Movado Group, Inc. (NYSE:MOV) Q4 2016 Results Earnings Conference Call March 20, 2017 9:00 AM ET
Rachel Schacter - IR, ICR, Inc.
Efraim Grinberg - Chairman and CEO
Ricardo Quintero - President
Sallie DeMarsilis - CFO
Oliver Chen - Cowen and Company
Frank Camma - Sidoti
Good day everyone and welcome to the Movado Group, Inc. Fiscal Fourth Quarter 2017 Earnings Conference Call. As a reminder, today's call is being recorded and may not be reproduced in whole or in part without permission from the Company.
At this time, I'd like to turn the conference over to Rachel Schacter of ICR. Please go ahead.
Thank you. Good morning, everyone. With me on the call is Efraim Grinberg, Chairman and Chief Executive Officer; Ricardo Quintero, President; and Sallie DeMarsilis, Chief Financial Officer.
Before we get started, I'd like to remind you of the Company's Safe Harbor language, which I’m sure you’re all familiar with. The statements contained in this conference call, which are not historical facts, maybe deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in such statements due to a number of risk and uncertainties, all of which are described in the Company's filings with the SEC, which includes today's press release. If any non-GAAP financial measure is used on this call or presentation of the most directly comparable GAAP financial measure to this non-GAAP financial measure will be provided as supplemental financial information in our press release.
Now, I'd like to turn the call over to Efraim Grinberg, Chairman and Chief Executive Officer of Movado Group.
Thank you, Rachel. Good morning and welcome to Movado Group's fourth quarter conference call.
We delivered a solid year despite a very difficult retail market especially in the United States. While we recognized early on that the retail environment would be challenging in both brick-and-mortar and in the watch category, the trend accelerated throughout the year especially in the fourth quarter. Even in this environment, we delivered sales within the range of our outlook and operating earnings towards the high end of our outlook.
We also continue to build our strong balance sheet with cash growing to a record $256 million. During the year, we delivered a number of new leading products across our brand portfolio that we're very proud of including the new Movado Heritage and Esperanza collections and saw the success from our Ultra Slim designs across our license brand portfolios and Movado Collection.
These products help us gain market share in the segments in which we operate. Over the last several years, the watch category has been impacted by the decrease traffic to our retail partners combined with the introduction of wearables. We believe that the digital shift consumers moving to purchasing on their smartphones and the consumption of digital media has accelerated greatly over the last 18 months.
Given this, investment behind our digital initiative is becoming our number one priority. For fiscal 2018, we will reallocate a much larger portion of our marketing dollars into the digital space and we will focus on accelerating our e-commerce sales both through of our own site and our retail partners.
The second impact to our category has been the introduction of wearables. While disruptive to the fashion category, we are still big believers that there are many opportunities with conventional watches that are differentiated by great brands and innovative design. There has already been a saturation, slow down and commoditization of the fitness band category and some of the major players are down trending.
In the smartwatch space, there is a continued opportunity as technology improves and consumers are able to get the creative designs they desire to deliver the functionality that they are looking for. We are very excited to introduce our new Android Wear Movado Connected Watch powered by the new Qualcomm, Snapdragon chip at Basel this week which is a truly innovative design featuring Movado's groundbreaking edge-to-edge crystal and dial design inspired by our Unique Museum Dial that is celebrating its 70th anniversary this year. We will introduce new Android Wear Watches in Hugo Boss and Tommy Hilfiger as well.
Despite the challenging marketplace, we are able to deliver adjusted operating profit north of 10% of sales. Given the very difficult holiday season for a number of our major retail partners in the U.S. and an increase focus on inventory management with declining store traffic, we have decided to execute a cost reduction plan for Movado Group. As a Company we have eliminated a number of positions in the U.S. and are in the process of executing a similar program in Switzerland in an effort to maintain our operating profit objectives on our expectations for reduced sales in fiscal 2018.
Eliminating positions is difficult but we felt it was necessary in order to operate effectively and profitably in the evolving retail landscape. Our program will deliver $12 million of savings in fiscal 2018 and $50 million on an annualized basis.
