Plains All American Pipeline, L.P.

Q2 2023 Earnings Conference Call

8/4/2023

spk00: Good morning and thank you for standing by. Welcome to the PAA and PAGP second quarter 2023 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Blake Fernandez, Vice President of Investor Relations. Please go ahead.
spk08: Thank you, Michelle. Good morning and welcome to Plains All-American second quarter 23 earnings call. Today's slide presentation is posted on the Investor Relations website under the news and events section at plains.com, where an audio replay will also be available following today's call. Important disclosures regarding forward-looking statements and non-GAAP financial measures are provided on slide two. Highlights from the quarter are provided on slide three. A condensed consolidating balance sheet for PAGP and other reference materials are located in the appendix. Today's call will be hosted by Willie Chang, Chairman and CEO, and Al Swanson, Executive Vice President and CFO, as well as other members of our management team. With that, I will now turn the call over to Willie.
spk02: Thank you, Blake. Good morning, everyone, and thanks for joining us. In our release earlier this morning, we announced strong second quarter results, along with the closing of a Permian Gathering bolt-on acquisition on July 28th, and we provided an update on our NGL segment optimization efforts at Fort Saskatchewan. These announcements reflect meaningful progress towards executing on our full year 23 targets and goals. As a result of our year-to-date performance and the bolt-on acquisition, we now expect to be at the high end of our 2.45 to 2.55 billion adjusted EBITDA range for 2023. Our revised outlook also contemplates slightly lower than expected Permian production, driven by lower commodity prices and some weather-related impacts that occurred in June and July. A high-level overview of our updated 23 guidance is located on slide four, and Al will share additional detail in his portion of the call. As summarized on slide five, our Permian JV acquired the remaining 43% non-operated interest in the OMOG JV from Diamondback Energy via a negotiated transaction for $225 million or approximately $145 million net to Plains' interest, which was funded with excess free cash flow. This further aligns us with Diamondback in the core of the Midland Basin and is consistent with our objective of capital discipline and efficient growth, complementing our existing footprint. With regard to updates on our NGL business optimization, a summary of today's announcements are provided on slide six. In summary, we sanctioned a 30,000-barrel-a-day Fort Sask train one to bottleneck and expansion. We also added connectivity projects to both our co-ed wide-grade gathering pipeline and our fourth SASC fractionation complex, which further integrates and expands our NGL system. We entered into commercial commitments, substantially increasing the weighted average contract tenured to 10 years across our fourth SASC fractionation capacity in our co-ed pipeline. Overall, we expect the NGL projects to generate unlevered returns in excess of our hurdle rate on approximately $200 million of investment capital. This multi-year investment fits within our previously communicated expectations for total average annual capital spend of $300 to $400 million a year net to PAA over the coming years. Lastly, we have a third-party supply agreement that expires at the end of 2024 which reduces our overall frack spread exposed volumes by approximately 15,000 barrels a day. The combinations of these announcements is expected to be EBITDA neutral in 2025 and beyond in a 55 to 60 cent per gallon frack spread environment, with the contributions from the Fort SAS expansion associated connectivity projects and code pipeline agreements offsetting the expiry of the NGL supply agreement. Importantly, the end result is a more predictable and durable level of fee-based earnings in our NGL segment, underpinned by long-term contracts. Additionally, we're no longer exploring a joint venture and a higher-cost expansion of Train 2 at the Fort Sasks facility, as it did not meet our required return thresholds. Before turning the call back over to Al, I want to leave you with three messages. First, we've exceeded our EBITDA targets through mid-year, and we expect to be at the high end of our full-year guidance range. Second, we closed an attractive Permian-Bulcan acquisition that further improves our premier Permian footprint in an efficient, disciplined manner. And third, we announced several strategic actions in our NGL segment, which will help improve the long-term durability and the quality of our cash flow stream over time. All of these actions align with our goals of remaining capital disciplined generating multi-year free cash flow, reducing leverage, and increasing returns of capital to our unit holders. With that, I'll turn the call over to Al.
