Nine Months 2015 Mechel OAO Earnings Call

Dec 16, 2015 AM EST
MTLR.MZ - Mechel PAO
Nine Months 2015 Mechel OAO Earnings Call
Dec 16, 2015 / 03:00PM GMT 

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Corporate Participants
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   *  Alexey Lukashov
      Mechel OAO - IR
   *  Oleg Korzhov
      Mechel OAO - CEO
   *  Andrey Slivchenko
      Mechel OAO - CFO

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Conference Call Participants
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   *  Christopher Reviduso
      Debtwire - Analyst
   *  Oleg Petropavlovskiy
      BCS - Analyst
   *  Ksenia Svetlova
      BNP Paribas - Analyst
   *  Vitali Petlovi
      Domesti - Analyst
   *  Anna Antonova
      Sberbank - Analyst

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Presentation
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Operator   [1]
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 Good day and welcome to the Mechel reports nine-month 2015 financial results. Today's conference is being recorded. At this time, I would like to turn the conference over to Alexey Lukashov. Please go ahead.

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 Alexey Lukashov,  Mechel OAO - IR   [2]
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 Thank you. Thank you, and good day, everyone. I would like to welcome you to Mechel's conference call to discuss our nine-month 2015 results, which we reported today. With us from management today are Mr. Oleg Korzhov, Mechel's CEO; and Mr. Andrey Slivchenko, Mechel's CFO.

 After management has made their formal remarks, we will take your questions to the presentation team. Please note that, during this call, management will make forward-looking statements, some of which may have been made in the press release. Some of the information on this conference call may contain projections or other forward-looking statements regarding future events or the future financial performance of Mechel, as defined in the safe harbor provision of the US Private Securities Litigation Reform Act of 1995.

 We wish to caution you that these statements are only predictions and that actual events may -- or results may differ materially. We do not intend to update these statements. We refer you to the documents Mechel files from time to time with the United States Securities and Exchange Commission, which contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

 In addition, we will be using non-GAAP financial measures, including EBITDA, in our discussions today. Reconciliation of non-GAAP financial measures to the most directly comparable US GAAP financial measures are contained in the earning press release, which is available on our Website at www.mechel.com.

 At this point, I would like turn the call over to Mechel's CEO. Mr. Korzhov, please go ahead.

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 Oleg Korzhov,  Mechel OAO - CEO   [3]
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 (interpreted) Good afternoon, and good morning, ladies and gentlemen. We're glad to welcome you to this conference call for the Company's financial results of nine months of 2015.

 Consolidated revenue in this accounting period amounted to $3.275 billion with consolidated EBITDA at $887 million. As a whole, I think that the Group has worked well during these nine months. Operational results remain at a stable level. I think that the following is particularly noteworthy. The Company currently generates sufficient EBITDA for us to pay current interest to our lenders. This is the basis for our negotiations with the banks and the recipe for our future stable work despite macroeconomic turbulence, which is generally expected to persist in 2016.

 This year was rather difficult for Mechel, the same as for other mining and steelmaking companies. Global contract prices for coking coal concentrate have fallen by 30% since last year from $119 to $81 a ton, which is a record low since 2004. Over these nine months, iron ore prices have slumped even worse. The domestic market for steel products also fell prey to the negative impact of supply outstripping demand.

 On the one hand, this is a highly unpleasant process accompanied by a series of bankruptcies. But, on the other hand, departure of less-efficient producers will help balance out supply and demand and stabilize prices. Demand on the global coking coal market remains weak, mostly due to a slump in demand from China, a major coal consumer on the spot market. This has inevitably put pressure on global prices.

 Nevertheless, even in this volatile market situation, we continue to develop our projects and demonstrate stable operational and financial results. Operational revenue and EBITDA topped the results from the same period last year and quarter on quarter. In both production and sales, we managed to cross into the green zone on most of our key products.

 I would particularly like to note the Elga project, which has reached a high production level in the second half of this year. Tomorrow, December 17th, Elga's open pit will fulfill our mining pledge for 2015 by mining 3.8 million tons. We expect that, by the year's end, Elga will yield some 4 million tons of coal. Next year, the complex will mine some 5 million tons. The facility's record profitability supported by the national currency's weakening enables Elga to be economically efficient, even with the current production volumes and low coal prices.

 We are currently in the final stage of our debt restructuring negotiations with Sberbank. We're also actively discussing the possibility of our partner banks entering the Elga deposit project, which would enable the group to significantly cut our debt burden, resolve the issue of underfinancing, and go into a stable operating mode while the banks will gain shares in one of the world's most efficient coal projects.

