Core Laboratories Inc (CLB) 2005 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Core Labs Second Quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS]. I would now like to turn the call over to Mr. David Demshur, Chief Executive Officer, Core Labs. Sir, you may begin.

Good morning in North America and good afternoon to all of our listeners in Europe and Asia-Pacific. We would like to welcome all of our shareholders, analysts, and most importantly, our employees to Core Laboratories' second quarter 2005 earnings conference call. As usual, I am joined by Dick Bergmark, Core's Executive Vice President and CFO.

The call will be divided into five segments. First, Dick will start by making remarks regarding forward-looking statements. Then, we'll come back and give a brief consolidated company overview of our operations. Dick will then follow with a detailed financial review and then we will come back and go over Core's three operating segments, detailing our progress and discussing the continued successful introduction of new Core technology and services and for this quarter, we are going to emphasize technology application associated with unconventional natural gas reservoirs in North America.

Then we'll open up the call for a Q&A session. I will turn it back over to Dick for some remarks regarding forward-looking statements.

Thanks, David. Before we start the conference this morning, I will mention that some of the statements that we make during this call may include projections, estimates and other forward-looking information. This would include any discussion of the Company's business outlook. These types of forward-looking statements are subject to a number of risks and uncertainties relating to the oil and gas industry, business conditions, international markets, international political climate, and other factors, including those discussed in our 34 Act filings that may affect our outcome. These factors and other factors mentioned on this call could cause actual results to differ materially and we undertake no obligation to update or revise any forward-looking statement made in this discussion. With that said, I'll pass it back to David.

Thanks, Dick. Now, for a consolidated company overview. Core posted exceptional results for the second quarter of 2005. In fact, it was our best quarter in our 68-year history of the Company. Operations delivered all time quarterly records for revenues, operating profit, net income and EPS of $0.37 and it was the highest second quarter operating margin in Company history. The quarter marked the sixth consecutive in which Core operations posted record revenues and EPS and marked the tenth consecutive quarter in which Core has met or exceeded our own internal targets. The sequential quarterly EPS increase of 19% was one of the highest in the small to mid-cap oil field service universe. We continue to be successful in introducing new technologies and services that do two things -- number 1, increase the daily production of hydrocarbons for our clients and number 2, maximize the ultimate recovery of hydrocarbon's from their producing assets.

Core's historic quarterly results were driven by increased demand for these proprietary technologies and services that were used to optimize reservoir performance. These specifically included among others, Core's new QuickRock Properties services used to develop ultra-tight unconventional natural gas reservoirs. Also, the increasing application of Core's HERO perforating charge technology applicable to gas shell reservoirs throughout North America. And then also the combination of our HERO technology and SpectraChem, fracture diagnostic services to optimize natural gas performance and production in the Barnett shale play mainly in Texas. And the initiation of a mobile client study evaluating natural gas, shale and potential gas shale reservoirs in North America using many technologies proprietary to Core. We'll highlight the impact of these new services in the detailed operational review to follow. Now, I'll turn it back over to Dick for a detailed financial review.

Thanks, David. Revenues were 118.4 million in the second quarter versus 102.2 million in the second quarter of last year and 116 million last quarter. The revenues were up 16% year-over-year, in our view, outpacing industry span. Of these revenues, sales were 25.5 million, down slightly from 25.9 last quarter. Services for the quarter 91.9 million, up from 90.1 last quarter. Cost of sales in the second quarter increased to 83.2% versus 79.3 last quarter and 81.9% for the full year in '04. Cost of services for the quarter, they are at 74.5% down from 77.2 in the first quarter and 77.8% for the full year of '04. G&A for the quarter 7.6 million, down slightly from 7.7 last quarter, but up from 6.3 million in last year's second quarter. That increase was due in most part to cost incurred relating to our Sarbanes-Oxley initiatives. For 2005, we expect G&A to run at similar levels coming in around 28 to 29 million for the full year.

Depreciation and amortization for the quarter at 4.6 million, up slightly from 4.3 last year in the second quarter. For 2005, depreciation expense is expected to continue to ramp up as our expenditures increased through the year, and we will probably total approximately 17 or 18 million for the full year. We had no performance-based stock compensation expense in the second quarter. We do have 125,000-share tranche of performance-based restricted shares that has a three-year measurement period ending this year-end. We do not know at this point whether it is probable that our stock will hit its measurement hurdles vis-a-vis the members of the OSX. Consequently, no charge for this potential order has been taken at this time. But if it did occur, the charge to earnings today would have been about 3.4 million. We will take a fresh look at this potential charge again in Q3.

