Q3 2018 Materialise NV Earnings Call

Oct 31, 2018 PM UTC 查看原文
MTLS - Materialise NV
Q3 2018 Materialise NV Earnings Call
Oct 31, 2018 / 12:30PM GMT 

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Corporate Participants
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   *  Harriet C. Fried
      Lippert/Heilshorn & Associates, Inc. - SVP
   *  Johan Albrecht
      Materialise NV - Executive VP & CFO
   *  Peter E. Leys
      Materialise NV - Executive Chairman
   *  Wilfried Vancraen
      Materialise NV - Founder, CEO & Director

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Conference Call Participants
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   *  Troy Donavon Jensen
      Piper Jaffray Companies, Research Division - MD and Senior Research Analyst
   *  Weston David Twigg
      KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst

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Presentation
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Operator   [1]
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 Good day, ladies and gentlemen, and welcome to the Q3 2018 Materialise Financial Results Conference Call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Harriet Fried of LHA. Please go ahead.

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 Harriet C. Fried,  Lippert/Heilshorn & Associates, Inc. - SVP   [2]
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 Thank you for joining us today for Materialise's Quarterly Conference Call. With us on the call are Fried Vancraen, Founder and Chief Executive Officer of Materialise; Peter Leys, Executive Chairman; and Johan Albrecht, Chief Financial Officer.

 Today's call and webcast are being accompanied by a slide presentation that reviews Materialise's strategic, financial and operational performance for the third quarter of 2018.

 To access the slide, please go to the Investor Relations section of the company's website at www.materialise.com. The earnings press release issued earlier this morning can also be found on that page. Before we begin, I'd like to remind you that management may make forward-looking statements regarding the company's plans, expectations and growth prospects among other things. These statements are subject to known and unknown uncertainties and risks that could cause actual results to differ materially from the expectations expressed, including competitive dynamics and industry change. Any forward-looking statements, including those related to the company's future results and activities, represent management's estimates as of today and should not be relied upon as representing their estimates as of any subsequent day.

 Management disclaims any duty to update or revise forward-looking statements to reflect future events or changes in expectations. A more detailed description of the risk and uncertainties and other factors that may impact the company's future business or financial results can be found in the fiscal year 2017 Form 20-F.

 Finally, management will discuss certain non-IFRS measures on today's call. A reconciliation table is concerned -- is contained in the earnings release and also at the end of the slide presentation. And now, I'd like to turn the call over to Peter Leys. Go ahead please, Peter.

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 Peter E. Leys,  Materialise NV - Executive Chairman   [3]
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 Thank you, Harriet. And thank you, everyone for joining us today. You will find an agenda for our call on slide 3.

 I will begin with a brief recap of our results for the quarter, which was a very positive one for us, with good performance in all 3 segments and much activity underway throughout the organization to innovate and advance the digital manufacturing process. After my review, Fried will come on and discuss some of our activities over the last quarter in more detail. After that, as usual, Johan will take us through our third quarter numbers in more detail. And finally, I'll come back with a few concluding remarks on our guidance for the rest of the year. When we've completed our prepared remarks, we will be happy to respond to any questions that you may have.

 Now, turning to Slide 4, you will see the highlights of our third quarter results. Total revenue rose by 45%. Excluding ACTech, total revenue rose by 10%.

 Our Materialise Medical and Materialise Software segments performed particularly well. Including the impact of ACTech, which contributed EBITDA of EUR 2.4 million in the quarter, our adjusted EBITDA rose 116%, and our net results swung from a loss of EUR 1.4 million to a profit of EUR 2.3 million.

 Excluding ACTech, our adjusted EBITDA rose 44%, and we posted a net profit of EUR 1.4 million.

 For the period all 3 of our segments delivered double-digit EBITDA margins and our medical segment actually set a new record at 19.3%.

 Against this background, I will turn the call over to Fried. Fried?

