Harvard Bioscience Inc (HBIO) 2016 Q2 法說會逐字稿

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  • Operator

  • Welcome to the Q2 2016 Harvard Bioscience Inc. earnings conference call. My name is Jason, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session. I will now turn the call over to Corey Manchester. Mr. Manchester, you may begin.

  • Corey Manchester - Director of Finance and IR

  • Thank you, Jason, and good morning everyone. Thank you for joining us for the Harvard Bioscience second quarter 2016 earnings conference call. Leading the call today will be Jeffrey Duchemin, president and chief executive officer, and Robert Gagnon, chief financial officer of Harvard Bioscience.

  • Before I turn the call over to Jeffrey, I will read our Safe Harbor statement. In our discussion today, we may make statements that constitute forward-looking statements. Our actual results and performance may differ materially from what we have projected into risks and uncertainties, including those detailed in our annual report on Form 10-K for the period ended December 31, 2015, and our other public filings. Any forward-looking statements, including those related to the company's future results and activities, represents our estimates as of today and should not be relied upon as representing our estimates as of any subsequent day.

  • I will now turn the call over to Jeffrey Duchemin. Jeffrey, please go ahead.

  • Jeffrey Duchemin - President and CEO

  • Thank you, Corey. Good morning, everyone. Thank you for joining us for our second quarter 2016 conference call. In my discussion today I will begin by providing some brief comments on our second quarter 2016 results, followed by a discussion on several other important areas of our business. Our CFO, Rob Gagnon, will then provide more financial details related to our second quarter 2016 results and our 2016 guidance.

  • Our topline second quarter 2016 results were slightly behind where we expected them to be, but I would also like to remind everyone that we reported a fairly weak Q1 2015 due to the decline of the euro and other factors which was followed by an unusually strong sequential Q2. Based on these timing differences, we believe looking at our 2016 year-to-date results is a better indicator of our performance.

  • Our revenues for the six months ended June 30th, 2016 were $53.1 million, which was a decrease of approximately 1.7% on a constant currency basis compared to the same period in 2015. Excluding the impact of the GE transition and currency translation, year-to-date revenues are flat compared to prior year's six month period.

  • Now I'd like to touch on our results on a geographic basis, as well as add some additional context to our topline results and outlook. Through six months of the year, revenues in the US grew 4%, while in China revenues grew 14%. We believe this performance is the result of our commercial team's execution. These gains were offset by a 15% decline in Europe, and a 4% decline in the rest of the world, mainly driven by the impact of the GE transition and currency translation.

  • We are within range of meeting our financial objectives for the year. In terms of the GE transition, we continue to meet our expectations as the ramp up of NanoVue and SimpliNano spectrophotometer instrumentation in service sales continue. As I said in the past, this revenue stream will be upside for us during the second half of the year as compared to the same period in 2015.

  • A potential tailwind, which hasn't been reflected in our financial guidance, is the benefit of the NIH budget increase. With 70% of our customers in academic markets, we feel as though this could have a meaningful impact to our results in the future. Additionally, a similar increase for the 2017 NIH budget is included in the Congressional budget that is yet to be approved. However, back to back years of mid-single digit growth is a welcome sign for our overall business, and a far cry from the flat to declining NIH budgets over the previous several years.

  • Now moving on to the bottom line. We are realizing the benefits of the restructuring we announced in the fourth quarter of 2015, as well as the gross margin expansion from our site consolidation efforts. Our year-to-date non-GAAP gross margin percentage increased to 46.4%, an increase of 50 basis points compared to the same period in 2015. Our year-to-date non-GAAP operating income increased to $3.6 million from $3.3 million for the same period in 2015. Rob will provide some additional details on margin and operating expenses.

  • As I mentioned on our last earnings call, product development is an important part of our strategy. When I took over as CEO almost three years ago, we were spending the majority of our R&D dollars and resources on deferred product maintenance. Our R&D function has done a good job of addressing and enhancing our existing product offerings. Although we will always dedicate dollars and resources to continued product maintenance of our existing portfolio, we are now able to pivot and focus on innovation.