As disclosed in our public filings and discussed on prior calls, we have stopped virtually all incentive awards for employees in the form of stock options and have replaced them for the most part with restricted stock awards. The restricted shares that have replaced options are referred to within the Company as RSAP, Restricted Stock Award Program. Generally, these awards are provided not just to executives and senior managers but also to our employees maybe at the manager level or our technical leaders. The first award of RSAP was last year on September 2 for approximately 130,000 shares. They vest over seven years in our expense straight line over that seven-year period. The plan does provide for accelerated vesting if the stock price remains above an average price of $0.25 per share over a 20-day period beginning this September 2, the one-year anniversary of the plan. If that happens, the charge to earnings in the third quarter would be about 2.3 million. As discussed on prior calls, all of our financial targets that we have mentioned have excluded any expense that maybe recorded as a result of these strictly performance-based incentives along with the related tax treatment.

And as a remainder from last quarter's call, certain members of executive management still hold options that were issued almost 10-years ago on our IPO. Under the terms of the option agreement, they will expire as worthless if we do not exercise them over the coming two months. Managers may sell the exercised options or more likely they may hold them. But in all cases, they must be exercised. So, please don't take this action as some type of evaluation call just because you see management exercising options over the next few months right before they expired.

Other income this quarter is an amount of 534,000, which came primarily from the sale of assets offset by foreign exchange losses. This compares to a loss in last year's second quarter of 532,000 (ph) primarily from foreign exchange wins. EBIT from continuing operations was 16.2 million in the quarter providing margins of 13.7% as David said our highest in any second quarter, which compares favorably to last year's second quarter EBIT of 11.6 million if you do add back the stock-based compensation to put the comparison on an equal basis. Margins would have been 11.3% in last year's second quarter on that same comparative basis. Our 240 basis point improvement in margins continues to be driven for the most part by the incremental margins earned on higher revenues combined with better utilization of our cost structuring. Our EBIT was up 4.6 million on that basis for almost 40% year-over-year, while incremental margins came in at just over 28%.

On a year-over-year basis, our incremental margins in the quarter by segments were Reservoir Description 23%, production has been 41% and they continue to improve in Reservoir Management up about 11% after being up 83% last interest expense was 2.1 million for the quarter, virtually the same as last year's second quarter. Income tax expense was 3.8 million for the quarter, compared to 1.9 million in the prior year's second quarter, due to higher earnings this year and the impact of accruing the stock-based compensation in last year's second quarter. We expect this year's rate to be about 27.3%, unless the stock-based compensation expenses accrued later in the year, then the full-year effective tax rate would become about 30%. So, the stock-based compensation awards will be accrued next quarter, we will provide details on the financial impact, so that earnings after-tax and EPS can be compared to other periods on an apples-to-apples equivalent basis. We look at income from continuing operations for the quarter came in at 10.2 million compared to last year's second quarter income at 6.9 million before the stock-based compensation charge.

On that basis, net income was up 47.8%. Earnings per share from continuing operations for the quarter was $0.37, $0.02 above first call's mean street estimate. This compares to the $0.24 earned before stock-based compensation in the second quarter of last year. So, earnings are up 54% year-over-year. Sequentially EPS is up $0.06, or 19.4% and as David mentioned this is right in line with many of the industry players that have already released earnings.

Now, going over to the balance sheet, there's just not many changes from year end to point out, cash was up by 2.9 million, receivables stood at 96.7 million, down when compared to 98.2 last quarter but up only 1.3 from 95.4 million at year end, importantly DSOs continue to improve, last quarter it was 74 days, compared to 76 days in the first quarter and 80 days in last year's second quarter. Inventory was virtually unchanged on both a sequential and year-over-year basis and no real changes in other current assets, PP&E or intangibles, good will, and other long-term assets. On the liability side of the balance sheet, our accounts payable for the quarter were down about 800,000 when compared to the year-end balance of 28.6 million, primarily due to the timing of vendor payments. Other current liabilities decreased from the 2004 year-end balance by 2.7 million due the timing of payments under our corporate insurance program. Long-term debt was 102.1 million, down over 10 million from last quarter's balance of 112.2 million, and about 8 million from the year-end balance of 110.2 million.