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 Wilfried Vancraen,  Materialise NV - Founder, CEO & Director   [4]
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 Good morning, good afternoon, everyone. Thank you for joining us today. During our last call, which came shortly after the announcement of our collaboration with BASF and the closing of our capital increase, we explained that we very much looked forward to spending more time on our daily operations. That is what we have done, and this focus on operational excellence has definitely contributed to the strong performance that every segment has posted in the third quarter of this year. What makes me particularly proud and confident in the future is that in every segment, the focus on the continued improvement of our operational excellence has not refrained our teams from simultaneously strengthening our strategic product and positioning.

 Over the past quarter, several projects have been started and several actions have been implemented to execute on the strategic collaboration with BASF. While the first results of these efforts will only enter the market during the next year, we are seeing, once again that the unique interaction between our manufacturing and software activities can lead to fast, useful developments that no other company can offer.

 At formnext, we will deliver another proof of this fruitful interaction between our manufacturing and software segments, with the full release of the metal simulation module in Magics. The simulation module, which was announced almost a year ago in collaboration with Simufact is the result of extensive internal experimentation. A total validation on the big amount of historical tracking data in our own metal 3D printing competence center in Bremen demonstrates that with the use of the new simulation module, we would have been able to predict and prevent 100% of the flaws and errors in historical problematic builds.

 This validation was externally complemented with an extensive beta program on a wide variety of metal product geometries, in multiple alloys on multiple metal printer brands. As a result, we are now able to very reliably demonstrate to our customers the tangible savings that they can make by simulating before printing.

 Importantly, we have integrated our simulation module into a user friendly workflow that enables Magics users to benefit from the tool without needing to be high level mathematical simulation experts.

 The simulation module will further reinforce e-Stage for Metal, which won the 2018 TCT Software Award in September. E-Stage for Metal has been proven to not only save time in work preparation and part finishing, but to also offer savings in material consumption and to improve quality along the way. For multiple customers, e-Stage for Metal literally bridges the gap from producing at a loss to producing at a profit.

 While our manufacturing segment delivers valuable feedback to our researchers, who develop processes and software, the manufacturing segment itself is the first to benefit from the use of our new tools, as shown in this segment's increasing margin, and our ability to do innovative projects.

 This was demonstrated a few weeks ago, when we won not 1, but 2 SILMO d'Or awards in Paris. Recognizing originality and quality in the optics and eyewear industry, the SILMO d'Or awards are widely regarded as the "The Oscars of eyewear innovation," with category champions viewed as best practice benchmark projects, not to mention trend indicators for the eyewear market as a whole. Our customer L'Amy won the Frame Technological Innovation Award with the McLaren Ultimate Vision range printed in titanium by Materialise. And another Materialise printed polyamide frame won the SILMO d'Or in the category best sunglasses.

 These awards demonstrate a leading position we have developed since we entered the market for 3D printed eyewear 5 years ago. From this position, we support a variety of eyewear brands with multiple solutions in customized and standard eyewear frames.

 The Materialise segment that best demonstrated operational excellence in Q3 was our medical segment. Introducing innovative and meaningful medical applications of 3D printing, such as a CMF personalized implants, is a big challenge that very few companies other than Materialise are up to. Subsequently ramping up custom implant design and manufacturing to the related guides and implants at high speed, while at all times maintaining quality and certification requirements, is another even bigger challenge. Our medical teams are proving on a daily basis that they can handle both challenges very successfully.

 In addition, all our software products and internal software systems have been made to operate in a new GDPR-compliant environment. This has required additional efforts, but we nevertheless, kept improving overall efficiencies. Later this year, at RSNA, we will be able to demonstrate more surgical planning options than ever before in our Mimics innovation suite. This has been made possible thanks to the continued expansion of the scripting options in the Mimics Innovation Suite that allow our internal application engineers as well as our customers to create and validate new medical image-based surgical planning applications.

 Today, based on this demonstrated performance, we can confidently conclude that the backbone systems that Materialise has been developing for Additive Manufacturing are well-positioned to power the growth of Additive Manufacturing for our customers in many applications.

