Q3 2017 XXL ASA Earnings Call
Oct 25, 2017 AM EDT
XXL.OL - XXL ASA
Q3 2017 XXL ASA Earnings Call
Oct 25, 2017 / 06:30AM GMT
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Corporate Participants
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* Fredrik Steenbuch
XXL ASA - CEO and MD
* Krister Andreas Fiksdal-Pedersen
XXL ASA - CFO
* Tolle O. R. Groterud
XXL ASA - Head of IR and Business Development Director
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Conference Call Participants
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* Magnus Raman
* Simon William George Irwin
Crédit Suisse AG, Research Division - Director
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Presentation
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Tolle O. R. Groterud, XXL ASA - Head of IR and Business Development Director [1]
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Good morning and welcome to XXL ASA's Third Quarter 2017 Results Presentation. My name is Tolle Groterud and I have the pleasure of guiding you through today's presentation. Our CEO Fredrik Steenbuch and our CFO, Krister Pedersen will take you through the results and the key drivers followed by a Q&A session. For media, there will also be an opportunity to perform separate interviews after that. So without further [introductions], I turn the floor over to you, Fredrik.
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Fredrik Steenbuch, XXL ASA - CEO and MD [2]
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Highlights Q3 2017. We reached a revenue growth of 16%. A like-for-like growth of 6%, an E-commerce growth of 28%. We can report overall normal selling seasons. We are gaining market shares in all markets and the EBITDA of NOK 252 million is up 18% and that's despite the establishment in Austria. We have good cost control and Sweden and Finland are showing solid progressions. The launch in Austria has really proved uniqueness of the XXL omni-channel concept. Growth drivers in the quarter; the growth is three folded and split into three equal parts. Like-for-like growth, full-year effect 2016 stores and new stores 2017. Growth split by markets; overall good growth in all markets.
Growth by segments; the growth in Norway, 10%; the growth in Sweden, 18%; the growth in Finland, 26% and the growth in Denmark, 27%; and ECOM, 28%, giving a group growth of 16%. And the like-for-like is also very strong: Norway, 6.3%; Sweden, 7.6% and before I give the Finns their like-for-like of 0.8% because of their total growth, I'll show you later, giving a like-for-like growth of 5.6%. And after only 30 days of operation in Q3, Austria is contributing with 8% of the total growth. I said Finland, I meant Austria. Gross margin development; the group's gross margin is up 0.2 points year-on-year despite the low gross margin from opening campaigns in Austria, and that's to be noted. More aggressive campaigns in Norway, Sweden is back on track after a setback in Q2 2017. Continued gross margin improvement in Finland and freight rates and order value lifted the gross margin in Denmark.
OpEx development: OpEx is stable despite the cost of establishing operations in Austria. OpEx is 27.6% when excluding for Austria, to be noted. Sweden, Finland and Denmark improved their OpEx. Norway is stable but some negative effects from smaller stores opened in 2016, even despite that very good figures. Many cost initiatives and fine-tuning of operations over time are showing results and the logistics segment showed scalability. All-in-all, good cost control.
EBITDA development: we have significant improvements in both Sweden and Finland. Norway impacted by the lower gross margin due to more aggressive campaigns. Group EBITDA margin stable despite the start-up cost in Austria, so 11.1% margin when excluding for Austria. The comparable margin is 10.3% last year, up to 11.1% this year. Norway taking market shares, 10% revenue growth year-on-year. A like-for-like growth of 6.3% and 7.2% adjusted for cannibalization effects. Gross margin is impacted by aggressive campaigns to drive volumes and like-for-like growth. A stable OpEx despite negative effects from smaller stores opened in 2016, that's well done. The EBITDA of NOK 232 million is impacted by the lower gross margin. Looking in a mirror, it might not have been necessary to do that aggressive campaign, but then again this is retail, it's all about finding the right balance.
Sweden, beating the market and striking back. A revenue growth of 18% year-on-year in local currency, a like-for-like growth of 7.6% in local currency. The gross margin increased from 37.5% to 38.6% year-on-year. And in addition, the OpEx is down 0.6 points to 26.1% driven by the positive like-for-like growth, giving an EBITDA of NOK 97 million and a margin of 12.5%, that's a strike back and I can [feel] I enjoy reading this for you.
Finland, solid margin progressions, 26% revenue growth year-on-year in local currency; in a still challenging market, negative like-for-like growth of 0.8% in local currency, but we are for sure taking market shares. And the gross margin improved from 30.3% to 36% year-on-year. In addition, the OpEx is down 1.1 point to 27.6% giving an EBITDA of NOK 32 million and a margin of 8.3%. That's well done.