Our net debt-to-cap continues to fall and at the end of the quarter, it stood at 27.3%. Outstandings under our revolving credit facilities were down by 27% from last quarter with the year-end balance, excuse me, with the quarter-end balance of 27 million compared to 37 million at the prior quarter end. Last week, subsequent to quarter end, we paid the first 7 million installment under our 75 million senior notes. So as of today, our total long-term debt stands at 100 million, down an additional 2 million from quarter end. The make up of that total is now 68 million senior notes and 32 million under the bank revolver. As has been the case for the last several quarters, our debt continues to come down, while at the same time we've continued our share repurchase program, and more on the program in a minute. Other long-term liabilities are 22.7 million, up 1.8 from year-end, primarily due to an increase in deferred compensation by 600,000 and deferred revenues by 900,000. Shareholders equity ended the quarter 205 million, up from the year-end balance of 190.3 million, our return on equity for the quarter using annualized EBIT was 31.5%, up from 28.7% last quarter.

Capital expenditures for the quarter were 5.4 million. For the first half, they were 8.6 million, up from 3.7 in the first half of last year, as we continue to invest in support of our growth objectives. We expect CapEx in 2005 to be about 19 million. If we go to cash flow, cash provided by operations in the quarter was 18 million and after paying for a 5.4 million in CapEx, our free cash flow was 12.6 million, or about $0.45 per diluted share. The per share cash yield on this cash flow was about 6.8%. So, how did we use free cash flow in this quarter, we gave about 5 million back to our shareholders through our share repurchase program and paid down the rest with debt paid down the debt with the rest. On the stock buy-back program during the quarter, we purchased an additional 181,300 shares at a cost of 4.6 million. Yesterday, we purchased a further 36,900 shares in this third quarter at a cost of about $1 million.

From inception of the program, we have purchased in the aggregate 8.5 million shares at a cost of about $133 million. About 25% of the shares outstanding at the time the program began on October 2002 bringing the current diluted shares outstanding to about 27.86 million shares. This has been a very successful program as we have discussed in the past. It has contributed to our shares more than tripling in value since inception. The return to our shareholders has been almost 250% significantly higher than the OSX, which was a 120% or the S&P 500, which rose 54%. Over the past year, our financial ratio has strengthened further, for example, our return on shareholders equity this quarter improved as I mentioned before to 31.5% compared to 24.7 in last year second quarter and our net debt-to-cap is down to 27% from 35% a year ago. We continue to further improve our balance sheet and financial position while providing our shareholders with one of the highest cash returns in the industry. The Company is well positioned financially to continue its historically rates of growth.

Now, we like to go over our internal financial targets with you. We've seen that most industry surveys are beginning to indicate that the rate of growth in expenditures by our oil company clients in 2005 will grow at a much faster rate than thought when the year began. Based on our year-to-date results, we believe our revenue growth continues to be a good proxy for our client's rate of growth in their expenditures. Several recent surveys announced just-in growth rates in the low teens driven (ph) by spinning over '04. Given our growth rate this quarter and for that matter all of the first half, which has been running around 16%. We continue to enjoy growth rates faster than the rate of spin by our clients and we expect that relationship to continue throughout the year. So what does that mean for internal financial targets. We believe that revenues for 2005 should be higher than the targets we set on the last call and could increase into the 470 to 475 million range. We also expect earnings to improve further in 2005 beyond what we talked about on the last call. Rather than earnings in the $35 to $40 EPS range as discussed before, we now believe our earnings could fall in the range of $40 to $45 per share or about 35% higher than 2004. These earnings targets, which we're giving today, exclude any cost associated with performance-based compensation.

And finally, what about the near term. Our third quarter revenue target is in the 125 million range. EPS around $0.39 to $0.41 reflecting a 38% increase over the $0.29 posted from operations in the third quarter of last year. As with all of our guidances, it excludes any potential impact from expenses relating to stock-based compensation.

And now back to David for more detail on our operation results.