As we look at the current year, we believe there are number of important global growth opportunities that Ricardo will highlight in his comments. I am proud of our teams around the world for executing on the Company's initiatives. We have successfully navigated changes in consumer behavior and the retail via environment in the past and are confident that we will continue to do so going forward.
Now I'd like to turn it over to Ricardo.
Thank you, Efraim and good morning.
The fourth quarter proved to be challenging for retail in general and particularly for the U.S. department store channel and mall-based retailers. The rise of online appears to be an accelerating trend that continues to grow double-digits and although only represents 15% of the U.S. watch category as tracked by NPD, it has had a significant effect on retailer brick-and-mortar traffic and it's sales results.
The total U.S. watch category in the 0 to $3000 price range declined approximately 14% in the fourth quarter resulting in a full-year decline of 11% making it one of the weakest performing categories track by NPD. To note, the fourth quarter was also highly promotional particularly in the U.S. fashion watch category. Although our fashion brands were not as promotional as our competition, our sell-through trends for Coach, Tommy Hilfiger and Hugo Boss declined in the mid-single digits compared to the market declining in the mid-teens.
As mentioned on our third quarter earnings call, we chose not to participate with Movado Bold in certain promotional events in order to protect brand equity and the long-term health of the brand. As expected, this had an impact on our short-term sell-through but despite this planned decision, the Movado brand outpaced the market.
During the fourth quarter in the $300 for $3000 price range, the Movado brand gained 50 basis points in market share and continues to be the leading player holding at over 21% market share for the full year according to NPD.
Given the challenging sell-through results and overall conservative outlook on the watch category, retailers are more focused than ever on reducing and rebasing inventory levels to significantly improved productivity. This resulted in a decline of 19.2% in our wholesale business in the U.S. during Q4 and this inventory reduction trend will certainly have an impact in fiscal 2018 particularly during the first quarter of the year.
To note, we've made the decision not to shift unusual quantities of inventory at lower margins in our price channels to protect our brand integrity. And we did a good job in managing our overall global inventory levels which are down 5.7% versus last year and down 6.6% versus last year on a constant currency basis.
A bright spot during the fourth quarter came from our outlet business in the U.S. delivering 7% growth versus last year and bucking the overall macro trend. Despite double-digit traffic declines, our teams did a great job at increasing conversion while maintaining a competitive value for the consumer.
During the fourth quarter, we were able to gain better visibility of the impact of connected watches to our business. For perspective, we have launched a total of 47 SKUs across seven brands in over a dozen countries.
Sell-through results were generally in line with expectation seeing the strongest results in our latest version of Movado Bold and in Coach, Tommy Hilfiger and Hugo Boss with a beautiful hybrid watches that provide consumers with functionalities such as notifications, step count and world timer all on a hidden screen.
As noted before, we are confident with our strategic approach to this emerging smartwatch category and early results confirm that this category is relevant but technology has not caught pace with what consumers are looking for. We believe that Apple has played a disruptive role in the fashion watch category and with the second generation of Android Wear powered by the new Qualcomm Snapdragon Wear Processor, we will begin to enter the fully connected smartwatch space.
As announced on March 8, we are excited about our partnership with Google and the launch of Movado Connect, one of the first watches designed specifically for Android Wear 2.0 to be introduced in the fall of 2017 across five men's styles, as well as two styles in Tommy Hilfiger, and two styles in Hugo Boss. All of these new collections will be unveiled later this week at Baselworld 2017.
Shifting to our international results by region, our results were mixed. During Q4, international wholesale decreased by 5.3% compared to last year and 2.7% on a constant currency basis. We continue to see sell-through growth in certain key international markets. Europe remains our strongest region where France is showing signs of improvement in shipments, while Germany and the U.K. continue to see solid sales growth on a sell-through basis.
Our shipment performance in Asia was positive and China continues showing healthy sell-through in our directly operated concession. Our shipments in Q4 for Latin America decreased to mid single-digits as these markets were U.S. dollar based and many of the major economies in the region have been impacted by currency devaluations and ongoing economic uncertainty. Sell-through in Brazil, our largest market in the region was positive which was offset by softness in Mexico, Argentina and continued challenges in the travel retail channel.