 At this point, Johan will come to give you more details on our third quarter financial results.

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 Johan Albrecht,  Materialise NV - Executive VP & CFO   [5]
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 Thank you, Fried. I'll begin with a brief review of consolidated revenue on Slide 6. Before getting started, I'd like to remind you, as I do each quarter, that when we refer to sales in our presentations, we mean revenues plus deferred revenues. Also, please note that unless otherwise stated, all comparisons in this call are against our results for the same period in 2017.

 Finally, we have consolidated results of ACTech for the third quarter of 2018 in our manufacturing business. As you know, they do not affect for financial reporting purposes the results of our software and medical segments. When we provide information on a cross segment basis, we will present the ACTech numbers separately.

 Now as Peter mentioned in his opening remarks, in this year's third quarter, including ACTech's EUR 11 million, we generated a 45% increase in revenue. Organically, our revenue grew to EUR 35.5 million or almost 10% compared to last year's period. Both our medical and our software segment had particularly solid revenue increases. As a result of the ACTech's acquisition, our revenue is again distributed somewhat differently this quarter than in last year's period, including ACTech's 24% share. Materialise Manufacturing grew to 51% of our revenue this quarter, while Materialise Software accounted for 21%, and Materialise Medical for 28%.

 The cross segment distribution of our revenues also looks different, in great part due to ACTech's acquisition. Although, total revenue from software products increased in absolute numbers by EUR 2 million, it decreased relatively as compared to the other cross segment product groups by 7 percentage points to 30.6%.

 Moving to Slide 7. You will see our consolidated adjusted EBITDA numbers for the third quarter. As Peter mentioned earlier, consolidated adjusted EBITDA increased by 116%, rising from EUR 3 million to EUR 7 million. This result includes ACTech's contribution of EUR 2.4 million. Our adjusted EBITDA margin rose 500 basis points from 10% to 15%. All 3 segments achieved EBITDA increases organically, excluding ACTech our adjusted EBITDA increased EUR 1.4 million to EUR 4.7 million or EBITDA margin of 13.2%.

 Slide 8 summarizes the results of our Materialise Software segment. Here, revenue increased 17.2% or EUR 1.5 million. Revenue growth from recurring sales was 33%, OEM sales rose 1%, and direct sales grew 20%.

 The segment's EBITDA went crescendo from Q1 over Q2 to Q3 from 28% to 31% and now 34.3% versus 39.9% in Q3 of 2017.

 Moving now to Slide 9, you will see that Materialise Medical had another outstanding quarter. Total revenue in the segment grew 23% to EUR 12.8 million. Revenue from Medical Device Solutions rose 27%, boosted by partner sales growth of 41%. Revenue from medical software rose 17%.

 Medical's EBITDA set another record by increasing EUR 1.3 million to EUR 2.5 million. The EBITDA margin was 19.3% as compared to 11.2% in the prior year's quarter. This was a result of the combination of higher revenues and improved operational excellence, while SG&A and research and development only increased moderately. This demonstrates once again, the way that successful investments and development of a vertical can yield an impressive outcome, in particular when scaling effects can be achieved.

 Now let's turn to Slide 10 for an overview of Q3 performance of our Materialise Manufacturing segment. There, revenue was up 78%, reflecting ACTech's strong EUR 11 million revenue contribution. While organically, the segments reported the highest revenue over the past 4 quarters, it still remained 5% below the strong third quarter last year. As we discussed last quarter, the automotive industry in Europe has dampened the growth of our top line in the past year. Based on our current more positive outlook for the near future, we do expect to report a positive organic growth again in Q4 2018. Despite a quarterly negative growth, the improved operational excellence resulted in a more than doubled organic EBITDA, which moved from EUR 0.5 million last year to over EUR 1 million this year. ACTech contributed EUR 2.4 million to the segment's EBITDA.