spk09: Thanks, Willie. We reported second quarter adjusted EBITDA attributable to PAA $597 million. This includes benefits from increased volumes across our systems in our crude oil segments. As mentioned on our last call, the NGL segment experienced lower sales volumes as a result of planned turnarounds and seasonally weaker demand. Slides 11 and 12 in today's appendix contains walks which provide more detail on our second quarter performance. An overview of our updated 2023 guidance is located on slide 7. As a result of business performance in both our crude oil and NGL segments year to date, and the partial benefit of the OMAG acquisition, we now expect to be at the high end of our full-year adjusted EBITDA guidance of $2.45 to $2.55 billion. We continue to expect year-over-year growth in our crude oil segment, driven by Permian tariff volume increases. For the NGL segment, we remain highly hedged and do not expect a material impact from the lower frack spreads or Canadian wildfires. Shifting to capital allocation, as illustrated on slide 8, we remain committed to, one, significant returns of capital to our equity holders, two, continued capital discipline, and three, reducing debt and increasing financial flexibility. For 2023, we expect to generate $2.5 billion in cash flow from operations, $1.6 billion of free cash flow, with $600 million of free cash flow after distributions available for net debt reduction. resulting in year-end leverage below 3.5 times. We will continue to self-fund $325 million and $195 million of 2023 investment and maintenance capital net to PAA, which is consistent with previous guidance and includes the anticipated capital related to today's NGL announcements. With that, I'll turn the call back to Willie.
spk02: Thanks, Al. Today's results reflect another quarter of strong execution. and we remain very confident in our ability to continue delivering on our goals and initiatives. Macro uncertainty continues to drive volatility in both the crude and NGL markets. However, we previously took steps to proactively mitigate this risk by entering into a combination of short-term crude contracts and hedges in the long haul crude business, along with our substantial hedge position in our NGL business. Over the long term, Plains remains well positioned as North American supply will continue to be critical to meeting growing global demand. As previously outlined in our capital allocation framework, we remain focused on continuing to meaningfully increase returns of capital to unit holders through targeted multi-year distribution growth. We have a 7.5% distribution yield, significant free cash flow generation, and balance sheet strength as shown on slide nine. We appreciate your continued interest and support and we will look forward to providing further updates on our earnings conference call in November. With that, I'll turn the call over to Blake to lead us into Q&A.
spk08: Thanks, Willie. As we enter the Q&A session, please limit yourself to one question and one follow-up. For those with additional questions, please feel free to return to the queue. This will allow us to address questions from as many participants as practical in our available time this morning. Additionally, the IR team will be available to address any additional questions you may have. Michelle, we're now ready to open the call for questions.
spk00: As a reminder, to ask a question, please press Star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press Star 11 again. Please stand by while we compile the Q&A roster. The first question comes from Spiro Donis with Citi. Your line is open.
spk11: Thanks, Operator. Good morning, everybody. First question, maybe to start with the guidance. From what I could tell, you all were trending probably towards the upper half of the range even before this bolt-on acquisition. So I'm curious, can you maybe speak to how much of that upgraded outlook is legacy operations versus the bolt-on? Sounds like maybe there could be some puts and takes into the end of the year.
spk02: Yes, Spiro. The way I would characterize it is the bolt-on is really a smaller piece of the mount. The transaction is expected to close here. It hasn't closed yet. Actually, it has closed, so it's going to be five months, but it's predominantly overperformance in the business.
spk11: Great. That's helpful. Thanks, Willie. Second one, just going to the NGL segment. So train two didn't meet the hurdle rates. I'm curious, maybe you can just go through some of the dynamics there and maybe what could bring that project back onto the burner here. And then beyond what's been announced today in Canada, anything else you're still pursuing around optimization there?
spk02: Yeah, I'm going to let Jeremy touch on that, but I want to open with one comment on this. When you think about all the things, there's a lot of moving parts around this whole optimization project. But the thing to think about is we always drive for the capital discipline high return option as we think about these options. Jeremy?
spk13: Sure. Spiro, I think the way to think about it is we were looking at alternatives. Chris and his team have identified some lower cost brownfield opportunities around our train one system. We were able to offer a package that between that and some existing capacity we have in the east at Sarnia, we're able to meet our needs through doing that. So we found a substantially more capital efficient way to get to the same place. And us and our partner decided that a commercial arrangement versus a partnership was a better way to solve the problem.