Denmark, in the right direction. We had revenue growth of 27% year-on-year in local currency. We had positive development in traffic. Actually, in September, no one of the Danish ECOM competitors had a higher traffic than XXL but still a negative EBITDA of NOK 2 million. We have strengthened the local management with full effect from Q4 2017 with internal recruitment from the Swedish management. And we will evaluate to open stores over time. Austria, seeing is believing, I'll give you two minutes from the day we launched in Austria, the 29th of August. (presentation) We are proving the strength of the concept. First store opened 29th of August in Shopping City Sud outside Vienna, and it was emotional as you can see. 13,000 customers and NOK 8 million in sales the opening day. We opened E-commerce through xxlsports.at on 17th September. E-commerce sales are NOK 5 million since the launch. Revenue of NOK 29 million after first month of operation equals 8% of growth contributing to the Group this quarter.
We are investing through campaigns and high marketing spend. The negative EBITDA of NOK 16 million, includes start-up costs, launch campaigns and costs related to the second store, which is as it should be, or actually even better. We opened the second store 9th of October in Donau Zentrum, Vienna. We achieved sales around NOK 5 million the first day but that was only Donau Zentrum. The opening gave good spin-off to the first store on E-com. The launch in Austria proves the uniqueness of the XXL omni-channel concept.
You think, yes, they opened business in Austria, well done, but you do not know the work load to enter new country and a new region. I will say that 50% of all working hours are [buying things], and that's a high amount of hours spent for this project over the last 3, 4 quarters. And the last quarter 75% of all hours are spent buying things .
Still, they have to handle other countries' E-commerce and outlet. The store concept team have spent 100% of their time in Austria, E-com, logistics, finance, IT has spent many hours for [the Austrian] project. A considerable part of the Nordic management and sales force has participated in Austria. Not to forget, the huge workload for our new fantastic Austrian colleagues, still they have delivered figures as I show you today and that is good figures.
I need to emphasize this, because this is not obvious for you, because no, you are not a part of it. You are on the outside looking in. The project under start-up faces 10x the workload of our earning operation. And this a huge achievement for the total XXL team and I'm extremely proud of them.
Do we have any funny experiences from Austria? Yes, we have a lot. Do I want to share them with you?
Yes I do. Will I share them with you? No, there is no time for that but I give you one. There is a very funny family living in Austria, they own the SPAR Group, and they own our competitor Hervis. In Austria, our web address is xxlsports.at and now Hervis has opened a new web page, xxlsport.at and if you search for XXL you might come to Hervis' new concept Hervis XXL, containing the old Hervis concept.
Why do they do that? Maybe this is the SPAR family humor, maybe they believe that consumers are stupid, luckily we do not think so. Maybe they like to confuse consumers and make them angry, and according to their Facebook page, they are really succeeding in doing that, or maybe they just have realized that their concept is no longer strong enough by itself. So that's why the funny SPAR family tries humor. Well, our sales figures in Austria says, they do provide entertainment and self humiliation more than business.
Is this a problem for us? No. Is it annoying? Yes. It is just like a small dog that's nagging your foot. And you need to take care not to stumble on it or you might step on it. But then again maybe it's just humor from the funny SPAR family. E-commerce, 28% revenue growth, all markets with strong growth. Sweden with solid improvements, and Austria a promising start. 10.6% of Group sales compared to 9.7% in Q3 2016 and new technical solutions are launched. We have strengthened the digital organization with a CRM manager and a technical system architect and as always many initiatives to come.
No, this time I actually have a question for you. You are a tall guy, why do people call you a shorty? You sell short. You sell shares that you do not have. And then you need [that share to fail them]. That's your bet. And you saw that a lot of the U.S. sporting teams were struggling. And then you thought we were struggling too. And that's why your short is xxl. I think I just found another reason to call you shorty. You sold shares you did not have, now we have to buy them back at a higher price. Now, you are stuck. Now it's actually our job to make you fail. I cannot help you, I'm sorry about that. Yes, life is hard sometimes. Yes and this guy calls me every day.
Well, it's time to start rolling out some news. I will give you some today and save some for later. The Austrian launched [E-Now] that still is great news. And for nearly two years, we have been working on a secret project, called team sales, and for nearly two years, we have been working on -- we think that team players are paying too much for their uniforms and material. We think that parents are paying too much for their kids to join a team, football team, handball team, Ice hockey team, any team. We think that the team sales model is out of date. So we made a game changer, this is our electric car. This is a new area to us, so we will not take on too many teams at first but soon we will increase speed. The team sales model used in the market today is not cost efficient. It contains manual work in stores, often having departments and dedicated people in store for team sales. Printing numbers and names, expensive sponging system to create money for the team, all in the end paid for by the single team member through expensive uniforms and materials. During the two last years, we have spent 2,500 hours for IT development. We have on the base of our existing webpage changed it and adapted it for team sales. We have set up a printing facility in both central warehouses.