Looking into fiscal 2018, we continue to believe there are many opportunities in the watch category. Innovation is the lifeline of our business and we are committed to continuing to lead with superior watch design in the traditional watch category, as well as in the connected segment.
In fiscal 2017 we brought many initiatives to market that build solid performance across our portfolio. Our Ultra Slim initiative was strong and have seen positive momentum which we expect to continue into fiscal 2018. Movado Esperanza is the biggest launch in the brand's recent history and ladies set Esperanza was our best-selling watch for the season.
Our Movado Heritage line is off to a fantastic start and we will see this connection gain further prominence during fiscal 2018. As mentioned by Efraim, we are excited about the celebration of the 70th anniversary of the Movado Museum Dial which will be supported by limited-edition product and a special association with the Albert Einstein Foundation under the theme Design Genius. Highlights for this campaign will be announced later this week during Baselworld 2017.
We are fully committed in our investments in digital and are very pleased with the multiple initiatives underway. Movado.com was our fastest growing business unit with double-digit increases and our digital advertising and social media footprint continues to grow and gain traction. We will continue to shift resources into digital to capture the many opportunities for Movado Group that we believe exist on a global basis including shifting a larger percentage of our marketing expenses to digital marketing.
As mentioned by Efraim, we have made the decision to implement certain cost saving initiatives in fiscal 2018 with a goal of delivering profitable growth while shifting resources to support the biggest opportunity, the fastest growing brands and channels with a continued focus on productivity and excellence in execution. As part of the strategic choices and rebalancing of resources, last quarter we announced the partnership with Rebecca Minkoff. We will also not renew our license with Juicy Couture which expires on December 31, 2017.
So the retail backdrop remains challenging and we recognize and are adapting to the major shifts in consumer behavior and preferences, we still believe there are many opportunities in the watch category for us. We're decisive in our commitment to become a linear, more agile organization rightsizing to the current operating environment and making smart resource allocation against the biggest opportunities with a focus on delivering sustainable profitable growth in a long run.
Given the current environment, our guidance for fiscal 2018 is that net sales will be in a range of $550 million to $530 million and operating income will be approximately $50 million to $55 million.
I will now turn the call over to Sallie.
Thank you, Ricardo, and good morning, everyone. For today's call, I'll first review our income statement and balance sheet and then discuss our outlook for fiscal 2018.
Before I review the quarter and the year in total, I would like to point out the special items included in our full year results for fiscal 2017 in both our fourth quarter and full year results for fiscal 2016. Please refer to our press release for a description of these items, as well as the table of GAAP and non-GAAP measures.
Our fiscal year 2017 GAAP results include a charge recorded in the third quarter of $1.3 million, which equates to $900,000 after tax or $0.03 per diluted share for an impairment of a long-term investment in a privately held company.
Our fiscal year 2017 GAAP results also include a $1.8 million pre-tax charge, which equates to $1.1 million after tax or $0.05 per diluted share in connection with the vesting of stock awards and certain other compensation in the first quarter related to the announcement of our former COO's retirement.
Our fiscal 2016 GAAP results include a $4 million pre-tax charge, which equates to $3.9 million after tax or $0.16 per diluted share in connection with our operating efficiency initiatives and other items. $1.3 million or $0.06 per diluted of this charge was in the fourth quarter and the remainder was in the first quarter. The balance of my remarks will exclude the special items just discussed.
For the fourth quarter of fiscal 2017, our sales decreased 8.7% to $130.8 million in line with our expectations. In constant dollars, sales decreased 7.5%, as currency unfavorably impacted our sales by $1.7 million, decreases in our luxury brand and licensed brand categories were partially offset by an increase in our retail sales.
Sales decreased 11.7% in the U.S. and in constant dollar decreased 2.7% internationally. Sales in our wholesale segment were $107.2 million or 11.6% below sales of $121.2 million for the same period of last year. In constant dollar, sales in our wholesale segment decreased 10.2%.