I would like to a detailed ops review of our three recording segments. First being Reservoir Description, just a little bit background, this represents about 60% of Core's revenue, that's down from about 65%, a number of quarters ago. It has a differential in growth rates between Reservoir Description in our two other segments. It has an international focus mostly related to crude oil projects, but as you all see from our discussion, the technology can also be applied to describe natural gas reservoirs in North America. Reservoir Description posted a solid quarter, it was the highest quarterly revenues ever posted in our 68-year history and increasing an 11% year-over-year. Also year-over-year margin improvement was greater than a 120 basis points to 12.1%. Two projects that we would like to highlight shows the increasing exposure to North America natural gas project. Moreover, in the unconventional reservoirs, those being Tight Gas Sands and gas shales, Core's QRP or QuickRock properties technology is helping our clients evaluate rocks that have micro to nanodarcy ranges of permeability. Just years ago, (indiscernible) here at Core to be Tombstone, but now seems to be very lucrative when looking at these reservoirs if they have developed properly.

Now what is critical with this technology in developing these unconventional natural gas reservoirs especially in the Rocky Mountains is they have the ability to detect very, very precise levels of water saturations. These water saturations are used to determine how the fuel will be developed, more importantly what the well spacing will be within these varied type reservoirs. It's important that we have tight reservoir spacing, and in the permeating throughout the Rocky Mountains is very difficult to drill, unless we have very precise and accurate measurements of reservoir properties to weed that water saturation. Core's QuickRock Property technology enables our clients to do that, and enables them to increase the spacing of their wells, increasing the production of natural gas from those wells, and the ultimate recovery from those reservoirs. So our QRP or QuickRock Properties technology has been a big hit with the number of the independents drilling for unconventional natural gas, throughout the Rocky Mountain space of the US, and Canada.

The second set of projects that we would like to highlight, Reservoir Description. Our reservoir and field delineation studies are for West Africa, these tend to be very large studies, the course tend to be several hundreds of feet in length. They are coupled with full suites of reservoir fluid analysis, where we analyze the crude oil, natural gas, and water components of the reservoir, and their phase behavior relationships. The objective of the studies, are to No.1, define the producable limits of the field, which will then aid our clients in determining what the producible reserves are. No. 2, determine the production scheme and schedule, what is the best way to start producing the fuel, to maximize the amount of oil and gas produce, and also maximize the amount of oil and gas recovery from the field over time. No. 3, would be to implement pressure maintenance procedures and we believe with the start of the production in the field, and these data sets will enable them to do that. And then finally, in the early stages of the field, they'll be able to plan primary, secondary, and enhanced oil recovery projects so they have a time schedule going forward, again to maximize the recovery, ultimate recovery from these reservoirs. This provides a good segway into our Production Enhancement segment. This continues to be the growth engine for the Company.

It is 35% of Core's revenues, and you must remember this has a North American focus, mainly related to natural gas and natural gas field developments. In this quarter, we are targeting technologies that we used in unconventional natural gas reservoirs, such as the tight gas sands, and gas bearing shale, and how we are going to apply these technologies to maximize recovery from those. Two of these new services continue to move to the head of the class. The first that we talked about it before is the HERO or High Efficiency Reservoir Optimization perforating charges, in gun systems. More and more, we have seen the HERO systems being used in the perforating of the Barnett Shale, and the Barnett Shale reservoirs throughout Texas. As previously discussed, the HERO technology is based on a powdered metal charged liner technology that significantly reduces formation damage when preparating the reservoir. The reduced damage promotes maximum natural gas flow in the near-wellbore environment, maximizing the flow, and the total natural gas recovery from these tight formations.

The second technology that we would like to highlight has been used successfully when combined with the HERO technology, and again this is our SpectraChem Tracer Technology, that is used to ensure that adjacent and nearby Barnett Shale wells do not have overlapping hydraulic fracturing events. These overlapping fracs decrease optimal production rates while causing operators to overspend for unnecessarily large fracing jobs. SpectraChem Tracers were used to determine frac patternings, lengths, and directions of the hydraulic fractures. The data were then used to optimize frac programs, to ensure that the frac added did not cause over adjacent wells, and that the area stimulated, were only stimulated ones. This promotes maximum flow from the wells that were perforated and moreover ensures that you get the maximum recovery from the Barnett Shale wells.