  • I'd like to spend a few moments to highlight one example of new innovative product that we brought to market this year. During Q2 we launched a comprehensive physiological monitoring system under our Harvard Apparatus brand name. This monitoring system integrates multiple physiology parameters, including respiration, heart rate, temperature and blood pressure, on one platform that represents an addition to our portfolio that continues to differentiate Harvard Biosciences as a market leader in the cell and animal physiology markets. Also, as I mentioned in our last earnings call, we have an ongoing R&D project that is funded by a DARPA grant, and in the second quarter we received approval for a second year of funding.

  • These are just two examples of initiatives that we believe will drive future growth. As we continue to focus our R&D organization on innovation, we are confident we will be bringing products to market we serve that assist our customers in their ever evolving research needs.

  • Before I turn the call over to Rob for his remarks, I'd like to discuss one more significant development in our business. During Q2 we began the second phase of our global ERP implementation. During this phase, which will roll out over the next 6 to 12 months, we will bring our German subsidiaries onto our Microsoft AX platform and will join our Denville subsidiary on this consolidated platform. Bringing our businesses onto this platform will generate operational efficiencies across the functions of our organization. Being on a consolidated platform like Microsoft AX will also allow us to integrate acquisitions more quickly and efficiently, whether the targets are bolt on or transformative in nature.

  • With that, I will turn the discussion over to Rob Gagnon, our CFO, who will provide more insight into our financials. Rob?

  • Robert Gagnon - CFO

  • Thanks, Jeffrey. As in previous quarters, much of my focus will be on non-GAAP quarterly results, which we believe better represent the ongoing economics of the business, reflect how we set and measure incentive compensation plans, and how we manage the business internally. However, I will briefly review the GAAP results, the differences of which are outlined in the press release we issued today, which can be found on our website under press releases.

  • As a reminder, we have included a comparative non-GAAP quarterly income statement as Exhibit 9 to the press release. Additionally, any material financial or other statistical information presented on the call, which is not included in our press release, will be archived and available in the investor relations section of our website. And a replay of this call will also be available for one week at the same location on our website at harvardbioscience.com.

  • Beginning with the topline, revenues in the second quarter were $26.1 million, a decrease of $2.7 million, or 9% compared with revenues of $28.8 million in the second quarter of last year. And revenues on a constant currency basis would have been $26.3 million, or a decrease of $2.5 million, or also 9%.

  • Our second quarter 2016 results were slightly behind where we expected them to be, but as Jeffrey stated, I would like to remind everyone that we reported a fairly weak Q1 2015 due to the decline of the euro and other factors, which was followed by an unusually strong sequential Q2. And based on these timing differences, we believe examining the 2016 year-to-date results is a better indication of performance and where we are as a business.

  • Revenues year-to-date were $53.1 million, a decrease of $1.5 million, or 3%, compared with revenues of $54.6 million for the six months ended June 30th, 2015. Revenues on a constant currency basis would have been $53.7 million, a decrease of $900,000, or 1.7%, which is primarily the result of the GE transition. In terms of the GE transition, revenues were unfavorable by approximately $1 million through the first half of the year. And as Jeffrey discussed, revenues associated with spectrophotometer sales will be a tailwind for the second half of the year as compared to the second half of 2015.

  • Also as Jeffrey mentioned in his remarks, year-to-date revenues in the US grew approximately 4% while revenues in China grew approximately 14%. Europe and rest of world declined approximately 15% and 4% respectively.

  • I'll now turn to cost and expenses. Cost of revenues on a non-GAAP basis were $14.4 million for Q2 compared to $15.7 million for Q2 of last year. As a result, our non-GAAP gross profit was $11.7 million this quarter compared with $13.1 million for last year's second quarter. Gross profit margin was 44.7% in Q2, down from 45.6% in Q2 of last year. This 90 basis point decrease in gross profit margin is primarily attributable to timing items, lower sales volumes, the mix of our product sales, and some sales promotions.

  • Gross profit margin year-to-date was 46.4%, up from 45.9% year-to-date of last year. This 50 basis point increase is primarily attributable to our site consolidation efforts in 2015, offset by the margin compression in Q2 I just mentioned. And on a GAAP basis, gross profit margin was 46.4% in Q2, an increase of 100 basis points over Q2 of last year. And gross profit margin year-to-date on a GAAP basis was 46.4%, a 230 basis point increase over the same period of last year.