 This quarter we added only 1 printer, which brings the total number of industrial printers that we have in production in our manufacturing and medical segments to 186. This total amount includes the 9 printers operated at ACTech.

 Slide 11 provides the highlights of our income statement for the third quarter. Gross profit rose 48% compared to last year's period. Excluding ACTech, gross profit increased 25%, and a gross margin increased to 63% as compared to 55% last year.

 The fixed cost of sales related to the decreased manufacturing revenues weighed on the gross margin, but were more than offset by optimized third-party subcontracting, materials and transportation expenditure in both our manufacturing and our medical segment. In total, R&D sales and marketing and G&A spending rose by 26% over the prior-year period. Excluding ACTech, these operating expenses increased 15%.

 R&D rose 20%, with increases in (technical difficulty) but in particular in manufacturing and software.

 Excluding ACTech, sales and marketing rose 19%, primarily as a result of increases in our software and medical segment. Excluding ACTech, G&A rose 7% over the prior-year period, reflecting increased efforts in further improving our internal processes and controls as well as expenses related to financial and other projects. ACTech's other operating expenses of almost EUR 700,000 primarily explain the decrease of the net other operating income line.

 The group's operating profit amounted to EUR 2.3 million as compared to an operating loss of something more than EUR 200,000 last year. Excluding ACTech, we posted an operating profit of EUR 1.1 million compared to the same loss of EUR 222,000, reflecting improvements in operational excellence, while we continue to invest in R&D and in SG&A.

 Net financial result was EUR 269,000 compared to a negative EUR 600,000 for last year's period, primarily reflecting variances in the currency exchange rates.

 Income tax remained limited to EUR 230,000 compared to EUR 433,000 for the third quarter of 2017. Net profit for the third quarter of 2018 was EUR 2,316,000 EUR or 0.04 per diluted share compared to a net loss of EUR 1.4 million or a loss of EUR 0.03. ACTech contributed EUR 890,000 positively to the net result.

 Now please turn to slide 12 for a recap of balance sheet and cash flow highlights per 30th of September. Our gross debt increased EUR 9.5 million to EUR 107.7 million as compared to 30th of June 2018, and this as a result of the EUR 10 million drawing from European Investment Bank credit facility. On the other side, and because of the net proceeds of the EUR 55.8 million from the BASF and follow-on public capital increases in July, our cash position grew to almost EUR 115 million.

 As a result, the net debt position of almost EUR 50 million end June, swung into a net cash position of EUR 7 million, and total equity increased to almost EUR 135 million from EUR 76.6 million in Q2 2018.

 Capital expenditures for the quarter amounted to EUR 5.6 million compared to EUR 9.6 million in last year. Cash flow from operating activities for the quarter amounted to EUR 7.2 million compared to negative EUR 2.7 million for the same period in 2017.

 Year-to-date, cash flow from operational activities now exceeded EUR 18 million.

 Total deferred revenue amounted to EUR 27.5 million as compared to EUR 22.6 million as of end last year.

 Of the EUR 27.5 million, EUR 20 million were related to annual software sales and maintenance contracts compared to EUR 18.7 million also at the end of last year.

 We should bear in mind that this cumulative amount of EUR 20 million on our balance sheet also reflects, to a very large extent, deferred operating profit.

 With that overview, I'll turn the call back to Peter.

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 Peter E. Leys,  Materialise NV - Executive Chairman   [6]
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 Thank you, Johan. As you may remember, in our previous 2018 earnings announcements, we stated that we expect to report consolidated revenue between EUR 180 million and EUR 185 million, adjusted EBITDA between EUR 22 million and EUR 25 million, and an increase of deferred revenue generated from annual licenses and maintenance of an amount between EUR 2 million and EUR 4 million as compared to year end 2017.

 Based on our performance in the first 9 months of 2018 and our outlook for the rest of the year, we expect all 3 of the guidance indicators to be somewhere within the higher end of these changes. Practically, this means that, while we expect to continue to perform well on all 3 fronts, we expect to report a particularly strong growth of our deferred revenues from annual licenses and maintenance in the fourth quarter.