spk11: Understood. And in terms of anything else, in terms of Canada and optimization, is it kind of it for now, or are you still more potentially in the background?
spk07: Chris? Morning, Spiro. This is Chris Chandler. We continue to find some pretty compelling opportunities across our system. Of course, we just talked about the opportunities in Edmonton at our Fort Sass facility. But we also have the NGL extraction plants at Empress outside of Medicine Hat. And as Jeremy mentioned, we have some unutilized capacity at our Sarnia Ontario fractionation facility. So we look at ways to optimize all of those, and we're making small targeted investments to further grow our business in all those areas. So I think there continues to be opportunities, and we're excited to pursue them.
spk02: And Spiro, the way these things typically work, as you build some of these things out, you end up finding additional optimization opportunities. So it's kind of a continuing process as we go through things.
spk11: Great. I'll leave it there. Have a good weekend, everybody. Thanks, Spiro.
spk00: Please stand by for the next question. The next question comes from Brian Reynolds with UBS. Your line is open.
spk10: Hi. Good morning, everyone. Maybe just as a follow-up to the guidance update, just kind of questions around your interbasin volumes going forward, you know, just given the peer acquisition that took place in 2Q, or whether you're seeing any fundamental shifts in the back half per mean volume expectation. Thanks.
spk13: Okay, so I think there was two questions there. On intrabasin volumes, the acquisition doesn't impact those. This is a midland basin acquisition, so it basically, it's something we already operate, so gross volumes flow straight into midland. There's no intrabasin component to it. As far as, I think your second question was overall expectations for the Permian. What I would say is the first part of the year, we're exceeding expectations. The last few months have been behind a bit. The activity so far this year has been largely in line. I'd say it's trending a little bit below at this point, but the productive capacity is still there to get there, so it's going to be a function of timing of completions in the second half of the year.
spk02: And, Spiro, you're aware that we ended up with some weather problems in the back half of June and July. It was really weather-related, hot weather. There was some gas plant issues, and the producers have been very disciplined not to flare. Also, we had a lower flat price in that period of time. So there is probably not as much incentive to try to produce. So we think we're through that. Oil prices have been more constructive, highlighted by the OPEC decisions today with a little more support behind it. So as we think about the rest of the year, we've incorporated all of this into our outlook on guidance. We actually have Permian guidance, volume guidance, just a little bit below our 500. But even with that, we still think we're going to be at the high end of the range.
spk10: Great. Appreciate all that color. And then maybe as a follow-up, can you just give us an update on the minimum volume commitments that are being worked through in 2023, you know, and how we should think about that as we look ahead into 2024? Will those be fully worked through, and could that be a tailwind as we think about 2024 early numbers? Thanks.
spk13: The way I would look at it is that there's two pipelines that are accruing deficiencies. I would say that the time period to work through those deficiencies. They're still accruing some on the pipelines. So I would view it as something that's going to take a few years to work through. Just because of the other commitments on the pipeline, you have to look at it as the using deficiency credits is the last barrel that's shipped. The barrels that are committed ship first, any spot barrels are next, and then the efficiency. So from a capacity standpoint, working through the deficiency variables but it'll take probably a couple years to do that.
spk02: And, Brian, our outlook hasn't changed. We still expect the spreads to strengthen as capacity shrinks with increasing production. As you probably know, and we've chatted about, on the Permian takeaway capacity of the Gulf Coast, we've essentially made sales and contracts to kind of protect that predominantly for this year and 2024. So that gives us a little bit of buffer, and we would expect that... the rates between Permian and the Gulf Coast should expand out to ultimately incremental transportation costs.
spk10: Well, it makes sense. Appreciate the time. Enjoy the rest of your morning.
spk00: Thanks, Brian. Please stand by for the next question. Please stand by for the next question. The next question comes from Gabrielle Maureen with Mizuo, your line is open.
spk06: Hey, good morning, everyone. I was wondering if you could maybe speak to your CapEx outlook for this year in light of a little bit of the tweaking to the Permian outlook. You're running a little bit late, I think, of your guidance if you, I guess, annualize it. So I'm just wondering, is it a possibility you come in on the lower end on the CapEx range given that Permian volume outlook?
spk02: Gabe, Chris Chandler covered that. There's a lot of work that we go through to keep capital discipline across the company.