By geography, our U.S. wholesale business decreased 19.2% to $44 million compared to $54.5 million last year. Our international wholesale business decreased 5.3% to $63.2 million compared to $66.8 million in the prior year, a decrease of 2.7% in constant dollars. Sales from the Company's retail business for the fourth quarter were up 7% from last year. At the end of the period, we operated 40 outlet locations.
Gross profit was $64.7 million or 49.5% of sales compared to $75.3 million or 52.5% in the fourth quarter of last year. The 300 basis point decrease in gross margin was primarily driven by the unfavorable impact of channel and product mix partially offset by the favorable change due to foreign currency exchange rates.
Operating expenses were $57.2 million, a decrease of 8.3% year-over-year. The decrease was primarily the result of the following; a $5.1 million decrease in performance based compensation and payroll related expenses, a $1.4 million decrease in other operating expenses, and a decrease of $700,000 resulting from the favorable impact of foreign currency exchange rates. These were partially offset by a $2.1 million increase in marketing expense.
Given the decrease in operating expenses, operating income was better than we expected for the fourth quarter. Operating income was $7.4 million or 5.7% of sales compared to $12.9 million or 9% of sales in the same year-ago period. Income tax expense was $1.9 million compared to income tax expense of $2.9 million in the same period of last year.
Net income in the fourth quarter was $5.2 million or $0.22 per diluted share versus net income of $9.2 million or $0.40 per diluted share in the year-ago period. Looking at the results for the full year ended January 31, 2017, sales were $552.8 million, a decrease of 7.1% from fiscal 2016. In constant dollar, sales decreased 6%.
Similar to the fourth quarter, sales declined in both our license brands and our luxury brands categories, an increase in our retail category. U.S. sales decreased 9.2%, international sales decreased 4% and on a constant dollar basis, international sales decreased 2.2%.
Gross profit was $294.8 million or 53.3% of sales as compared to $317.6 million or 53.4% of sales last year. Operating income was $55.8 million or 10.1% of sales compared to $74.1 million or 12.5% of sales in fiscal 2016.
Income tax expense was $17.4 million compared to income tax expense of $23.5 million for last year and our effective tax rate was 31.9% for fiscal 2017 compared to a 32.1% effective tax rate last year. Net income was $37.1 million compared to net income of $49 million in the prior year. Diluted earnings per share decreased to a $1.59 per share in the current year compared to $2.06 per share last year.
Now turning to our balance sheet. Cash at year end was $256.3 million compared to $228.2 last year. We generated $58.4 million in cash flow from operations, repaid $10 million on our revolving credit facility, paid dividends of close to $12 million and repurchased $3.9 million of shares under our share repurchase program.
Accounts receivable decreased $4.2 million to $66.8 million compared to last year and inventory decreased $9.3 million to $153.2 million or 5.7%. Capital expenditures for the year were $5.9 million and depreciation and amortization expense was $11.5 million.
I will now discuss our outlook for fiscal 2018. As Ricardo mentioned, our outlook is based upon the current challenging retail environment and volatile global economies and assumes currency rates consistent with recent levels.
Our results maybe materially affected by many factors such as changes in global economic conditions in customer spending, fluctuations in foreign currency exchange rates, and various other causes.
As aforementioned, our cost savings initiatives is expected to result in annualized pre-tax cost savings of approximately $15 million predominately from payroll reduction. We expect to realize approximately $12 million of these savings this year fiscal 2018.
Associated with this initiative will be a pre-tax charge in a range of approximately $7 million to $10 million related to the completion of the program which will be reported predominately in the first quarter with a balance being recorded throughout fiscal 2018.
In light of the forgoing, for fiscal 2018 we anticipate our sales will be in a range of $515 million to $530 million. We expect the first half sales performance to be below last year's levels in the high single digit range with the first quarter being below last year by mid to high teens as the retailers continue to focus on optimizing their inventory.
As usual, we will be closely managing our expenses for the current year. However fiscal 2018 will reflect the disciplined investments and growth opportunities of digital and e-commerce as both Efraim and Ricardo mentioned.
Operating income is projected to be in a range $50 million to $55 million. We expect our first half operating income to be below the prior year based upon our expected first half sales results. We also want to remind everyone that although we do not provide quarterly guidance, our first quarter ended April 30 is historically our smallest sales quarter.