 This concludes our prepared remarks. Operator, we are now ready to open the call to questions.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) And our first question comes from Troy Jensen with Piper Jaffray.

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 Troy Donavon Jensen,  Piper Jaffray Companies, Research Division - MD and Senior Research Analyst   [2]
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 So quick -- how about on the medical section, really good growth there, was a lot of that from CMF contribution? Or was that just more broad-based strength in medical?

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 Wilfried Vancraen,  Materialise NV - Founder, CEO & Director   [3]
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 Well, definitely our fastest growing line at this moment is CMF. So you are right.

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 Troy Donavon Jensen,  Piper Jaffray Companies, Research Division - MD and Senior Research Analyst   [4]
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 Is it a meaningful number, though, Fried, where it's kind of really driving some revenue growth for the company?

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 Wilfried Vancraen,  Materialise NV - Founder, CEO & Director   [5]
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 Definitely, it is driving revenue growth, and sorry, I didn't fully grasp the question, Troy.

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 Troy Donavon Jensen,  Piper Jaffray Companies, Research Division - MD and Senior Research Analyst   [6]
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 I guess, I was just wondering the size of it, I mean percentage growth can be high off a little base, but I was just wondering, if the dollar size or euro size is large? I think that was enough, Fried. How about -- if you could just give us an update on what you think your EBITDA margins can be for the medical segments?

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 Wilfried Vancraen,  Materialise NV - Founder, CEO & Director   [7]
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 Well, we are aiming for EBITDA margin on both of 20%, but at the same time, we want to say that we have also a lot of important projects in the pipeline that are demanding high R&D efforts, and that will -- yes, if they grow in importance, they will probably also grow in requirement, as you know in the medical sector, once a product could become ready for the market there is a huge effort to be done on the quality side, and on the certification side, which is often a multiple of the original development cost. And so we have still, very interesting projects in the pipeline, that will weigh on the EBITDA margin.

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 Troy Donavon Jensen,  Piper Jaffray Companies, Research Division - MD and Senior Research Analyst   [8]
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 Okay, understood. Jumping into the software segment. I think you showed on the slide, OEMs were up 1%, but direct sales were up 20%. I'm just curious, why there's such a spread between the OEM channel and the direct channel? And does it make more sense for you guys to commit more to direct sales here that yield better return?

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 Peter E. Leys,  Materialise NV - Executive Chairman   [9]
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 Yes. Troy, this is Peter. It's important to look at trends here, and not just to look at the numbers that we post for 1 particular quarter, it is -- what sometimes happens is in a particular quarter, OEMs sell machines to existing Magics users, not we will just add that particular machine to their suite, which will imply that we will sell less through the OEMs for that particular quarter, but then our direct sales force will come in and as these customers grow their machine basis, they're more likely to be prone to up-selling efforts from our direct sales force. So that explains to some extent, the situation here, where we have 20% growth in direct sales, and a very moderate 1% growth in OEM sales.

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 Johan Albrecht,  Materialise NV - Executive VP & CFO   [10]
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 Over the year plus 10% year-to-date, so this is (inaudible) just this quarter.

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 Troy Donavon Jensen,  Piper Jaffray Companies, Research Division - MD and Senior Research Analyst   [11]
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 So 10% for OEMs?

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 Wilfried Vancraen,  Materialise NV - Founder, CEO & Director   [12]
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 Yes, year-to-date.

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 Troy Donavon Jensen,  Piper Jaffray Companies, Research Division - MD and Senior Research Analyst   [13]
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 Okay, that's perfect. And then last question for me, it is on the BASF partnership. Can you just talk about some optimistic outcomes from this partnership? And maybe your sense of timing for revenue contributions?

