 4, we have the total thermal dispatch and the spot price in order for us to compare them. In the first chart, we can see a slight increase of the spot price during the drought in 2016 as of April. Some factors contributed more significantly to the increase in the spot price in all sub-markets, and for this week it is already at R$120 per megawatt hour to all sub-markets. Among them, we can mention, number one, the systematic increase of the load previewed by the ONS throughout 2016; number two, the review of the limits of some of the plants in the Northeast; and the hydrology lower because of the La Nina phenomenon.

The increase in the spot price during the drought period associated to the expectations of adjusting the parameters of risk aversion in the models of price formation already influences the increase of prices of energy negotiated in the free market during 2017 and 2018. The second chart has a comparison between the thermal dispatch within and outside the order of merit recorded in SIN from January 2013. As you can see, there has been a significant increase of the dispatch outside the order of merit, which in our view interferes in the accurate product formation and leads us to lower spot prices in the period, especially in the southeast and central west regions.

As I mentioned -- as was mentioned before, the reason for the high thermal dispatch outside the order of merit was associated through a policy of dispatch which was more conservative because it was aimed at ensuring the recovery of the levels of the reservoirs in the drought. From May 2016 we observed the reduction of the total thermal dispatch with 2015. However, in our view, the level of the thermal dispatch out of the merit still is proportionally superior to the thermal dispatch inside the order of merit. Even though this dispatch is related to more electrical limitations, with exception made to the north and northeast which are related to energy safety.

I would like to highlight that the recent position driven by the committee of the electrical sector in order to reduce the thermal generation outside the merit of the order due to safety issues, and still bring closer the formation of prices of energy and the operations of the system, which in our view is requirable and desirable and healthy for in order to signal to the market the conditions of the system. Therefore, our Company is working together with other associations to review the model of the dispatch and price formation.

The next slide you can see the increase of the generated energy in 2016. We can see that we’ve generated 109% of the physical guarantee of the Company against 46% in the second quarter of 2015. This was a result of higher electric hydroelectrical dispatch by ONS, which was mirrored by the increase in the level of reservoirs since 2015 and since the increase of the load. As you can see to your right, the levels of the reservoirs of the Company in general are higher than the second quarter of 2015 and 2014, including Água Vermelha which is our biggest plants. Our major plans have closed the second quarter with 91% of the equivalent energy against 80.5% in the second quarter. Yesterday as to so for -- just so you know, our reservoirs had 79%.

Next Slide No 6, we show the MRE lowering verified in the second quarter 2015 and 2016. The lowering in the second quarter of 2016 was 10.1%, which is a decrease by 8.8 percentage points, compared to what was recorded into the second quarter of ’15, which was 18.9%. This variation is a consequence of the improvements at the level of SIN reservoirs as I have mentioned and the increase of the load by 2.8% in comparison between the periods, very much because of the temperature and the review of the loads carried out by the ONS for 2016.

Here, I would like to highlight that the impact of GSF in 2016 is reduced for the Company when we compare it to the previous years, not only because of the lower expected spot price for 2016, but because of our strategy for commercializing energy adopted for this year in which we adopted -- we kept 5% of our energy available to mitigate exposure.

The next slide, we present the results of the invoiced energy and the net revenue for the period. Our invoiced energy increased by 14% compared to 2015, mainly because of the increase of the energy sold in the MRE, justified by the greater generation and more dispatch in the plants. The net revenue for the quarter totaled R$412.1 million, which is 38.2% less than the second quarter of 2015. As mentioned in the financial highlight, this reduction in revenue resulted from the end of the contracts between the Company and AES Eletropaulo on December 31, 2015, which impacted the average price of commercialized energy, which went from 141 megawatt hour, in the second trimester of 2015 when 100% of our energy was contracted by AES Eletropaulo, to 144 megawatt hour in the second quarter of 2016 where our energy is sold in the free market and the regulated market. The reduction of the volume and price of the energy sold in the short-term market went from 382.87 megawatt hours in the second quarter of 2015 to R$62.37 per megawatt hour in the sub-market South East and Centre West this quarter, was also an important factor that explains the variation of the revenue of the Company in the period.

On the next slide, Slide No. 8, we will be addressing costs in the second quarter 2016 vis-a-vis 2015. As we can see, costs and expenses came to R$171 million in the second quarter of 2016, a drop of 57% when compared to R$399 million recorded in the second quarter of last year. The drop in volume and in price of energy purchased in the spot market, which mirrors a lower GFS, is the main driver behind that drop. PMSO reported increased by R$5 million in the second quarter of 2016 when compared to the amount recorded in the second quarter of 2015.