spk07: Chris? Yeah, good morning, Gabe. We do continue to optimize our spend for 2023, thinking in buckets for our gathering system projects. We're pacing our investment timing with our customers' schedules, and Willie mentioned the Yeah, some color there with, you know, leaving a period of some adverse weather and lower prices. We expect that to kind of pick up in the second half of the year. On Permian infrastructure investments, we do complete projects as needed to match expected production growth in the different regions of the Permian. So we try to time that appropriately. And then remember, we just announced a new NGL project at Fort Sask and we're going to be able to fund the 2023 portion of that project within our existing guidance of $325 million net to Plains for 2023. So there are some moving parts there, but we're reiterating our current guidance for the year.
spk06: Understood. Thanks, Chris. And then maybe on this M&A deal and a little bit of a two-parter, one is to what extent when you do these gathering deals within the JV program, Are you either extending or renewing further downstream commitments? I realize that may be a commercially sensitive question to ask and then just kind of lay the land in terms of getting more of these gathering acquisitions kind of done and what it's looking like.
spk13: Sure. The way I look at it is if we're buying from a producer, generally there's an improvement in the contractual relationship. We had one as being partners with them, but we converted it a bit to something that was more appropriate for us not being business partners and us being the owner and them being the shipper or the producer. So the terms were strengthened to reflect that relationship. We have a great relationship with Diamondback and look forward to growing with them in this area.
spk06: Great. Thanks, Jeremy.
spk00: Please stand by for the next question. The next question comes from Michael Bloom with Wells Fargo. Your line is open.
spk03: Thank you. Good morning, everyone. So just wanted to stay on this tuck-in acquisition here and just get your thoughts on whether this is kind of was a one-off opportunity or do you think there's going to be other potential kind of tuck-in deals here that we should expect to see over the next couple of years?
spk02: So Michael, this is Willie. I mean, the way we look at this is We've got a great franchise across North America, particularly around the Permian. And if there's anyone that can extract synergies in these opportunities, it should be us. But we're going to remain very, very disciplined as we approach this. And so when you think about what we might do, it's things like these bolt-on acquisitions, bite-sized bolt-on acquisitions that make a lot of sense to us. So I would expect that we are going to continue to look at opportunities there. And if there are strong return projects, that are strategic and meet the hurdle rates of our returns, we are going to consider them. But we've got to stay disciplined, and we look at a lot of things, and we end up with a few. Jeremy, anything to add on this?
spk13: No. Michael, I would just say this is consistent with the advantage transaction, the purchase of the West's interest in Cactus 2 last year in this one. So this is a trend, but it's something like Willie said. It's got to fit for us. It's got to work for them. We're going to be very disciplined. As you said, we look at a lot, but it's got to compete for capital with the rest of our potential uses.
spk03: Okay, great. That helps. And then just in light of today's, the announcements on the Canada investment that you're going to be making, just wanted to confirm that your long-term kind of annual capital spend rates are unchanged.
spk02: I'll take that one. Absolutely. We expect to stay between the $300 million to $400 million range. as we go forward. We've set average because there could be some lumpiness in some of the timing around the projects, but you can expect us to stay within that range for a number of years.
spk03: Thank you.
spk02: Thank you.
spk00: Please stand by for the next question. The next question comes from Keith Stanley with Wolf Research. Your line is open.
spk05: Hi, good morning. I wanted to stay on the FRAC expansion project. And so I just want to clarify that the project is EBITDA neutral in 2025 and beyond because of the existing contract rolling off. I assume that existing contract you have is in the money or favorable in some way. Could you just give more color on the dynamics there on why the EBITDA from the project itself would be offset?
spk13: Sure, Keith. This is Jeremy. So that contract was entered into about 25 years ago. And so we're changing the relationship that we have with that counterparty in it. So I view this as, depends on how your view of commodity exposure is. We gave you a sense for where it is. At $0.50 it would be in the money. At $0.70 it wouldn't be. But you have to look at this $200 million as a series of projects. It's gathering projects. It's connectivity between facilities. The frack expansion is just a small portion. That's the uniqueness of the brownfield expansion. So this is a series of projects with diverse customer bases for very long term. So we're excited about the durability of the cash flow and predictability. So it's basically taking a third of our frack spread exposure and converting it to a durable cash flow. But we are changing the contractual nature that we have servicing this customer as part of this process.
