Marcus Corp (MCS) 2010 Q1 法說會逐字稿

Good morning, everyone and welcome to the The Marcus Corporation first quarter earnings conference call. My name is Yenick and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference.

(Operator Instructions). As a reminder, this conference call is being recorded. Joining us are Greg Marcus, President and Chief Executive Officer and Doug Neis, Chief Financial Officer of the The Marcus Corporation. At this time I would like to turn the program over to Mr. Neis for his opening remarks. Please go ahead, sir.

Thank you very much. Welcome everybody to our fiscal 2010 first quarter conference call. As usual, I need to begin by stating we plan on making a number of forward-looking statements on our call today.

Our forward-looking statements could include, but are not limited, to statements about our future revenues and earnings expectations, our future RevPAR, occupancy rates and room rate expectations for our hotels and resorts division, expectations about the quality quantity and audience appeal of film products expected to be made available to us in the future, expectations of the future trends in the business group and leisure travel industry and in our markets, expectations and plans regarding growth and a number and type of our properties and facilities, expectations regarding various nonoperating line items on our earnings statement and expectations regarding future capital expenditures.

Of course our actual results could differ materially from those projected or suggested by our forward-looking statements. Factors, risks and uncertainties which could impact our ability to achieve our expectations are included in the risk factor section of our 10-K and 10-Q filings can be obtained from the SEC of the Company. We'll also post all regulation G disclosures when applicable on our website at www.MarcusCorp.com.

With that behind us, let's talk about fiscal 2010 first quarter results. Once again, we have two different stories to tell. Our theater division reported another strong quarter, just missing last year's record results while our hotel and resorts business continued to be impacted by a very challenging lodging demand environment.

Before we get into the operating results, let me first briefly address any variations in the line items for the operating income versus last year. As you can see, investment income was down slightly from last year as expected due to lower interest rates and a continued reduction in our remaining timeshare notes receivable. Assuming interest rates remain low in future periods, we will likely continue to track slightly lower on this line item during future periods as well. Having said that, I must remind you that last year during our fiscal second quarter we reported over $2 million in unusual investment losses. We will likely have very favorable comparisons to last year on this line item when we report our second quarter results this year.

Meanwhile, interest expense was down another $825,000 during our fiscal 2010 first quarter compared to the prior year, due to reduced borrowings and lower short-term interest rates. Depending upon the actual timing of our future capital spending and assuming that short-term rates remain low for the foreseeable future, we could continue to see our interest expense run lower than the prior year in future quarters. As you know, during the summer we are at a our peak as far as cash influence while at the same time we generally refrain from significant capital spending so as in the past, we are likely to see our debt level rise in the future periods now that the summer is behind us. Our overall debt to capitalization ratio at the end of the quarter was a very strong 42%, down from 44% on our recent year end due to the aforementioned strong cash flow of summer for us.

Continuing down the earnings page, we had relatively little activity of change this particular quarter this year and last year on our gains from dispositions and equity earnings and loss lines. It's possible we will report some level of gains in sales during the remarried of fiscal 2010. We do have a couple of asset sales under contract and we'll in due diligence portion right now. But as always, the timing of such gains is always difficult to pinpoint. Looking ahead to next quarter, I would be remiss if I didn't remind you that last year during our second quarter, we reported a $1.1 million loss related to our investment in our condominium units at our Las Vegas property. In our year-to-year comparison in our second quarter, keep that in mind.

And finally, our effective income tax rate this quarter was 36.5% which is slightly lower than the normal amount due to a decrease in the amount of unrecognized tax benefits. This is a result of a lapse of some applicable statute of limitations. I currently expect our tax rate for the remainder of the year to be in our historical 38% to 40% range, pending any further lapses in statute of limitations or completion of tax examinations by taxing authorities.

Shifting gears, our total capital expenditures during the first quarter of fiscal 2010 totaled approximately $5 million, compared to just over $9 million last year. Over $4 million of this year's amount occurred in our hotel division and relates to the ongoing renovations at our Grand Geneva and Hilton Milwaukee properties. At this early stage of our fiscal year, I have no reason to adjust our previous estimate for capital expenditures for fiscal 2010 of an amount in the $50 million to $70 million range. We are still finalizing the scope and timing of the various requested projects by the two divisions and several additional projects would need to be approved in order for us to end up at the higher end of that range. The actual timing of the various projects currently underway or proposed will certainly impact our final capital expenditure numbers, as will any currently unidentified projects that could develop during the fiscal year.