Turning to Reservoir Management, this is 5% of Core's revenues, and has an engineering focus. Of all the client interest in the unconventional natural gas reservoirs, those being tight gas sands, and gas bearing shales. Our Reservoir Management segment initiated a study entitled reservoir characteristics, and production properties of gas shale, at the behest of a large number of clients. Client response is overwhelming. That's currently one third of all the natural gas produced in US were about 17 billion cubic feet per day which is equal and the entire natural gas production in the country of Canada is from US unconventional reservoirs. So, you can see the importance of the growth of the amount of natural gas coming from unconventional reservoirs. As is the case with similar multi-client studies, the participating companies will furnish (indiscernible) feet of Core samples to the study, and the number of these unconventional reservoirs will be analyzed by geological, petrophysical, and engineering tests to determine the production characteristics of the shale. Results will be then used to optimize exploitation of these unconventional natural gas reservoirs, which will play an ever-increasing role in North American natural gas production.

And with that detailed review of our operations, I would like to have Crystal open the line for questions, and this morning we have an unusual number of callers that are listening and we know that there are number of other conference calls going on behind ours. So, if you can limit questions to one per participant, we would appreciate that. Crystal?

[OPERATOR INSTRUCTIONS] Jim Wicklund, Banc of America Securities.

David, we talked the other day, and one of the concerns that we hear from investors is that while your technology is without question extremely valuable and useful and it works on that kind of stuff, do you have difficulties scaling it? In the (indiscernible), you cure one person at a time as opposed to selling a million pills that cures everybody at once. Where do you hit the level with some of these technologies or where do you or to what level can you going forward scale?

Yes, I think that is a good question Jim. In looking at our world-wide network, right now we believe that we can put about $600 million worth of revenue through our structure before we hit a step function for increased CapEx for buildings, and more importantly getting in specialized geoscientists to handle these problems. So, as it stands right now, our long-term growth rate over the last several years has run in excess of two to three to 400 basis points above what the spend right has been. So, from a long-term growth standpoint, we don't have a concern about that. For scale on the margin side, indeed we feel very, very comfortable with our margins that we are generating out of production enhancement and reservoir management and also the rocks segment of our reservoir description area. It's the fluid segment that we are working on right now and if we look at what we have done on our margins over the past eight quarters, we believe that we will still see significant margin improvement due to some of the incremental margins that Dick mentioned. When we look at Core, we have a 25% compounded annual growth rate over the OSX, and has increased over the past 10 years. So, on a scale we would certainly have put the infrastructure in to be able to do that. Again, as it has been in the last eight to nine quarters within Core, it's just the execution at hand for our operations and we are growing more and more comfortable with that every quarter.

Well, it sounds like you didn't scale your margins and that's more important than scaling your revenues, I guess. Okay guys, thanks very much.

Robert MacKenzie, FBR.

Good morning guys, good quarter. I wanted to build on that last question, scaling the margins, you did have a very good quarter on the margins and for two quarters now in a row you have had 28% year-over-year give or take incremental margins. Yet, when I look at the guidance being given there doesn't seem to be the same level of margin expansion in the next couple of quarters that we might expect based on recent performance and what you might have let us to believe given your recent comments vis-a-vis continued improvement in margins. Could you explain the apparent discrepancy?

I think well, I think every quarter we have this discussion. Our guidance tends to be more on the conservative side and from the standpoint of trying to increase our margins, let us remember that we have the management incentivized in this Company at 16% EBIT margins, we are approaching that. Certainly, in the past our EBIT margins, if we look at the third quarter 1998, climbed to almost 18%. So certainly the potential is there, I think, guidance might be a bit on the conservative side as it has been, maybe the last eight to nine quarters. We think that has worked for us.

Will Foley, Sidoti & Co.

With respect to production enhancement, I know one of the drivers of that market is your not only the growth in North American drilling activity, but your ongoing penetration of that markets with your products and services. Can you just give me a sense of how, what the progress you guys have been making in terms of the penetration of that markets?

Will, what we see when we look at our -- not just geographic breakdown domestically, but also internationally. You know David talked production enhancement has primarily focused North America. We have had some pretty good success in the quarter and the first half of getting that technology out into some other location. And primarily if you look at SpectraFlood that has certainly been the one that we had enabled to transport, for example into Nigeria and Mexico and we are certainly hoping to get it out further into Asia Pacific for example. And naturally you can see the Russia's CIS market is being very applicable to several of those services and product line.