 I do understand that everyone would like to know more. But, we think it's inappropriate to make public the details of these discussions until legally binding agreements are signed. We believe that this difficult and drawn-out process will be successfully completed in the near future.

 Now, I would like to give the floor to our Chief Financial Officer Andrey Slivchenko, who will give details of the financial results of all of our business segments. Thank you for your attention.

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 Andrey Slivchenko,  Mechel OAO - CFO   [4]
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 Ladies and gentlemen, good afternoon, and welcome to our call today. I would like to make a few comments on the financials for the nine months of 2015, which we are releasing today.

 After a short strengthening in the second quarter, the Russian ruble resumed its downward glide. This pushed revenues further down. However, due to the difference in the currency devaluation rates and cost inflation rate, it had positive effect on the profitability and, similarly to the first quarter, enhanced our operating cash flows.

 This altogether allowed us to slightly invest back into the working capital and to start decreasing our payables. EBITDA amounted to $587.5 million, exceeding current interest expenses. On the other hand, we realized a $767 million ForEx loss, which almost equaled to our net loss of $773 million for the third quarter.

 Revenues were falling down across all the segments in the third quarter. The consolidated revenue dropped by 13% to be at more than $1 billion. The nine-month revenues were down by 35% at $3.3 billion, as the markets are shrinking, and the appreciated dollar is affecting the ruble-denominated sales.

 Cost of goods sold fell slightly more than the revenues, providing for an increase in the gross margins from 40.6% in the second quarter to -- up to 44.2% in the third quarter.

 Mining segment revenues of $302 million dropped by 17% quarter on quarter on the world price descent and lower sales of metallurgical coals.

 Steam coal sales were country wise up by 31%, supported by increased production from the Elga deposit.

 Costs were down by 23%, bringing gross margin up to 56.7% and EBITDA margin up to 24%.

 Unlike mining segment, steel segment revenues dropped only by 10% and amounted to $611.6 million in the third quarter on declining ruble exchange rate, while with prices failing to catch up. Growth in sales of long and flat steel as well as wires partially compensated for the fall. Gross margin, though, increased to 25.5% in the third quarter.

 Revenues breakdown for nine months of 2015 was as follows: 65% sold on domestic markets, and 35% was sold for exports, while mining segment contributed 32%, and 58% was contributed by the steel segment.

 Consolidated EBITDA for nine months reached $587.5 million, up 20% from the previous year, converting current interest expenses net of fines. EBITDA margin also grew from 10% to 18%. EBITDA contribution by segments was 52% from mining, 60 -- sorry, 46% from steel, and 2% from the power segment.

 Over the third quarter, EBITDA increased by 10% and reached $197 million for the quarter. On devaluating cost, lower cost of raws, and lower seasonal energy consumption, as well as increased steam coal sales and steel power products.

 On average, costs in mining fell by 23%, and steel by 16% over the quarter, also pushing the quarter EBITDA up by 4.5% and 2%, accordingly.

 The operating profits in nine months almost tripled from $129 million to $376.3 million, largely due to the ruble devaluation effect. A third-quarter increase was $31 million, up 29%.

 As a result of a decrease in cost, net loss for nine months of 2015 was down by 17% from the previous year and amounted to approximately $1 billion. Divestment of Bluestone operations also contributed to the reduced loss.

 Third quarter financial results were predominantly driven by loss on foreign exchange, which amounted to 99% of the net loss.

 Cash flows, operating cash flows for the nine months of 2015 before payment of interest and changes in working capital, was positive and amounted to $613 million, sufficient to cover $112 million of investing activities -- spent on investment activities, $329 million spent on interest paid, and repayment of -- net repayment of debt of $152 million, as well as financing the working capital in the amount of $40 million for the nine months.

 Cash flow deficit and ForEx effect were covered by cash at the beginning of the year. CapEx financed in 2015 amounted to $61 million. Net decrease in borrowings amounted to $152 million over the period. Almost one-third was spent on bonds redemption, while the rest was used for debt settlement with different banks and leasing companies.

 As far as debt is concerned as of the end to the nine-month period, net debt amounted to $6.5 billion, which is eight times EBITDA accounted for the past 12 months. Net debt is down from the year beginning, primarily due to the devaluation of ruble and, to a lesser extent, to debt repayments.

 Debt service burden, which I think is the most interesting for you today, in dollar terms, was decreasing over the year, with devaluation of ruble and decrease in interest rates affected by higher rates in the beginning of the year.