We have done 1000s of hours on manual preparations, all initial costs are taken. Now, we have a totally new pure, robust game changing team sales model working like this. Each team member are in direct contact with XXL through the XXL/team web page buying his and hers uniforms and materials on our website. Each team lead, foreman are in direct contact with XXL buying through the XXL team sales and XXL/team web page buying his or hers team uniforms and materials on our website, all deliveries are made directly to the individual member from our central warehouse where our stores will serve as picking points.
The other areas signed up some teams where we have 10 testings in Finland, Sweden and Norway that delivers during the pilot test. The whole business is operated by a few XXL employees in close relationship with our existing sport division. And as noted, as we are only child, the team members will have a app like picture on their mobile, when they shop at XXL, they are supporting their team by a cashback from XXL to the team. This is a great incentive to shop all their sporting gear, outdoor gear, clothing, shoes/skis/bikes from all our assortment at XXL still fill best prices in market. The cash back from XXL to the team is big enough or can be big enough to fund the team and low enough that we can easily carry it. The members' loyalty to the team is a sponsorship for the team and that's a great incident to support XXL. And of course, family connected to team member, mothers, fathers, sisters, brothers can support XXL and by that support their team.
We must also discuss with elite teams and then we know that you have to evaluate a high level of sponsorship and we might do that. Everybody wins because you we have removed all the inefficiency in team sales, and of course, we offer high quality branded goods to the teams, not homemade, private leather. I would like to create one of the heads of the real brands that are heavily into team size.
Now XXL has done what everybody said should be done, but nobody has them. This is to the future. And I can now show you it was not an easy setup. No one likes to get in size of the Nordics team's market, but there is a consensus that within those sports, team size market is around NOK 3 billion. And innovation, what I wanted is organizing team size category, there are more sports than all the ball sports, hockey among others is huge. We give all team members and families another reason to shop at XXL.
We increased our direct communication with our customers. We included in our database, we have become able to speak directly to it and all other members regarding all their needs from the full range of our assortment and there is much more. This is (inaudible) can handle this new business. By using the exact same web-based system, the payment system third-party credit risk of course, the routines, the logistics, the backbone, we can have efficient growth at fire departments, police departments, municipalities, any company or just the finance guys that wants to go skiing in the Alps with a similar jacket, printed Catch Me If You Can on their backs. Our group, all journalists said yes I will, I am there, or they answer back, what did I say. And this market is limitless. Now you have the systems, all we need to do is to decide to open for it. Alas, this is not for the short-term investors but then again what-is. This is for the long-term investors.
It's so nice getting up in the morning noting that we have entered a new NOK 3 billion market and in addition to this endless possibilities within B2B. Regardless, most important is that we were taking action to safeguard our like-for-like in the rapidly changing retail environment. On our game changing system, it's very cost efficient to operate. We like to open new doors giving real possibilities for XXL.
So somebody is calling again. Hello, yes. Sorry, I cannot say what you say when you're crying. Yes the market is approximately NOK 3 billion, but that's all middle sport. In regard the B2B, it's an addition to this and we have lots of endless opportunity.
Sorry? He is gone. Okay, we'll see. HQ & Logistics, starting scalability. 10% growth in OpEx compared to revenue growth in the group of 16% year-on-year, that's well done. OpEx were NOK 95 million to 3.9% of group sale. And now we increase the speed searching for new central warehouse capacity in the Hearth of Europe.
Priorities going forward. I always enjoy this because this is the last one. We will improve the omni-channel experience, we will continue to drive like-for-like and we will open new stores, but we will focus most on growth on newcomers, experts with high revenue potential and always focus on cost improvement. And I have a message for you, shorty, you thought that we were just another sporting chain. Well, you're wrong, we are XXL. Krister, CFO over to you.
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Krister Andreas Fiksdal-Pedersen, XXL ASA - CFO [3]
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Thank you, Fredrik. Yes, on the next financials, we have on the income statement and we are very happy to be back with growth after a difficult first half of the year. It sounds like possible that the like-for-like growth is driven by both stores as well as e-commerce. Earlier quarter has been more e-commerce dominated. The growth is maintaining the margins despite the Austria launch, Sweden and Finland with strong improvements. Finland is again showing the strongest improvement, but Sweden is improving on high -- around tougher comps. Further all segments are showing solid cost achievements. Net financial cost of NOK 23 million which is equal to last year. Negative currency effects on inter-company balances equaled NOK 9 million of the total cost. However, this is a non-cash item.