[OPERATOR INSTRUCTIONS] Robert Christensen, Buckingham Research Group

Good morning. It is actually Philip Juskowicz. The HERO charges were being used in the Gulf of Mexico, you guys talked about that in the last quarter. You introduced it, I think it was with Chevron Texaco, can you give a little update on that?

Yes, I think what your are referring to Phil is the ultra-deep tests that are being drilled on the shelf in the Gulf of Mexico. These were -- you referred to, on the Chevron was project Genesis. This was a charge that was being designed for the ultra-thick two wheelers that will be chrome alloy steels that will be more than one inch in thickness that will be at the bottom of some of this 30,000-foot tests. A number of those wells are drilling now. We expect that they will be reaching TD over the next several months. We have test fired the project Genesis charge and we are now just waiting to perforate a reservoir 30,000 foot plus and we are pretty excited about that.

Brad Nider (ph), First Albany Capital

I guess to sort of follow on to line of questioning about the ability to continue to grow at the rate that you've seen over the past number of quarters. In terms of staffing, are you guys having the difficulties that you have been hearing about in other sectors, and if so, have you taken steps as far as retention plan, you mention in your recitals? Have you taken that to a lower level to keep the staff you have or attract the others?

It is interesting when you look at the employee make up that we have, a high level are on the sciences. Those are not as difficult for us as for example field engineers that might be able to also work in other oil service companies. I think that's where we seeing the most turnover. But we are in fact not seeing much at all, but for those technical people that are very important to us, we've certainly done things to retain our employees, it only makes sense to do that.

And if you look at our employee make up in specializing in reservoir optimization, as we have discussed in the past, really if you are going to work in this field, this highly specific field, you are either going to work for a major oil company technology center in providing these disciplines or you are going to work for Core Laboratories. So the pool of employees is fairly limited to the extent of -- if they want to practice these sciences, where they can go

And as Dick mentioned we do and have used a number of incentive schemes to make sure that we entice our employees to Core Lab. Also, we have ongoing programs with universities enticed to their petroleum engineering and geoscience colleges to ensure that we can get a flow of individuals from colleges, but also in recruiting and overseas locations, read that, the former Soviet Union and China, where you can pick up some pretty good engineering talent that needs to be re-trained over a year or two period, but that's also a source for some strong engineering talent as we go forward.

Alright, thanks very much for the color.

Bill Discolete (ph), Buckingham Research.

The shale study that you guys initiated, is that -- how does that work? You said it's being done by -- a lot of your customers approached you. Does that mean that throughout the country that there has been different producers that have come to you, and if that's the case and how does I guess all your managers collaborate together and work on that or is I guess by a bunch of producers in a specific area?

Yes, I feel these studies are run by our reservoir management group under their auspices and what has happened here typically in these studies, you have as many as 20 participating companies and a number of them will approach us or we will approach them and say we have got an idea of where we would like to study the producing characteristics of oil pipe gas and -- or oil gas shales throughout North America. And what we would like to do is get a collection of let's say a 100 cores down through these reservoirs from a number of these producing areas, and what we will do is we will have all companies donate cores from their producing fields, we will test these using different analytical, geological and engineering techniques, put them into really a country-wide database and then share that with the participating companies. And participation costs can run anywhere from $100,000 to $750,000 million depending on the analytical and data content and objectives of the study. So, we have got a number of these ongoing and this is the most recent line as there has been a lot of interest pickup in these gas shale or potential gas shale reservoirs.

At this time, we have no further questions. Gentlemen, are there any closing remarks?

Yes, thanks, Crystall. In summary, Core posted our best quarter in the company's history. Company has never been better technologically positioned to assist our clients worldwide to expand their existing production base. With the worldwide challenge to produce more hydrocarbons becoming more and more difficult every day, of course decade long laser focus of providing reservoir-optimizing technology as the Company dynamically positions for continued growth in 2005 and beyond.

So in closing, we would like to thank all of our shareholders, the analysts that follow Core, and especially all of our hard working employees for spending part of their morning with Core, and we look forward to visiting with you at the end of the third quarter. Thank you and goodbye.

Thank you for participating in today's call. That concludes our 2005 earnings conference call. You may now disconnect.