  • Non-GAAP operating expenses for Q2 were $10.4 million, a decrease of $395,000, compared to $10.8 million in Q2 of last year. This decrease in operating expenses is due to a number of factors, but mostly the result of the restructuring that took place last November, as well as the site consolidations. Year-to-date non-GAAP operating expenses have declined $800,000 compared to the same period of last year. On a GAAP basis, operating expenses were $12.5 million for Q2, essentially unchanged from the same quarter of prior year. Operating expenses on a GAAP basis would have declined $500,000 excluding the forensic investigation costs that we incurred in Q2 of this year.

  • Operating income on a GAAP basis in Q2 decreased to $1.2 million as compared to $2.3 million in Q2 of last year. Our non-GAAP operating margin in Q2 was approximately 5% on a non-GAAP basis. This compares to an operating margin in Q2 last year of 8% on a non-GAAP basis, and 9% in Q1 of 2016. On a year-to-date basis, our non-GAAP operating margin was 7%, up from 6% in the first half of 2015. The non-GAAP operating margin reported in Q2 of approximately 5% is not indicative of the non-GAAP operating margin that we expect to report for the full year 2016. We believe our non-GAAP operating margin for the full year 2016 will be more in line with the operating margin reported in Q1 2016 due to seasonality in the business in Q4 and the GE transition.

  • Our non-GAAP effective tax rate was 25% in Q2 compared to 20% in Q2 of last year. This increase in effective tax rate was primarily the result of changes in R&D tax credits. Our GAAP net loss was $713,000 in Q2, or $0.02 per diluted share compared with net income of $349,000, or $0.01 per diluted share for Q2 of last year. Included in our Q2 GAAP results is $498,000 of expense related to the forensic investigation. This item has been excluded from the non-GAAP results.

  • Our non-GAAP net income for Q2 was $989,000, or $0.03 per diluted share compared with $0.05 per diluted share in Q2 of last year. Year-to-date non-GAAP diluted earnings per share were $0.08 compared with $0.07 per diluted share in the same period of 2015. Weighted average shares outstanding were $34.1 million in Q2 as compared to $35 million in Q2 of last year.

  • I'll now turn to the balance sheet. We finished Q2 with approximately $3.6 million of cash and equivalents, a decrease of approximately $3 million compared to $6.7 million from Q4 of last year. The decrease is due to the forensic investigation cost paid during 2016, as well as changes in working capital and scheduled debt payments in the first six months of the year.

  • Accounts receivable as of Q2 were $16.3 million compared to $17.5 million as of Q4 last year, a decrease of $1.2 million. And DSO was 57 as of Q2 compared to 60 as of Q4 last year.

  • Inventory at the end of Q2 was $22.2 million compared to $22.3 million at the end of Q4 last year. And inventory turns were 2.6 times compared to 2.7 times for Q4 last year.

  • Capital expenditures were $200,000 for Q2 compared to $600,000 for Q2 last year. Our capital expenditures have come down significantly since the first quarter of last year due to the timing of the ERP implementation and site consolidations. We expect capital expenditure levels will increase in the second half of the year as we ramp up the next stage of the ERP build out.

  • And debt at the end of Q2 was $16.2 million compared to $18.7 million at the end of Q4 last year. The decrease was due to principle payments made during the first six months, and our available borrowing capacity subject to covenants and working capital restrictions was approximately $7 million.

  • I'll now turn to our financial guidance. Today we're updating our full year 2016 guidance to reflect current foreign currency rates, including current British pound sterling rates following the Brexit vote. As of June 30th, 2016 the British pound sterling spot rate was 1.34 as compared to the mid-1.4s at the time we initially provided guidance. As approximately 17% of our revenues are generated from our UK-based entities, however only half of those revenues are priced in British pound sterling. Based on the change in FX rates, if rates stay where they are today, it will impact our topline for the remainder of 2016 by approximately $1 million.

  • Additionally, although we have some natural hedge in our P&L, with expenses in British pound sterling, if the rate remains where they are today, it will negatively impact our bottom line by approximately $0.01 in EPS. As such, holding everything else in our previously disclosed guidance equal, we now expect to report revenues of approximately $108 million to $110 million, and now expect to report non-GAAP EPS of $0.16 to $0.18. As compared to 2015, our non-GAAP EPS growth is expected to be between 23% and 38%.