 However, due to nonperformance under the credit and leasing facilities, debt service expenses were increased by $263 million of fines and penalties. Currently, we're in talks with creditors on writing off such fines subject to agreement on restructuring and meeting the new obligations.

 Interest expenses for third quarter, net of fines, amounted to $169.2 million -- sorry, $167.2 million, which is 84% of the quarter EBITDA. For the nine months at large, current interest amounted to $561.1 million, or 96% of the EBITDA for the period.

 This is all I have to comment today. And I would be glad to take your questions. Thank you.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions). [Christopher Reviduso], Debtwire.

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 Christopher Reviduso,  Debtwire - Analyst   [2]
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 Yes, good day, gentlemen. Christopher Reviduso here. I just wanted to know if you would be able to tell me, please, if you have a projection by how much you plan to decrease debt in 2016, or the net debt that is to say.

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 Oleg Korzhov,  Mechel OAO - CEO   [3]
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 (interpreted) The answer is that the current expectations are to maintain debt at almost the same level, whereby the Company's currently negotiating with the bank to extend the debt repayment for a more lengthy period of time.

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Operator   [4]
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 (Operator Instructions). Oleg Petropavlovskiy, BCS.

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 Oleg Petropavlovskiy,  BCS - Analyst   [5]
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 Good evening, gentlemen. Thank you for the presentation. Could you please share with us your expectations about 2016, I mean production in mining and steel segments, and your CapEx guidance would be [worthy]. Thank you very much.

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 Alexey Lukashov,  Mechel OAO - IR   [6]
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 The question will be answered by Oleg Korzhov.

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 Oleg Korzhov,  Mechel OAO - CEO   [7]
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 (interpreted) In as far as the mining segment of our business is concerned, we are planning our production to about the level of 25 million tons. In terms of iron ore concentrate, we are planning to produce approximately 3.5 million tons, the amount of production of coke approximately 2.6 million. In the steelmaking division, we plan the production of steel and rod products would amount to about 4 million tons, whereas the ferric silica about 70,000 tons for the year.

 And in as far as the amount of CapEx is concerned, I'm not just ready to quote the numbers because the process is not yet over. We currently continue to look into and adopt various divisional budgets. And only once we get through the process, we'll be more or less able to identify what our CapEx is going to be. In any case, we're not planning any new investment projects next year.

 Now, in as far as the maintenance cost is concerned, I would say that it is going to remain at a level of our planned figures for 2015, which is going to be about $40 million throughout the year, covering all of the divisions.

 As far as the investments project is concerned, as I said, we are not planning any new ones. Quite possibly, there may be certain repayment of the receivables. But, in case we would be considering any investment project, those are definitely going to be small ones aimed at an effective outcome and guaranteeing a quick return. But, it would all depend upon whether we'll have any funding sources for that or not.

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 Alexey Lukashov,  Mechel OAO - IR   [8]
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 Next question, please.

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Operator   [9]
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 (Operator Instructions). There are currently no questions in the queue. (Operator Instructions). There are no questions in the queue at this time. Christopher Reviduso, Debtwire.

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 Christopher Reviduso,  Debtwire - Analyst   [10]
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 Thanks very much. Gentlemen, I just had one question with regards to the Elga mine. From what I understand, the Company has spoken to Russian Railways, RZhD. The -- in 2014 about the prospect of them taking over and maintaining that line, which -- for which I believe -- the rail connection, that is, for which I believe Mechel is now responsible. Has there been any change on that? Will Mechel continue to maintain that rail connection, or have there been any talks about -- any further talks about RZhD taking it over?

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 Alexey Lukashov,  Mechel OAO - IR   [11]
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 The question will be answered by Oleg Korzhov.

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 Oleg Korzhov,  Mechel OAO - CEO   [12]
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 (interpreted) Indeed, and you understood quite right because we had negotiations with the Russian Railroad Company for the possible sale of this connection into the RZhD structure because we thought that and we believed that this particular project could've been of interest to RZhD, both from the point of view of payback and management. And so, we continue to think that RZhD would've been in a position to organization a more effective operation of it.

 Unfortunately, sometime about 18 months ago, we did not manage to complete this initiative because of different reasons. And so, as of today, we continue to act as the operator of this railway connection.

 However, we continue to entertain plans for a possible future sales of this particular connection to RZhD. We are weighing different options, including the sale of it in installment as well as through a leasing arrangement. But, the current environment is not very favorable in terms of the ability of anybody to go into this kind of funding. So, we are not -- we have not parted with this idea. But, at the same time, I cannot say that we had any substantive or constructive negotiations on this topic.