spk02: And Keith, maybe to add one thing, You know, this just reinforces the integrated system we have. But when you really look at it, we talk about our saddle and the seasonality of it. It goes back to trying to increase a portion of our cash flow to the fee-based side, and it should flatten that saddle as we go forward. So we think that predictable, more durable earnings long-term should help as far as we think about valuation for our units.
spk05: got it uh thanks and sorry i'm gonna stick with ngls for my second question just obviously frac spreads came down a lot in q2 although propane's kind of coming back with oil now can you comment at all on where you stand on 2024 exposure and you know how open you are to pricing and then relatedly just looking at ngls in 2024 You know, these turnarounds seem like they have a pretty big impact this year, $50 million in Q2. So should we assume that turnaround impact would reverse and be a benefit in 2024 looking forward, or how should we think about that?
spk13: Sure. There was two questions there. On the turnaround, I don't think we have any material turnarounds projected for next year, and I don't think the impact was quite that big for this year. So I I would view it from a capital standpoint, yes, there's substantial maintenance capital that goes into them. So from a cash flow standpoint, you won't have the maintenance capital and you'll have some additional production. But I don't think the impact's in the neighborhood of $50 million. Your other question, can you repeat that?
spk02: Really, frack spread exposure, and I'll take this. Keith, we don't disclose what we're going to do on frack spread exposure. You're right, frack spread exposures were high. They've come off significantly. They're coming back. And what I would tell you is we look at, we try to time and be very thoughtful about how we do hedge forward. And as we go forward into 2024, we'll probably share, we'll definitely share more at the end of the year, but the market is improving as far as the frack spread environment for 2024. Thank you. Thank you.
spk00: Please stand by for the next question. The next question comes from Neil Dingman with Truist Securities. Your line's open.
spk12: Yes, guys. Can you just talk about twofold, one on 24 CapEx, maybe a little more details, and secondly, just on cap allocation, we're on that 3.5 target. Thank you. Al? Go ahead.
spk02: The first question was on capital, Neil? For 24. For 24? 300 to 400 million is what we're going to stick with for the next number of years. And your second one, could you re-ask your second question?
spk12: Neil, are you still there? Yes, I just got cut off for one second. Sorry, I just got cut off for one second.
spk02: Did you hear my comment on 24 capex? 24 capex will be $300 to $400 million, consistent with our target across the years. And then could you ask your second question on capital allocation?
spk12: Yeah, just on, I know you've got the 3.5 targets. I'm just wondering, would you, you know, if you keep, what we have for pre-cash that you can get below that, would you keep taking it below? Or, you know, how do you think about, you know, sort of payout versus taking that debt lower?
spk09: Yeah, at this point in the year, our guidance is that we expect to be a little below the three and a half times at year end. Clearly, a function of that will be what is our working capital requirements in the back half of this year that can move it a little bit. Our stated range still remains 3.75 to four and a quarter. And as we've articulated over the last few quarters, we intend to operate below that for the near term. And so really there's no really other moving part. If we get a little extra cash flow, we'll reduce debt in the back half. But the rest of the capital allocation is lined out. Clearly, if we're successful with another bolt-on acquisition, that can change the dynamic a little bit. But we do still expect to be at that three and a half times or below.
spk02: Neil, did that answer your question? Yes, sir. Thank you. Okay, thanks.
spk00: Please stand by for the next question. The next question comes from Neil Mitra with Bank of America. Your line is open.
spk04: Hi, thanks for taking my question. Willie, I think you alluded to some of the issues in the second quarter with just Permian growth and seeing that in your slides with gathering intrabasin and intrabasin. And I was wondering if you could just speak to some of the issues that were faced in the second quarter. I think some of your peers alluded to this, but just wanted to understand what underpinned some of the production issues that are now resolved.
spk02: Yeah, in my earlier comments, Neil, it really was a lot of hot weather issues that affected gas processing. And what we've seen is The producers have remained very disciplined around not wanting to flare, and you also had a lower price environment that probably didn't give people an incentive to try to push any harder. So there's capital discipline that the producers had, and it was really back half of June and July, and since then it's kind of improved. I don't know if there was more that you were looking for. I don't know. Jeremy, do you have anything to add?