Balance sheet and cash flow, we have improved working capital in future and it's mainly driven by reduced purchase of goods. Last year, we bought too much which reduced sales compensated by buying less. Inventory per store has been reduced, we had currency effects and new store opening in the beginning of October adjusting with which in per store is NOK 37.4 million within and against the target of NOK 35 million per store by the end of the year.
Investments in stores and infrastructure are according to plan. Advanced facilities are the same as earlier quarters and liquidity itself was NOK 577 million at the end of the quarter. Net interest bearing debt was NOK 1.9 billion giving a leverage ratio of 2.4x.
On the outlook, first the 11 store openings this year, we have opened 6 by the end of the quarter, the remaining 5 stores, 1 in Norway, 1 is Sweden, 2 in Finland and 1 in Austria. The one in Austria opened 9th of October, so there is 4 to go.
For 2018, we have signed 5 stores, but we are very close to the sixth one. We aim 7 to 10 stores in total. The e-commerce growth is much stronger than the store growth in general. We will at all times evaluate this trend compared to opening new stores. The required market size on new stores is going to be higher going forward. Further, we remain at our long-term targets for growth and models and there was no change in the outlook for Austria.
To sum it up, it's good to be back on growth. We have growth in both new and existing business. EBITDA was NOK 252 million and comparable against last year which means that Austria was up 25%, excluding Finland with solid improvements and overall strong cost achievement in all segments. Rather the biggest happening of the quarter is the loss in Austria. This changed the strength of the XXL concept also outside the Nordics. This was a door opener for a big market and for future of XXL growth. Okay.
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Questions and Answers
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Tolle O. R. Groterud, XXL ASA - Head of IR and Business Development Director [1]
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Then we open up for questions. First from the audience present here at (inaudible), please wait for a microphone and we kindly ask you to introduce yourself and limit the questions one at a time. So please go ahead. There are no questions from the audience and we are ready to take questions from those of you listening in on the phone. So we kindly ask you to introduce yourself and limit the question to one a time. And I now call upon the conference host for further introduction.
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Operator [2]
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Thank you. (Operator Instructions) The first question comes from Magnus Raman from HSB.
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Magnus Raman, [3]
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There is a bit of an echo in the sound, but I hope you can hear me. My first question relates to your brand expansion in 2018 where you talk about 7 to 10 [store] openings. If you can give us a bit more color on how that you see that being split geographically. Thank you.
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Tolle O. R. Groterud, XXL ASA - Head of IR and Business Development Director [4]
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I didn't get the question, did you?
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Fredrik Steenbuch, XXL ASA - CEO and MD [5]
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Currently the 5 that we have signed. Three of them is in Norway and only have 1 is Sweden and 1 in Austria. But we have 10 or more stores in Austria and maybe also more in the other 3 markets.
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Tolle O. R. Groterud, XXL ASA - Head of IR and Business Development Director [6]
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And they end up 7% stores.
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Fredrik Steenbuch, XXL ASA - CEO and MD [7]
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And opening with the success in Austria as we think we did, opens new pontential.
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Magnus Raman, [8]
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That connects to the second question of -- you announced that you are looking to potentially open fulfilment center I believe in Central Europe. Can you give us a bit of understanding of where -- how we should look at the overhead costs? They were at NOK 95 million this quarter and I think this is despite some of the costs being transferred to the Austria operations. How should we view overheads looking after a year or two and should we expect those two clients with the central facility in Europe?
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Fredrik Steenbuch, XXL ASA - CEO and MD [9]
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Well, it will not be any use in warehouses in 2018, but we will look into that for 2019 or 2020. The HQ and the Logistics cost will increase against earlier comparable quarters, so there is no significant changes in the structure as we speak.
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Tolle O. R. Groterud, XXL ASA - Head of IR and Business Development Director [10]
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And then again, it doesn't also mean that we will expand the Swedish central warehouse if we expand in Hearth of Europe. So you can play it up and today we are delivering from the central warehouse in Sweden to Austria.
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Magnus Raman, [11]
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Okay. Then on net financials, (inaudible) translations in this quarter, how should we view net financials going forward? Is this the same underlying run-rate for the financial cost and should we expect any more translation effects in the coming quarter (inaudible) as you see it, or is it to early to call?