  • As mentioned on past calls, the differences between our GAAP and non-GAAP financial guidance, including EPS and reconciliations, are outlined in the earnings release we issued today, which can be found on our website under press releases.

  • We will now open the call to questions from participants. Operator?

  • Operator

  • Thank you. We will now begin the question and answer session. (Operator instructions) And our first question comes from Paul Knight from Janney Montgomery Scott. Your line is open.

  • Paul Knight - Analyst

  • Hey guys. Could you talk about I guess the non-GAAP gross margin, 46.4%, that's correct, right? Or is it 44.7% or 46.4% through the six month period?

  • Robert Gagnon - CFO

  • Yes, so Paul, it's 44.7% for Q2. I can address that. Let me go back on gross margins. Our GAAP gross margin was 46%, which was up 100 BPS. Our non-GAAP gross margin rounded to 45%, which was down 90 basis points year-over-year. And year-to-date, the non-GAAP gross margin was 46%, which was up 50 basis points.

  • There are a number of things that went on that impacted gross margins in the quarter, so in addition to just the lower volumes on the topline, product mix was a significant factor. As you know, we sell several different instruments and the prices range from a few thousand dollars to several thousand dollars. The profit associated with each product can differ by more than an insignificant amount. And as a result, depending on product mix, overall gross margins can vary. So that product mix was a significant factor this quarter.

  • We also had some onetime items that hit us in Q2 around higher shipping costs. And we had a minor technical issue with one of our product lines. And although individually they were minor, these things added up and unfortunately were all unfavorable and had a negative impact.

  • We don't believe Q2 is indicative of where we'll finish for the year. Similar to after finishing Q1, we were 48%, we felt that was favorable and ahead of where we would trend for the year. We're up basically 200 basis points. But now standing here halfway through the year at 50 basis points, we still believe that gross margins over the long run will normalize higher than Q2 but lower than what we experienced in Q1, excluding future plant consolidations.

  • Paul Knight - Analyst

  • Meaning somewhere around 46%?

  • Robert Gagnon - CFO

  • I would put it somewhere in the 46% to 47% range. Yes.

  • Paul Knight - Analyst

  • Okay.

  • Robert Gagnon - CFO

  • Yes. Now, if I may, I mean we were targeting $1 million in operating expense savings in 2016. And through six months, we've achieved $800,000, which is well ahead of where we thought we would be. I think what's going on there is that we're starting to see some benefits from site consolidations on the OpEx line as well because of savings in G&A costs and other costs. So I think as you look at our operating margin overall, we're still expecting and targeting to be approximately in the 8% range, which would tie back to that EPS growth that we mentioned.

  • Paul Knight - Analyst

  • Eight percent this year?

  • Robert Gagnon - CFO

  • Yes.

  • Paul Knight - Analyst

  • And you had the foreign exchange gain in this quarter of $282,000, so that obviously helps the EPS a bit. And your non-GAAP op margin of 5% versus 8%, so I guess we see foreign exchange go away and then your op margin should pick up. I mean can you -- what are the drivers again behind that op margin pick up potentially here in 3Q, 4Q?

  • Robert Gagnon - CFO

  • Yes, I'm glad you mentioned that. So we did have a favorable impact due to the currency movement below the line, but we were negatively impacted on the revenue line.

  • Paul Knight - Analyst

  • Okay.

  • Robert Gagnon - CFO

  • So that's just the revaluation of some working capital accounts. But in terms of the drivers the back half of the year, there's really two that are highlighted. It's just the overall seasonality in the business that tends to pick up in the fourth quarter. And then also, as Jeffrey mentioned, some of the tailwinds, you know the GE comps last year are very low because of the transition. So that business continues to ramp up. That will be a favorable tailwind for us in the back half of the year. So I'd really say it's those drivers.

  • Paul Knight - Analyst

  • And then my last question is, can you talk to GE? I guess it kicks in here in 3Q. You've got the sales force higher. The service has been going on, but can you talk to where are we with this GE transition today in the beginning here of third quarter?

  • Jeffrey Duchemin - President and CEO

  • Hey, Paul, it's Jeffrey. As I stated last quarter, the GE transition has gone very well from both a sales and service end of the business. Our distribution agreements are in place. We're seeing great activity from our distributor partners, along with the individuals internal that are overseeing the project. We're right where we need to be at this point in the year, so the GE transition has gone very sell.