With the expected sales levels just mentioned and only a partial quarter impact of the cost savings initiatives, we anticipate the first quarter operating income to be below prior year. Due to the projected mix of global pre-tax results excluding the impact of any potential U.S. tax reform, the estimated effective tax rate is expected to be 32% and net income is expected to be in the range of approximately $33 million to $36.3 million.
We expect diluted earnings per share for fiscal 2018 to be in a range of approximately $1.40 to $1.55. Capital expenditures for fiscal 2018 are estimated to be approximately $8 million. The outlook we have provided assumes no unusual items for fiscal 2018 and therefore excludes the approximate 7 million to 10 million pre-tax charge for fiscal 2018 which was previously mentioned cost savings initiatives.
I'd now like to open the call up for questions.
[Operator Instructions] And we’ll take our first question from Oliver Chen with Cowen and Company. Please go ahead.
Hi, good morning. Thanks for the details. We had a few questions. Regarding the shift to digital, what percentage of your spend will be in digital and is this going to be a bigger catalyst for your wholesale or direct to consumer? And what is the rationale for accelerating now versus prior? It does seem like this is highly relevant with how the consumer is moving.
Also, a second question on, as you think about the cost savings opportunities, which operations you have the most opportunities? And how do you balance this against the changes happening and just ensuring that you have the right investments in the right places? Just curious about what you're thinking is around where you see the most savings. Thanks.
Well on the first part the digital part, we've obviously been increasing our digital investments and this year I would believe that out of our media budget it will be approaching 50%. So that's a significant increase and it has done to drive both our e-commerce business, our overall brand because that's really where the consumer is not only shopping but also getting their information and their education on products and drive retail demand both in brick-and-mortar and e-commerce for our retail partners.
So - and we already launched that campaign now but it will obviously be accelerating through the spring gift-giving season.
And then on the other second question on all over in terms of where we see bigger opportunities, we're seeing great traction in Europe as I mentioned in my prepared remarks. So we want to built and invest in these markets where we're seeing a stronger return on a sell-through basis. So certain new places like the U.K., like Germany, France which are markets where we now have our direct operated subsidiary are places where we want to continue investing.
Okay. And on the guidance, your overall revenue growth seems less negative on the guidance than how the industry has been trending and it looks like the back half there's an expectation for an improvement. So what gives you the confidence? Should we have concerns that your new revenue guidance isn't conservative enough, just given the rapid changes that have happened in fourth quarter, how fourth quarter unfolded relative to your expectations?
Well I think the fourth quarter already has some of that built in for us because you did see a decline in replenishment from Christmas based on challenging holiday season. And that’s probably the part that had the greatest effect on the fourth quarter and that’s why we believe that there's still an inventory that retailers will be very focused on their inventories and rightsizing the size of their business during the first half of the year but the trend should begin to stabilize in the second half of the year.
Okay. And lastly, on the Android Wear product, the announcement is exciting. What's the price range of that product and where will it sit? And how have you been feeling overall, Efraim, with how consumers have embraced wearables? It still feels very fragmented and evolving. I'm a little unsure about how this will manifest on a multiyear basis with the technology and the pricing.
So we will start at approximately $295 in Tommy Hilfiger and then our entry price point in Movado will be $495. We believe it's still a competitive marketplace of pricing in the technologies here.
As you know Ricardo and I both shared in our comments, we're big believer still in traditional watches and believe that that category will stabilize and begin to grow again but there is an opportunity for wearables although we believe it's not as large an opportunity as is it might be for some of the other people who make - who are in the sport watch market or directly in that connected space.
And you already have seen a saturation for example in fitness bands and the category is beginning to really get highly, highly commoditized. So it's not a space where we want to play.
Okay. One last question which we are getting incomings on, you have a really nice balance sheet. Just could you remind us of your strategy for use of cash in terms of your long-term views on how you prioritize cash versus investments? Thank you.
I think in this environment it gives us a great deal of flexibility in terms of what we can do and provides a solid foundation and security for the company. Obviously you're also - there maybe ability to repatriate significant portions of that cash in the future and we have - bought back stock through - plan to offset dilution, as well as continue to pay dividends.