Personnel recorded an increase of R$3 million, driven by the collective bargaining, which was 8.2% and which took place in June 2015, also came from the adjustment in benefits, contract terminations and a change in the staff of the Company associated with an internal strengthening of the teams, which aim at servicing our main strategic objectives, namely the diversification of our portfolio and our new commercial platform, as presented by Julian in his first opening remarks.

Material costs and third-party services amounted to R$19.9 million in the second quarter of 2016, up 8.6% from the second quarter of last year. That variation is due mainly to a postponement of the acquisition of materials and the conduction of services in the second quarter of 2015. Those maintenance works working better in the end of 2015 with regard to the net variation of R$1.4 million when we compare those two periods.

On Slide No. 9, we’ll address EBITDA and how it was affected by those variations. In the second quarter of 2016, it's possible to notice EBITDA of R$241 million and amounted to 10% below that recorded in the second quarter of 2015 which sat at R$268 million. This happened mainly due to mainly average price of our sale portfolio, which moved from R$194.12 per megawatt hour in the second quarter of last year to R$138.8 million per megawatt hour in the second quarter of this year, and also comes from a reduction in cost in the purchase of energy, which are associated to lower GSF and lower PLD or spot price in the period.

Our EBITDA showed a drop of 46%, moving from R$658 million in the second quarter of last year to R$420 million in the second quarter of this year. That change can also be explained by the same factors just exposed. Consequently, our net income sat at R$103 million this quarter when compared to R$120 last year, driven from factors mentioned before and also from an increase in financial expenses, which had an impact of R$50 million in the quarter’s income, influenced by expenses with monetary updating in the amount of R$21.4 million, relative to the GSF and the injunction favoring the Company on June 1, 2015, which totaled R$273.2 million by June 30, 2016.

When you compare semesters, our net income was R$178 million in the first half, 43% below the numbers recorded in the first half of last year, which was R$340 million. So, our concern is the dividend payout as mentioned by Julian. The Company’s management approved the payout of R$118.7 million for the second quarter 2016, with a dividend yield of 2.1% considering the average of our units throughout the quarter and a payout of 150%.

Investments in the second quarter as shown on slide 10 totaled R$26 million, a drop of 26% when compared to R$36 million invested in the second quarter of last year. This drop is due mainly to the closing of the cycles of large maintenance works including preventive general maintenance programs over the last years. Out of those R$36 million, we can call your attention to R$18 million which were used in preventive maintenance for other Agua Vermelha and R$5 million relative to interest coming from our fixed asset base, considering the maintenance and modernization plan for our plants in 2016. In the year-to-date, AES Tiete Energy invested R$38 million allocated mainly to modernize and maintain preventively Agua Vermelha. I would like to highlight that our investment program from 2016 through 2020 totals R$402.5 million, focused mainly on the continuous improvement of our operating conditions.

Speaking of cash flow on the next slide, Slide No. 11, in the second quarter of 2016 our free cash flow turned out to be positive at R$165.2 million, an amount which is R$95.5 million above the one recorded in the second half -- in the second quarter of last year, which totaled R$69.8 million. That performance is due to the net amortization of R$180 million, which happened in the second quarter of 2015 and because of the refinancing associated to amortization of 60% of the first issuance of debentures of the Company, which took place on April 1, 2015.

The amortization of the remaining 40% took place on March 30, 2015. The lower generation of operating cash in the second quarter can be justified mainly by the closing of the contract with AES Eletropaulo on December 31, 2015. As a result, the final cash balance reached R$346.6 million in the second quarter of 2016 when compared to R$227.7 million recorded in the second quarter of 2015.

The year-to-date 2016, the free cash flow was positive at R$160.1 billion, an amount which is R$311.3 million above that recorded in the first half of 2015. That performance is due mainly to an increase in operating cash flow by R$135.3 million, which reflects the positive impact from GSF and the APINE injunction, which prevents this GSF to be allocated to generating companies which hold an injunction, which was obtained in June 1st. This increase in operational cash can also be justified by the net amortization of R$300 million due to the settlement of the first issuance of debentures of the Company, which took place in the first half of 2015. Those variables were partially offset by a greater income tax expense at R$146.6 million, due to the results 2015 vis-a-vis that of 2014.

As a result of the elements above mentioned and of the increase of R$430.3 million, and the payout of the second half of 2016 when compared to the second quarter of 2015, the final cash balance for the second quarter of this year sat at R$336.6 million in the first half of this year as opposed to R$227.7 million in the first half of last year.