  • Paul Knight - Analyst

  • Okay. Thank you very much.

  • Robert Gagnon - CFO

  • Thanks, Paul.

  • Jeffrey Duchemin - President and CEO

  • Thanks, Paul.

  • Operator

  • Thank you. (Operator instructions) Our next question comes from Raymond Myers from Benchmark. Your line is open.

  • Raymond Myers - Analyst

  • Thanks, and thanks for taking the questions. My first one is, could you touch on just what the bookings and backlog were in the quarter?

  • Robert Gagnon - CFO

  • Yes, so the backlog finished in the range of $6 million to $7 million range, the high $6 million side. Bookings would track sales. I think in this case bookings were probably slightly below sales because we came in with a slightly higher backlog. But we'll have all those details for you when we file the Q, which we expect to do next week.

  • Raymond Myers - Analyst

  • Okay, great. So excluding the currency and the spectrophotometer business, revenue was up for the first half of the year, but that was heavily weighted to the first quarter. Can you help us to understand what influenced the shift towards first quarter, and offer any visibility into how the rest of the year's revenue could be supported more like Q1 versus impacted like Q2?

  • Jeffrey Duchemin - President and CEO

  • Hey, Ray, it's Jeffrey. Q1 we had stated that we came into the quarter with a high backlog. We had some equipment sales in China. If you can remember, in Q1 we had 30% growth in China. After Q2 year-to-date we're now at 14%, which we think is more of a normal run rate. So this is something that was expected. I think we're doing very well in the US with 4% growth year-to-date.

  • So, moving forward, I think these numbers are more normalized and stable compared to what you saw in Q1. And so it was really right where we thought we'd be at this point in the year, a little bit softer on the topline. There's some timing related to that. As Rob mentioned, some product mix that impacted gross margins. But overall I think these are some of the -- the numbers that you're seeing from a regional standpoint are more normalized now than they were after Q1.

  • Robert Gagnon - CFO

  • Yes, and just in terms of those figures, Q1 of 2015 our reported revenues were $25.8 million. Q2 was $28.8 million. So it was kind of an unusual trend Q1 to Q2 sequentially last year, which I know certainly the shock of the euro had something to do with that. This year is more back to basics, what we typically experience, which is roughly $27 million in Q1 and $26 million in Q2.

  • Raymond Myers - Analyst

  • Okay. That makes sense for the first half. Now looking out to the second half, what gives you the confidence that we'll see growth in the second half relative to what was a more normalized Q2 then?

  • Jeffrey Duchemin - President and CEO

  • Well I think our sales marketing teams, the commercialization of new products. We mentioned a little bit in my script the launching of new products will help drive growth in the second half. We said all along that Q2 was going to be the challenging quarter for this business. By getting through Q2 where we are year-to-date, I mean we feel confident that we'll continue to move forward and meet our guidance, our financial guidance.

  • I think the fact that we're seeing strong performance in China, I think that the fact that the US is 4% growth year-to-date, the fact that the GE situation is now behind us, it's all upside moving forward and we know there's going to be a consistent ramp in the second half of the year with GE products, we feel confident that the back half will be stronger than the first half.

  • Robert Gagnon - CFO

  • And if I can just add, the other piece there would be the potential NIH budget, which we haven't factored into our plans, we're not factoring it in, but that would be an additional tailwind should that come through.

  • Raymond Myers - Analyst

  • That's great. And have you heard anything about (inaudible) have any sense that the NIH budget is starting to factor into laboratory spending yet or is it still too early to say?

  • Jeffrey Duchemin - President and CEO

  • You know, this is just our personal opinion. We're not seeing it. We're not feeling it. But, you know, we hope it will transition. During the second half of the year it will be all upside for us.

  • Raymond Myers - Analyst

  • Okay, great. Jeffrey, you mentioned the possibility of introducing more internally developed products, and you mentioned one that was introduced in Q2.

  • Jeffrey Duchemin - President and CEO

  • Yes.

  • Raymond Myers - Analyst

  • Can you describe what the future products might be and give us a sense of possible timing for introduction of more internally developed products?