Now before I turn the call over to Greg, let me provide a few additional financial comments on our operations for the first quarter, beginning with theaters. Box office revenues were up 1.4% during the first quarter as you can see with concession revenues down 1.9%. Now that we've owned seven Nebraska theaters for over a year, these year-over-year comparisons are pretty close to being apples-to-apples. We did close three leased theaters with 16 screens last year; one of which was a budget theater. Closing these theaters has minimal impact on our comparable operating results.

Our total attendance at our comparable theaters decreased 4.9% for the first quarter which can be attributed almost entirely to the summer weeks where we were going up against The Dark Knight last year. The impact of our overall attendance decrease was partially offset by an increase in our average admission price for these theaters of 7.2% for the quarter. An increase in our average concessions and food beverage revenues per person of 3.7%, premium pricing for our digital 3D attractions and UltraScreens contributed to the higher average admission prices and our expanded food and beverage offerings at newly renovated North Shore Cinema contributed to our increased average concession per capita. Our operating margins for this division decreased to 24.4% compared to 25.2% last year, due to the impact of the reduced attendance on our fixed costs and due to slightly higher film costs.

Shifting to our hotel resort division, our overall hotel revenues were down 19.2% and total RevPAR was down 21.1% during the quarter compared to the same period last year. As we've noted in the past, our RevPAR performance did vary by market and type of property, but all eight Company-owned properties were down this quarter. According to data received from Smith Travel Research and compiled by us in order to match our fiscal year, comparable upper upscale hotels throughout the United States experienced fairly similar decreases in RevPAR during our fiscal 2010. Our fiscal 2010 first quarter overall RevPAR decrease was a result of an overall occupancy rate decrease of 8.7 percentage points and an average daily rate decrease of 11.1%. With that, I will now turn the call over to Greg.

Thanks Doug. I will begin my remarks today with the theater group. As Doug shared with you, our attendance decreased this quarter compared to the same quarter last year, due entirely to the impact of The Dark Knight. We went on to post the second best box office results of all time compared to Titanic. That's a tough act to follow.

Yet despite the difficult comparison, we were able to match last year's record revenues and come close to matching last year's record fourth quarter operating income. The reason we were able to do that becomes evident when you take a look at how the movies performed the rest of the summer. If you would exclude the three weeks in mid-July, early August that corresponded with the opening three weeks of the Dark Knight, our comparable box office totals were up double-digit percentages over the prior year during eight of the remaining 10 weeks of our fiscal first quarter. While our best movie this year produced box office results over 30 % lower that The Dark Knight, there was a great deal of depth to this summer's products.

After The Dark Knight last year, we only had one other film produce box office receipts of greater than $3 million for our circuit. This year, we had four films reach that level. Three of which reached the $4 million level. In addition, as our press release notes and Doug expanded upon, our strategic initiatives to expand our digital 3D footprint, increase our number of UltraScreens with related reserved seating and expand our food and beverage offerings paid dividends this quarter as we were able to make up for some of the reduced penance with increased per capita revenue. This of course was all accomplished during a continued period of economic challenge and uncertainty. We don't take that for granted.

We believe we continually need to focus on providing the best possible value proposition for our customers, especially during these difficult economic times. Providing value can be accomplished several different ways. In addition to offering state-of-the-art amenities such as the aforementioned digital 3D, 7D, plus foot-wide UltraScreens, reserve seating with accompanying food and beverage vouchers and theatre dining, and the convenience of food and beverage outlets like Zaffiro's for before and after show time. Another cornerstone of our success can be found in our innovative, value-oriented trademark promotions, our family oriented Kids Rule program in the summer and Frosty Flicks in the winter are two such examples, along with our popular Young At Heart program for seniors and Spotlight Movie Night.

All these promotions provide opportunities to see films at reduced prices, resulting in an average ticket price that remains an outstanding value compared to any other form of out-of-home entertainment. Of course, good movies contribute significantly to the customer's sense of value and Hollywood has overall had more hits than misses during the past year. We've been in this business long enough to know that you will go through stretches where the misses outnumber the hits, but we're built to ride those periods out as well.