Moving on to the next slide, slide number 12, you see that our leverage level closed the quarter at 0.9 times net debt over EBITDA. Our gross debt totaled R$1.4 billion on June 30th, an amount which is 4.2% above that of the same date of 2015, which was R$1.349 billion. That change is associated with the issuance of the fourth series of debentures on December 15, 2015 in the amount of R$594 million and the settlement of the second issuance of promissory notes on December 17, 2015 with an amortization of R$500 million.

At the closing of the quarter, of the second quarter availabilities totaled R$347 million, R$121 million above that recorded in the same period of last year. So net debt at the end of the second quarter was R$1.016 billion, an amount which is 5.4% below that recorded in the second quarter of last year. And the amortization schedule, we can see that of R$164 million for 2016, that amount is made up basically of the maturity base of the first series of the fourth issuance of debentures of the Company in 2017. R$223 million will be amortized, mainly relative to the amortization of the first installment of the second series of the fourth issuance and the first installment of the second issuance.

Now I’ll give the floor over to Italo Freitas who will be talking about our client portfolio and the Company’s new businesses. Thank you.

Italo Freitas

Thank you, Francisco. Good morning everyone. Before I begin my presentation on Slide No. 13, I'd like to share with you the Company’s vision about Brazil and the generating sector. As I mentioned in the last quarter, we continued our commitment with Brazil and Brazil continues to be an important competitive market for the year, given the relevance of the country within Latin America. We see in this country an important growth platform for AES especially in generation and also in the possibility of offering innovative solutions for energy.

At AES Tietê Energia, we intend to diversify our metrics which is totally based on hydroelectric plant survey. We plan to explore renewable sources, sun, wind, thermal, and new energies such as distributed energy and the connection of batteries to the grid. For that we are exploring the existing sale platform to develop a new commercial platform which will be integrated with two new electro solutions. Our products range from the conventional energy sale to co-generation and new energies, such as distributed generation and the storage of energy in batteries.

Along those lines, as part of our development of our commercial platform, I’d like to emphasize the startup of a project of solar energy of 6 kilowatts, and the signing of another 15 kilowatt peak which will be operational by October 2016 with a focus on long-term contracting. The level of contracting this year is already at a safe level of approximately 95%. This way, for this year 2016 we have chosen to preserve a component of the available energy to mitigate exposure risks to the short term market because of hydrology risks.

For next year, we have already sold 88% of our available energy which gives the Company some flexibility to start contracting in 2018, considering the new contract signed in the first quarter in 2018 when we will have reached 70% of our available energy for 2019, 38% and for 2020, we have commercialized 26% of our available energy as can be seen on Slide 13. The new contracts were signed in the price range of R$120 and R$150 per megawatt hour, which we announced last quarter.

As addressed before by Francisco, the potential increase in load predicted by the ONS, a low hydrology in historical terms and also uncertainties associated to the La Nina effect and a perspective of adjustment and risk aversion parameters, we have updated our guidance of prices for energy in the free market, which, as I mentioned, was between R$120 and R$150 megawatt hour and now occupy a new range, which is that of 140 and 170 megawatt hour. Our portfolio is also well qualified and we have not recorded so far delinquency associated with our free market clients. I emphasize that all our contracts go through a very careful credit analysis, and also we include financial and corporate guarantees aiming at mitigating delinquency risks.

Thank you so much and I will give the floor back over to Julian.

Julian Nebreda

Thank you, Italo. In the next slide, as you will observe or as you have observed during the presentation, the second quarter of this year was influenced by a reduction in effluents, despite the higher level observed in our reservoirs, potential review of load by the ONS, a worsening of hydrology levels since March and a lower effluent during the drought period, and also uncertainties regarding La Nina still bring some volatility to the free market. Those uncertainties associated with a likely change in risk aversion parameters in price forming has reduced the market's liquidity, pressuring prices in the free market.

This way, our expectation in terms of prices for new contracts starting 2018 now rest in the range of R$140- R$170 megawatt hour, which is a significant improvement from the previous numbers. A third topic would be that the Company is still paying out above 100%. We are paying out now R$118.7 million in dividends in the second quarter of 2016. The fourth important topic has to do with new businesses, our new commercial platform, where I highlight the startup of our first solar project, and also the signing of new contracts to deliver energy between 2018 and 2020.

Lastly, before we move on to the Q&A, I would like to highlight the fact that we go on improving our financial processes, our operating processes and also the management of our assets. As a result, we have been awarded the transparency award from ANEFAC 2016, which makes us all very proud.

Thank you. And we can now move on to the Q&A session.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now start the question-and-answer session. [Operator Instructions] Our first question comes from Carolina Carneiro from Santander.