  • Jeffrey Duchemin - President and CEO

  • I don't think I want to go into the timing of new products and what's in store for us in the future, but I will tell you, you know one of the things that's happened over the last couple of years is we've transitioned our R&D process from deferred maintenance now to developing innovative products that will come to market.

  • The two products I mentioned, one was launched in Q2, which was our physiological monitoring system. The other is part of the DARPA grant, which is a neural recording system that monitors neuro signals for rodents. And this is coming from our Triangle BioSystems business. We're really excited about this and we have several other products that I didn't mention that are working their way through the process.

  • So as we move forward as an organization, we'll continue with deferred maintenance, we'll continue to update existing legacy products, but we're really excited about the launching of new products. It's something this business hasn't seen in many years.

  • Raymond Myers - Analyst

  • That will be nice to see. Next I want to touch, if you could give us a little more visibility around the ERP systems. You mentioned that that is scheduled to be completed in a 6 to 12 month timeframe. Can you give us a sense of what ultimately the benefits of the ERP consolidation would be in terms of whether it's cost or better management control, or what's the purpose of it?

  • Jeffrey Duchemin - President and CEO

  • Yes, I'll start. First of all the ERP core team that's in place is doing a great job. We're right in line with our timing of finalizing this project sometime later in 2016, probably a go live in Q1 of 2017. We're really excited with the progress the team has made. And this is our German subsidiaries. There's three subsidiaries that we're working on in Germany right now. This is a phase two portion of our global ERP platform.

  • The benefits are -- they vary. They're dominant. From a financial standpoint, able to track and record financial information that integrates multiple businesses into one. Inventory systems. There's a great amount of efficiencies that this program will bring to the business. The ability to integrate tuck in acquisitions or transformative acquisitions in a much faster timeline. The tracking of data, the cleansing of data. Many of these legacy businesses had data that was somewhat outdated. This is customer information and things like that. The ability to share customer information through multiple business units. There's a variety of benefits that this global ERP platform will bring, not only to an individual business unit but to multiple businesses within Harvard Bioscience.

  • Robert Gagnon - CFO

  • And Ray, I just want to add something there. You talked about the next 6 to 12 months. That's really to complete a large portion of our European footprint. So there would be some work that would follow after that, but that would allow us to, like Jeffrey said, integrate future acquisitions, also benefit around sourcing. And when you have that many different systems, a lot of them are end of life. They're no longer supported by the vendor, and it's expensive to maintain third party consulting arrangements to support these systems. So we'll be able to eliminate a lot of those costs by having one system that's supported.

  • Raymond Myers - Analyst

  • That's great. Good. And then just to wrap up a final question. I'll leave it kind of up to you to how to answer this. But over the last two years you've done a lot to consolidate facilities, now you're going to the next stage and bringing it all onto a central ERP system. All great things that give you better control over the business, better cost structure, et cetera. But can you remind us of your vision of how you're going to go from that to growth over the next two to three years?

  • Jeffrey Duchemin - President and CEO

  • I think the fact, Ray, that the business is much less fragmented today than it was several years ago, and I'll give you a couple examples. We had multiple R&D teams within multiple subsidiaries of the business. The fact that we're pulling all of our R&D resources together, sharing ideas, sharing technology, is providing us the ability to innovate and bring products to market faster. It's just one example.

  • I think from a customer standpoint, from a sales and marketing standpoint, we've launched CRM processes, which allows us to track customer information, vital customer information, and share that information among multiple subsidiaries. The fact that we've brought our selling organizations into one organization. We have specialized sales teams within that one organization. But the fact that our sales people are now talking to one another and sharing opportunities and sharing contact information, allows us to not only sell one particular product, but pull through other products. And these are just a couple examples of where the business is today compared to where it was in the past.

  • Raymond Myers - Analyst

  • Okay. That sounds great. Thank you very much.

  • Jeffrey Duchemin - President and CEO

  • Thank you.

  • Robert Gagnon - CFO

  • Thanks, Ray.

  • Operator

  • Thank you. And we have no further questions, so I would like to turn the call over to Jeffrey Duchemin for final remarks.

  • Jeffrey Duchemin - President and CEO

  • Thank you, everyone, for joining us for today's call. We look forward to presenting Q3 financials sometime in late October. Thank you.

  • Operator

  • Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.