September, typically our slowest month of the year, is running ahead of last year so far. We hope that is a sign that Hollywood is hearing the calls for exhibitors to provide a more even distribution of quality films throughout the year, not just during the summer and holiday period. While it is nearly impossible to predict how an upcoming quarter's slate of films will perform, our press release attempted to highlight some of the films being released in the coming months that are currently receiving the most buzz within the industry. So while we eagerly await each Friday to see if that next hit will show up on our screens, we also continue to execute on the many strategies we've highlighted in our recent annual report and the prior communications with you.

Our press release mentioned several of these. We continue to be pleased with the customer response to our renovations and new Zaffiro's Pizzeria and Bar at the North Shore Cinema in Wisconsin. And we currently have up to three more UltraScreens on the drawing boards for other existing locations. We also noted in the release that in November we will be opening and operating under our management contract with Mutual of Omaha a unique upscale four level, five screen entertainment destination in Omaha, Nebraska which will provide us with an opportunity to offer in-theater dining in a multiple screen setting for the first time. As I wrap up my comments on this division, I think it is probably pretty evident that we remain excited about the theater business and the opportunity to provide increased value for our shareholders in both good times and bad.

With that, let's move on to our second division, hotels and resorts where the stories is not as upbeat in the near term. On the one hand, after four straight quarters of worsening RevPAR trends during fiscal 2009, we were pleased to report a slight improvement in that trend during the fiscal 2010 first quarter. But let's not kid ourselves, we were still down 21% during was what is typically our best quarter of the year. But this is a tough time to be in the lodging business.

I want to acknowledge the outstanding work of our management team to minimize the impact of this revenue decrease on our bottom line under very difficult circumstances. Our team was able to see that only 44% of our decline in revenues dropped to our operating income line while still providing the excellent service that our guests have come to expect from Marcus' hotels and resorts. In general, in this industry, anything less than 50% flow through is very very good.

As Doug shared with you, all of our properties reported reduced revenues this quarter compared to the prior year, but the amount of the decrease certainly varied by market and type of property. As we indicated in the past, in general the group business segment remains the most challenged. And properties that rely on that customer segment the most have generally been the most impacted during the past year. In addition, properties that serve destination travel markets or are perceived to operate close to the luxury end of the hotel sector have also seen a greater proportion of the decline in business travel demand.

During the recently completed summer quarter, the one twist to these ongoing generalities was the impact leisure travel may have had on a particular property. While business travel remains very soft, leisure travel was much better on a relative basis. Properties that could backfill their business customer with attractive value packages or leisure guests were able to perform relatively better this quarter. Our Grand Geneva property is a example of this dynamic. They were able to minimize their occupancy declines from reduced group business this quarter with increased stays from the leisure segment, albeit at a lower average rate in order to reduce their RevPAR declines better than the average.

In fact just as I discussed, the value proposition in our theatre group. Our hotel sales average this summer placed a significant emphasis on offering value packages to our guests in order to drive demand. This doesn't necessarily mean a significantly reduced average rate, although clearly rates have decreased. It also could mean offering packages that include added amenities such as breakfasts, spa treatments, et cetera.

Regardless, it is clearly a buyer's market right now and will likely remain so until we see an increase in business travel demand. With that in mind, we certainly are encouraged by some of the recent economic news that suggests better times lie ahead. We feel we are starting to gain some traction from the individual business traveler. However, the booking window remains very short. If this recovery unfolds like others have in prior cycles, it will likely take group business longer to return to normal levels as companies typically take a very cautious approach over these expenditures before restoring to the appropriate budgets. In the meantime, comparisons to last year will begin to get a little easier in subsequent quarters. If demand does not erode further, we would be in a position to continue to see improvements in the RevPAR trends in the future.

In our movie business, everyone likes a story with a happy ending. When I started this story on the hotel business, I would be will remiss if I didn't end it with the inevitable opportunity that can arise out of these difficult times. You've heard us say this before, but it is even more true today. We've built our Company to withstand the tough times like these. Our balance sheet remains in outstanding shape and there is a lot of elasticity to reinvest in our hotels when others are worrying about just making their debt interest payments. When the business rebounds -- it will rebound. We will be poised to continue to increase our market share and provide the best hospitality experience to our guests. And with a 42% debt to capitalization ratio, over $110 million revolving credit availability as of quarter end and $150 million universal shelf registration statement on file and effective with the SEC, we have tools in place to explore and follow through on potential growth opportunities that may arise during these difficult times.