 However, we know that the Russian Railroad Company's aware of this and potentially as far as we know, they are not averse to discussing this future possibility with us. So, we will be continuing to look for possible points of correlation with the RZhD. So, finally, I would describe that this is not something that has been considered in depth or something that has entered into any further phase as a project negotiation. So, we continue to simply keep it in our mind.

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 Christopher Reviduso,  Debtwire - Analyst   [13]
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 Thank you.

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 Alexey Lukashov,  Mechel OAO - IR   [14]
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 Next question, please.

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Operator   [15]
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 [Ksenia Svetlova], BNP Paribas.

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 Ksenia Svetlova,  BNP Paribas - Analyst   [16]
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 Yes, thank you very much for your presentation. Just a quick question coming back to restructuring processes with Sberbank, if you could share us your point of view, you hope to finalize this with Sberbank, and maybe there are certain blocking points with them when the (inaudible) have a term sheet negotiation. Thank you.

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 Alexey Lukashov,  Mechel OAO - IR   [17]
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 The question will be answered by Oleg Korzhov.

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 Oleg Korzhov,  Mechel OAO - CEO   [18]
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 (interpreted) In as far as our negotiations with Sberbank are concerned, we have done quite a lot of substantive work and negotiations with them. And so, in as far as the restructuring of our debt is concerned, at this point in time, we have entered into a home stretch, and we have completely agreed upon the terms of the out-of-court settlement as well as we have agreed the text of all of the loan documentation.

 So, in some immediate future, we are planning to sign both of these and certainly within the framework of the signed loan agreement, we shall continue to live and work.

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 Ksenia Svetlova,  BNP Paribas - Analyst   [19]
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 Thank you.

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 Alexey Lukashov,  Mechel OAO - IR   [20]
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 Next question, please.

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Operator   [21]
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 [Vitali Petlovi], [Domesti].

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 Vitali Petlovi,  Domesti - Analyst   [22]
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 Hello. My name is Vitali Petlovi from (inaudible) [newspaper]. Could you please say, in what conditions do you suggest to peak [the] creditors with which I guess you just have a negotiation about restructuring debt for $1 billion? And until what point of time are you suggesting to restructure your debt for $1 billion? Thank you.

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 Alexey Lukashov,  Mechel OAO - IR   [23]
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 The question will be answered by Andrey Slivchenko.

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 Andrey Slivchenko,  Mechel OAO - CFO   [24]
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 (interpreted) We have been having extensive negotiations with all of the lenders and rather with the coordinating committee that the lenders have appointed for the (inaudible). And basically speaking, we have been set a condition for this restructuring that it would be subject to a successful restructuring effort with the government banks.

 Our basic intention is to be able to service all of the debt. And that is why our negotiating position with the lenders is in our intention to delay the repayment of the principle until the point in time when we will have sufficient cash flow to both service the interest as well as repay the principle.

 And moreover, we had the lenders expressing the expectation for an equal treatment of all of the lenders. And so, what I would like to say may be preempting your question that, based upon an agreement with -- once we've reached an agreement with the government banks, we would be in a position to achieve the same kind of terms with the (inaudible) lenders.

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 Vitali Petlovi,  Domesti - Analyst   [25]
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 (interpreted) Is it going to be 2017, like in the case with [EBTB], when the principle is going to start being repaid?

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 Andrey Slivchenko,  Mechel OAO - CFO   [26]
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 (interpreted) I would rather wait until the final resolution is reached on the loan agreements with the government banks before responding.

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 Alexey Lukashov,  Mechel OAO - IR   [27]
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 Next question, please.

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Operator   [28]
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 (Operator Instructions). Anna Antonova, Sberbank.

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 Anna Antonova,  Sberbank - Analyst   [29]
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 (interpreted) I would like to, if possible, ask you for an opinion as to what kind of trends do you expect in the steel market as well as in the raw materials market for next year, considering the current easy and difficult environment. Do you expect any recovery in terms of the demand in the domestic market in the construction segment? And what would you expect the coal and iron ore market domestically to evolve during the next year? Thank you.

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 Alexey Lukashov,  Mechel OAO - IR   [30]
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 The question will be answered by Oleg Korzhov.