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 Wilfried Vancraen,  Materialise NV - Founder, CEO & Director   [14]
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 Well, the aim is that we are, together, really capable of bringing some high-performance materials to the market, that really enlarge the applications scope of 3D printing. Especially, on the plastic side, I think we have seen a slower evolution than on the metal side, and partially, this has also been the case because we are not that fast as a sector to introduce more material options to the customers that they can really step into new applications. And we are aiming at multiple developments in multiple fields, one of them, as I mentioned earlier, eyewear, where -- for instance, 30% of the eyewear frames are currently manufactured in semi-transparent materials and there are no materials that mimic that behavior for 3D printing at this moment, sufficiently stable and sufficiently easy to process, to address that part of the market. That's 1 example of multiple that Materialise is addressing together with BASF.

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Operator   [15]
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 (Operator Instructions) And our next question comes from Weston Twigg with KeyBanc.

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 Weston David Twigg,  KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst   [16]
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 I was just wondering, if maybe you can talk a little bit more about the broader manufacturing trends, and other concerns about the slowdown in autos maybe persisting, to slowdown in China, maybe impacting broader manufacturing demand overall. And so given that the organic growth was down little last quarter, but do you see a strong rebound in Q4? Just wondering, if you could help walk us through your confidence in the rebound and maybe some of the more significant trends you're seeing over the next couple of quarters.

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 Peter E. Leys,  Materialise NV - Executive Chairman   [17]
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 Thank you, Weston. As you know, our manufacturing activity is really an activity that is based in Europe and only -- mainly concentrates on serving European customers. So some of the trends that you're referring to, like slowdown of the industrial activity in China, will have little impact, at least on our manufacturing business in Europe. That being said, yes, we have been referring for a couple of quarters now to the slowdown in the European automotive business, in particular, slowdown in coming up with new models, which has affected our manufacturing activity. And as we said during -- in the prepared remarks, as the actions we already had I think hinted at during previous calls, we do see some light at the end of the tunnel, possibly already in Q4, definitely in the first quarters of 2019. So, yes, based on the renewed activity that we see there, we do expect that our European focused manufacturing activity will again touch base with positive organic growth as early as in the fourth quarter. That is to a large extent, due to the rebound that we see in European automotive manufacturers bringing new models to the market.

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 Weston David Twigg,  KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst   [18]
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 Okay, so you're not seeing any of the broader macro concerns leaking into your manufacturing activity over the next 2 or 3 quarters at this point?

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 Peter E. Leys,  Materialise NV - Executive Chairman   [19]
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 Over the next 2 to 3 quarters, frankly, Wes, our outlook does not suggest that macroeconomic situations that do not affect European market would affect our European focused manufacturing activity.

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 Weston David Twigg,  KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst   [20]
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 Okay. I also wanted to ask about eyewear. Their words look really interesting, and know that the ramp was supposed to start to pick up in the second half of this year. I'm just wondering, if you can give us a progress update in terms of that ramp and when we might start seeing some meaningful revenue in the eyewear segment?

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 Wilfried Vancraen,  Materialise NV - Founder, CEO & Director   [21]
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 Well, we have to confirm, what we also already indicated in a previous call, that the ramp up of the customized eyewear is going slower than we anticipated. However, Materialise is also printing quite some series of 3D printed eyewear that are not customized. And there, we see a nice continued growth, yes. Actually, it's -- if you compare to last year, it's a growth of approximately 65%.

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Operator   [22]
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 And this does conclude the question-and-answer session. I would now like to turn the call back to Peter Leys for any further remarks.

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 Peter E. Leys,  Materialise NV - Executive Chairman   [23]
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 Thank you. And thank you all again for joining us today. As always, we look forward to continuing our dialogue in our year-end call. Both Fried and Johan will be attending formnext in a couple of weeks in Germany, I myself expect to be in the U.S. during the second week of next year, when I will attend the Needham Conference. So we very much look forward to meeting some or all of you at either one of these events. Thank you, again, and goodbye for now. Bye.

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Operator   [24]
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 Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, you may all disconnect, and everyone, have a great day.




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