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Fredrik Steenbuch, XXL ASA - CEO and MD [12]
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It will be currency effects from inter-company items. We will of course try to reduce them as much as possible but we don't know how the currency rates will change. So it's impossible to say it's positive or negative going forward. The other financial cost adventures and other will be at this run-rate going forward.
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Operator [13]
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And the next question comes from Simon Irwin from Credit Suisse.
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Simon William George Irwin, Crédit Suisse AG, Research Division - Director [14]
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Good morning, gentlemen. Can I just ask you about the quality of inventory you have as to how much of it is say more than a year old product, you think you may have to discount in order to shift it and how much do you think is genuinely current season?
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Fredrik Steenbuch, XXL ASA - CEO and MD [15]
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Well, yes as earlier mentioned, we bought too much goods in third and fourth quarter last year and we will try to compensate those seasons maybe this year. It might have some effects on the gross margin going forward, but that after this year-end it shouldnt be any more problem regarding that.
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Simon William George Irwin, Crédit Suisse AG, Research Division - Director [16]
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And what's your sense of how the inventory level within the market particularly given the amount of promotions that you put through in 3Q?
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Fredrik Steenbuch, XXL ASA - CEO and MD [17]
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Well, in the market I don't have any figure on that. But there is consensus that it's higher than usual. But you can call or compare the results, but we think it's higher than the usual, but not a risky degree of volume in the market.
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Simon William George Irwin, Crédit Suisse AG, Research Division - Director [18]
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And in terms of the Austrian opening, obviously you're very happy with the overall numbers. Can you give us a bit of flavor about what sold well, what sold less well than you had expected?
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Fredrik Steenbuch, XXL ASA - CEO and MD [19]
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There is also actually more or less just like expected. I see that the new category sports in fact sold more than I expected. The other as expected or a bit more all of them. But this year, our business is just as expected and very similar to the Nordics.
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Simon William George Irwin, Crédit Suisse AG, Research Division - Director [20]
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And in terms of competitive response, you obviously mentioned what's -- the competitive website, have any of the other competitors in Austria responded particularly aggressively?
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Fredrik Steenbuch, XXL ASA - CEO and MD [21]
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Yes, there was a lot of response, but we have seen the response and it was just like in all the other countries or a bit more amusing actually. Some of them and this is under full control, and I think we will not see any new response than we have seen so far. But of course, just now there is a fight going on to save politicians.
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Simon William George Irwin, Crédit Suisse AG, Research Division - Director [22]
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And if we look at the U.S. there's obviously been quite a degree of weakness in the sporting goods market. Obviously, I think a lot of that seems to coming more through the kind of [athleisure] fashion side. Are you seeing any underlying changes within sporting consumption in the Nordics at the moment?
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Fredrik Steenbuch, XXL ASA - CEO and MD [23]
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In general, in retail there are changes because the web is growing, but I think that we will stick to our omnichannel concept which we think are proving its existence every day because people want to shop where they want to shop on the web or on the store. And I think -- do now think that the sporting business is different from many other retailers, not for Europe at least.
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Operator [24]
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(Operator Instructions) We do have another question from Magnus Raman from HSB.
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Magnus Raman, [25]
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Yes, maybe if I can just ask about (technical difficulty) how you see (technical difficulty) numbers in 2018, should be (technical difficulty) like-for-like all else equal (technical difficulty) margins.
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Fredrik Steenbuch, XXL ASA - CEO and MD [26]
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I didn't get that question because of your echo. It's technical problems. Did you get it?
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Magnus Raman, [27]
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(technical difficulty) The question regards to your launch of team sport if you see this like-for-like (technical difficulty).
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Fredrik Steenbuch, XXL ASA - CEO and MD [28]
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I didn't it, did you? What is the question?
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Krister Andreas Fiksdal-Pedersen, XXL ASA - CFO [29]
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About margins and the contributions for 2018.
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Fredrik Steenbuch, XXL ASA - CEO and MD [30]
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Okay, today the team sales model is not a very profitable model but our model should be that because we have removed the costs. But I actually will not give you any like-for-like drivers on that one because I think 2018 is a start-up phase. It will be positive for us but I will not be give you any figures. And when it comes to how it will help on our EBIT, I'm sure our model will provide that. So, yes, that's all I'm going to say.
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Operator [31]
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[Operator Instructions] We currently have no questions coming through. So I will hand the call back to you, thank you.
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Tolle O. R. Groterud, XXL ASA - Head of IR and Business Development Director [32]
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Thank you. So that ends our session. So thank you all for coming and have a nice day.
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