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 Oleg Korzhov,  Mechel OAO - CEO   [31]
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 (interpreted) During the recent years, we've seen that, to try and predict prices is something which is far from being gratifying, unfortunately. And unfortunately, the commodity markets do remain at their historic minimums. And it's not really easy to try and guess what the prices for the future periods will be. We stated more than once that prices have reached their bottom. And we also used to say that we are hopeful that there will be a certain recoil upwards.

 But, regrettably, life is not giving us any reasons to be optimistic. So, we based our outlook from the fact that the prices for our main products, the iron ore concentrate and coal, will remain at the level of the fourth quarter this year. We are not planning and we are not putting into our budgets or expectations any significant growth. So, if it happens, that will be definitely a very pleasant surprise and very good news to us.

 Now, in as far as the prices for the steel products are concerned, I am not ready to talk about the whole of the steel segments, but rather mention a few words about the products that we are producing and that we are interested in the first place.

 As far as the construction assortment is concerned, we do not see for next year any significant spike of activities in the construction industry based upon the current events. But, nevertheless, we believe and we are planning that, in as far as our volume of the sales of the construction assortment, and we're talking about the reinforced steel and the beams, we will be in a position to sell it.

 And our confidence in the first place is based upon the statistics that we were able to gather during the past few years about our sales. And secondly, as we used to say, we have quite a diverse and well developed the service base and distribution base that allows us to reach out to our consumers.

 And additionally, considering the fact that, within the construction assortment, there are quite a few players who are growing production, we believe that, compared to that, we have quite a competitive advantage. First of all, we do produce the long steel out of the full steelmaking cycle, which up until now really generated certain cost advantage. And secondly, as I mentioned, we have a well-developed distribution and sales network.

 As far as the fasteners market is concerned, again, despite a certain decline in demand this year, we see that our volumes in production and sales of fasteners is not going down, which gives us reason to think that we'll be able to keep our position in fasteners for next year, although the trends definitely are not the best ones.

 At the same time, we do see that we have a certain definitive I should say products which we believe are going to sell next year. And maybe we would be selling them at a bigger -- in bigger volumes. And we definitely see where we can develop ourselves in terms of the stainless rolled products. And there is quite a good demand for that. And it has a very good profit margin and profile, including the thick sheets, where we see that all of these volumes that we are capable of producing we will be able to sell.

 Another niche is in the quality rolled products. There are quite a few players, again, in this market today. But, considering the way the situation is evolving particularly in terms of the defense industry contracts, whatever we principally are able to offer what we can, like in the machine building. This is a very good quality niche that we are supposed to develop as best as we can and use it for the purpose of our competitive advantage.

 So, overall, for next year, as I mentioned, we're not planning to reduce the output of steel and rolled products. We believe that whatever we are capable of producing, we will definitely do so. And we will be specifically talking about the price factor when selling it. But, based upon the current environment and the way it is developing, we would say that the fourth quarter prices slightly go down. So, the prices for next year, principally speaking, should be at least at the level of Q3 2015.

 Therefore, I would say hardly likely the prices would further go down because, in terms of their level, they have reached the cost level in many steel producers. They have reached one could say a critical level and the level of a variable cost. So, principally speaking, we should not expect any further downward trends.

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 Anna Antonova,  Sberbank - Analyst   [32]
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 (interpreted) Thank you very much for such a detailed answer. So, one further question. Could you please say, in as far as your long steel sales are concerned, what is the share of exports in it?

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 Alexey Lukashov,  Mechel OAO - IR   [33]
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 Oleg Korzhov will answer.

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 Oleg Korzhov,  Mechel OAO - CEO   [34]
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 (interpreted) It is something that has to be further specified because, if we're talking about the far abroad, we are practically not selling anything to the countries which are behind the [CIS] perimeter. We have some insignificant volumes that we sold to Kazakhstan and the adjacent countries. So, most of what we produce in terms of long steel is consumed in the domestic market.

 But, just for the sake of being 100% precise, this would be about 1%, not really more than that.

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 Alexey Lukashov,  Mechel OAO - IR   [35]
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 Next question, please.

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Operator   [36]
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 (Operator Instructions). There are no questions at this time. (Operator Instructions). As there are no further questions, that will conclude today's Q&A session. I would now like to turn the call back to you for any additional or closing remarks.

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 Alexey Lukashov,  Mechel OAO - IR   [37]
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 Thank you. Ladies and gentlemen, thank you for taking the time to join Mechel's nine-month 2015 financial results conference call today. The replay of the call will be available on Mechel's Website. If you have any further questions, please contact the Investor Relations office. Thank you, again, from all the team here.

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Operator   [38]
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 That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

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Editor   [39]
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 Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.




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