Carolina Carneiro

I have two questions. The first one, you commented about the range review of the average price and the expectation of R$140 to R$170 per megawatt hour. I would just like to understand this a little bit better. The contract level that you have signed this half is not within this range, is it? It's probably between R$120 - R$140 per megawatt hour. Is that it? Because I wasn’t really sure. And the second question is we have seen that the government has managed to cancel the GSF Brazil injunction. And I understand that this is not injunction that includes view, that includes GSF [ph] but that the Company still has to do the GSF provisions. So this will not impact you. But I would like your opinion on this, on the discussion of the GSF and the possibility of the other injunction fee canceled as well.

Julian Nebreda

The first point concerning the contract and the range, in the contracts that we signed in this quarter, it is the range of R$120 - R$150 per megawatt hour. That is, it. But now we have a new range with a better range which is R$140 to R$170 per megawatt hour and the market is around half of this rate, it's around R$150 - R$160 per megawatt hour. Concerning the injunction, [indiscernible] injunction, that is correct. That is not our injunction. And we are still -- we still understand that it is very challenged but now there is a precedence. So it is difficult to see to say if we will have the same trait as this one other brands. Clarification in cash includes this risk. So this will not affect our dividend plan or any future plans. We already have these provisions because we are confident that our injunction will no longer be canceled.

Operator

The next question comes from Vinicius Canheu, Credit Suisse.

Vinicius Canheu

I have two questions. The first one is about Slide 9, where you show the average price in the second quarter and then you show on Slide 6, the portfolio for June. I’d like to understand why we have such a big difference of price in the second quarter versus what it is for the entire year if we’re talking about the contracted portfolio? This is usually a difference that could be inflation but I think that’s not the case, because it's too big a difference. That’s my first question. Why 144 to 154? And my second question is we have seen in terms of review of the loads that expectation of free markets has increased. We see that the prices are increasing, but the liquidity, the size of the contracts are still not as high. Do you feel that that there’ll be a higher demand or are the contract level and the expectation of contract levels is still low?

Julian Nebreda

The second question, I’ll ask Francisco to answer. We have seen more liquidity. The liquidity is improving the price in the free market. As you are saying half of the range, 150-180 is returning to liquidity. I believe this will improve even more. But with those amounts to see this and three to four weeks, we have had more generators and consumer clients coming back to the market with prices that are above what we saw in the past.

Francisco Morandi

In terms of the price, on Slide 3, on energy prices we are referring to a base -- 13, on a base for June 2016, and this price mirrors only conventional energy. So we have also back to back energy, which is not there.

Vinicius Canheu

So on slide 9 the back to back is not there? Oh, the 9 does and the 13 doesn't, Slide 13. Okay, right. Thank you.

Operator

[Operator Instructions] Since there are no further questions, I like to give the floor to Mr. Julian Nebreda for his final remarks.

Julian Nebreda

Thank you very much. I'd like to thank you again -- more questions? There is a question, okay.

Operator

The next question comes from Marcelo Sa of UBS Bank.

Marcelo Sa

It's a question concerning the new demand preview for ONS. Will this impact the spot price that will be announced this week?

Julian Nebreda

You know that the pricing for -- the pricing in the short-term of course and any kind of change will have a high impact. Ricardo may provide more detail. But, yes, we do understand that there may be a change. Ricardo?

Ricardo Cyrin

Precisely. Hi. Good morning, Marcelo. We have seen that the INS [ph] has reviewed the load for the forward months around 3 gigawatts, and a review was announced around 1.7. And as of September, as Julian said, yes, there may be -- there will be a variation in bad debt as of September, not for next week. If it were next week, it would be a variation of PLD, not the CLD. There will be a variation.

Marcelo Sa

When you see the document of ONS, where they explain the reason for the review, they show that the growth was due to the increase in temperature. Do you understand that there will be an increase in loads on a recurrent base, not impacted by temperature? Do you understand this? Is this what you understand?

Julian Nebreda

Marcelo, we are not sure of the reason of the review, but our studies show that the ONS has been adjusting its preview, and it has resulted the base in the last months, in the previous months of 2015. So yes, there may be a structural adjustment, not related to the economy or the temperature. It may be a structural adjustment, because they may think is required due to the measurements they make.

Operator

[Operator Instructions]. Since there are no more questions, I’d like to give the floor to Julian for his final remarks.

Julian Nebreda

Okay, no more questions. Okay, good morning everyone. I’d like to thank you all for taking part in the call. You know that myself, Francisco and our investor team, we are available if you have any questions that you may have. So, thank you very much and good morning to all of you.

Operator

Conference call is now closed. Thank you for taking part, and have a nice day.

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