spk13: Yeah, I would say a lot of that led to producers not completing wells into that environment. So they're going to produce what they had, they throttle wells that they had, maybe not complete all the wells that they were intending to. So that pushed completions into the August and forward time period.
spk04: Okay, perfect. Thank you. And then for my second question, I wanted to understand how you're looking at re-contracting Cactus 2 maybe with when it extends ahead of possibly a competitor coming out with an open season, or if that affects how you look at re-contracting. I know that the forward curve has improved, so just your general thoughts on the long haul type re-contracting. Thank you.
spk13: Sure. Neil, what I would say is We continue to have constructive dialogue with our customers. The back end of the view of prospective rates hasn't been nearly as volatile as the front end. So those discussions continue. There's options to extend on the Cactus 2 pipeline of attractive rates for our customers. So that one is pretty clear. I'd say for Cactus 1 and others, our integrated business model and asset base provides us unique advantages and aligns us with our customers for long periods of time. So we fully expect to do that as a function of when and timing, and we'll update you guys when we have more information.
spk04: Thank you very much.
spk00: Please stand by for the next question. The next question comes from Sunil Sibyl with Seaport Global. Your line is open.
spk01: Yes, hi. Good morning, everybody. So I just wanted to understand a little bit better about bolt-on acquisition. So it seems like those volumes are already reported as part of your gathering volumes, and just that you will get better economics on those. And if you could talk about kind of return on this kind of bolt-on acquisition.
spk13: Jeremy? Sure. You're correct. Because we operated the asset and had over 50% interest, it was consolidated, and gross gathering volumes wouldn't change. impact long haul or intrabasin. You know, I think we said it before, it just further aligns us with they want to drill wells and be in it. They feel very comfortable with the relationship and us as operators. So it makes sense for us to acquire that position and Diamondback can recycle that into however it wants to use its capital.
spk01: Okay. And then second was a little bit broader question on capital allocation. So It seems like, you know, the bond maturity you have coming up in the second half, you should be able to take care of that. And it seems like, you know, you still want to target higher than where, you know, you will end up in 2023 in terms of the leverage metrics. So I'm just kind of curious, is this geared towards more of kind of, you know... creating capacity for preps, taking out preps over a longer period of time, or what are the kind of, you know, longer-term thought process in terms of that leverage, you know, goal of 375 to 425?
spk02: Hey, Sunil, this is Willie. I'll give you my thoughts on capital allocation, and then Al can certainly add to it. You know, as we think about capital allocation, there's two primary things. One, we need to drive free cash flow. You can't do anything if you're not driving free cash flows. And the second one is really around discipline around everything we do, but particularly on CapEx. So as we think of the order in how we allocate going forward, one, we want to protect our commitment to return capital to the unit holders. We laid out this capital allocation framework, so that's going to be high on the list. And then we go to... strategic, high-return, bolt-on projects that we will consider that make sense to help us efficiently grow the business. Opportunistic buybacks and the preps are probably further down the list because we want to maintain financial flexibility and a strong balance sheet. So that's what we kind of juggle back and forth, but as you think about the priority and the way I see it, that's kind of the way, the order. Al?
spk09: Yeah, no, that is accurate, Willie. The only, I would add, Yeah, the note we have coming up in October, $700 million, we exited June with $900 million of cash. So that will be repaid out of that. Again, as I commented on an earlier question, we've left our leverage target the same at 3.75 to 4.25 and intend to operate at the low end or below. And that is partially to have some capacity on our balance sheet. to be able to weather through the industry ups and downs, as well as be able to fund things as we need to. Ultimately, at some point in the future, we will look to address the press, but there's no near-term plan to do that. But over time, we would expect that would be a good use of some of that capacity, and hopefully it would be Taking those out with that, we don't believe we should be using common equity at this time due to the valuation.
spk01: Got it. Thanks.
spk00: I show no further questions at this time. I would now like to turn the call back to the company for closing remarks.
spk02: Thanks. Well, listen, everyone, thanks for your time and joining us this morning. We hope to see you soon and have a nice weekend.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer

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