Thank you. Best regards.
And we will take our next question from Ed Yruma with KeyBanc. Please go ahead.
Hi, thanks for taking our questions. This is Matt on for Ed. We are wondering about how the cost savings will flow through the income statement and if there is any seasonality to the cost reductions. And do you believe you'll get to the $30 million annualized savings by Q2 or will the full changes take longer than one quarter to implement. Thanks.
Okay, Matt I’ll address a little bit of that and just a little clarification. So, as I mentioned in my comments, the cost savings initiatives will predominately impact the first quarter with the remainder happening throughout the rest of the year as far as the charge goes. We will identify that in our first quarter results, as well as throughout the year and identify the amounts to you. It's in predominately in our operating expenses, it will be little in gross margin, little bit in our remainder being OpEx and the annualized number is $15 million.
The number for this year, the savings will be $12 million and since we have just kicked it off now, being March, you're going to have a partial impact in this first quarter with the remainder happening throughout the year as far as the savings impacting favorably to the P&L.
Okay, thanks. Can you also talk about your comfort level with channel inventory, particularly we want to know about the multibrand specialty watch stores?
I think inventories have been declining and you're seeing that and especially since for us our year end is in January and retail has used that period to find bring down their inventory and continue to focus on that in Q1. But we're very pleased with this that the quality of our inventory both our own and in the marketplace is of excellent quality. So - and that's something we always focus on.
Okay, thanks. And one more if we could. I believe you said your outlet sales were up 7% this quarter. Are you seeing similar trends that other discounters like TJ and Ross?
We don't have a big role in those other off-price retailers and I think it's a highly fairly segmented business. So I wouldn't - we don't really particularly know that but we were very pleased with our trend in the fourth quarter and in our own outlet store especially given the fact that traffic continue to be down but when people came in to mall, came into our stores, they bought watches which further affirms is the fact that the consumers continue to be interested in a nice watches.
We will take our next question from Frank Camma with Sidoti. Please go ahead.
Good morning, guys. A follow-up on the capital allocation question. Are you opposed to - because I know obviously most of your cash is still overseas, are you opposed to borrow in short term to repurchase shares in hopes that you can repatriate later?
I think that we've done that in the past. So we're not adverse to it.
Okay. I just meant I think recently you've kind of pulled back on that. Is that a fair statement or not?
In think in Q4 we generally have bought more stock back I think in the first half of the year generally been in the second half of the year.
Okay. And just a little more detail on the significant drop in the gross margin. You did call out the channel and the product mix. Now do you mean by channel that the retail that your outlets were more of a mix? I'm just try to figure out why the drop. I mean I understand what you are saying, but it's still a pretty significant drop when compared to your last multiple quarters there. So if you just can give a little more detail on that.
Frank I’ll try to address a little bit and perhaps I’m going add a little color. We do have some seasonality to our gross margin. Our gross margin in the fourth quarter is historically lower. We have a certain amount of fixed cost for instance so in a smaller quarter which is the fourth quarter is one of them, are to leverage some of those costs.
I mean if you go back and look perhaps two years ago, we are right in line with where we were. We were not highly promotional so the decrease was function of mix of where it’s selling and what selling and so forth but we’re not in a highly promotional situation as perhaps maybe some other people are.
And I think just to add to Sallie's, it's basically we believe directly related to volume. So the fact the replenishments were lower in January would certainly have an effect on our gross margin and mix and being able to leverage the fixed production cost and that some of our cost cuts are also in the gross margin area as well.
Okay. So going forward - in your guidance your gross margin - it sounds like your gross margin is relatively stable year-over-year, not calling out the quarters, but is that a fair statement on a year-over-year basis?
Yes, that's fine. That's fair.
And it appears there are no further questions at this time. I’d like to turn the conference back over to management for any closing remarks.
Okay. I'd like to thank all of you for participating on today's call and we look forward to talking to you during our first quarter conference call. Thank you again.
And this concludes today's call. Thank you for your participation. You may now disconnect.
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