In November, the The Marcus Corporation will begin its 75th year of being in the people pleasing people business. Those of you who have invested in The Marcus Corporation know that maintaining a strong balance sheet and focusing on long-term growth are philosophies that have defined our Company throughout these years. And we remain just as committed to these basic tenants today as we were when may grandfather, Ben Marcus, started the business all those years ago. We look forward to continuing to create -- to creating value for our shareholders, customers and associates in the months and years ahead. With that, at this time Doug and I would be happy to open the call up for questions you may have.

Thank you. (Operator Instructions). We will go first to Andrew Loeb from Baird -- I mean David Loeb, sorry.

We were going to both ask at once. That's fine. How are you doing, David?

I'm doing well. Hope you guys are doing well. Thank you. I had a couple and I think Andy is going to ask a couple of others. I apologize if I cover something that you hit on the call. I'm going back and forth between two things.

Greg, particularly in theaters, it sounded from the press release like 3D is becoming a much more important driver of revenues because a number of the more impactful films were 3D. Can you talk a little bit about how important 3D, food and beverage, other new amenities are? And how you might see the expansion opportunities for those amenities into other locations? And what kind of capital might be required for that?

That was quite a question, David.

Sorry.

Let me start with 3D. It is becoming more important. It's still just one screen in every one of our complexes, but it's an important screen. They tend to be [ten-fold] films. Hollywood is investing the money in the 3D process. They put it in the films they think will have the best draw.

The one thing -- the reason it's becoming important as well is they are running about an average of one a month. We actually are now at the point where we can devote a screen -- at least one screen -- in some cases, potentially two screens in each complex to 3D. What that involves is putting a digital projector, putting up a silver screen and then a special 3D component for the electronics. The capital has been that it requires -- we don't disclose the specific costs in capital. It changes because the deals with Hollywood are changing and aren't fully settled.

What we do is we look and say, okay, how do we think it's going to perform. We run it through our investment committee process. And if we see the right return on capital -- whatever capital it might take and this -- situations really differ each time. We -- especially given the tightness in the financing markets for digital equipment, we -- but if it meets our hurdles, then we will still make the investment. We continue to see it growing in importance. I don't have a crystal ball to tell you how long it will last and how -- different films have performed differently.

How many complexes have 3D today?

We have I believe 27 at the moment. We are -- we've indicated that is likely that we will be adding some additional ones in time for additional pictures that are coming out in the near term. But at the moment, we have 27 screens throughout our -- 27 theaters that have them so it's over half of our theaters.

The big one is Avatar in December. Everybody's got their eyes -- that's where the eye on the prize are. The Jim Cameron (inaudible) first film in a decade.

Just to expand on that a little bit, Greg. If you were to roll this out over the next several years to all of those locations, are we talking about single-digit millions of capital or into the double digits?

David, here is why it's hard to tell you that. Because what I can't tell you is -- because one of the main components of it is the digital projector. If digital rolls out, as it looks like it's happening and starting to happen across the country and it will happen. If you have a digital projector, you really don't have a significant capital cost to add 3D to that.

What is the incremental cost of 3D, it's really -- as we look at it -- when we make the investment, we realize eventually digital is coming and the money we spend on the projector will ultimately become a part of a larger digital program. It's hard to answer that question in isolation. If we end up up in two years in full blown digital rollout and I'm not going to put a timeline on it. That's just a hypothetical. You wouldn't have -- you wouldn't have to spend much more to have 3D.

I got it. Basically, the message here is this is a growth opportunity. It's a high return opportunity. And it's an open question how much capital will be required, depending on where digital comes to the 2D films.

If I could further [opuscate] your -- the answer is that Technicolor just recently is promoting, and I don't know if they're going to get anywhere with it, a film version of 3D where it's got a very low capital investment and you don't need a digital projector. You say it should be a temporary solution until the digital release -- digital occurs everywhere. They say, it's very high quality. I haven't seen it, but I've heard good things. It will depend on if Hollywood accepts it or not.

As I said, David, we have one screen for each of these 27 locations. Now I will tell you that the next wave that we are looking at -- we might have our -- for first time add a second screen at one or more of our busiest locations to hold pictures over at the busiest places. But right now, how the numbers have penciled out, you only need basically one a month -- you basically just need one auditorium dedicated to it. This capital is not significant.

Where I was going was trying to assess is this a continued growth opportunity and is it a manageable capital expense. The answer to both is yes.

I would agree with that answer.

The second half of that question, related to food and beverage, it seems like that again is a major growth opportunity. Also requires some capital and you are going to continue to evaluate that. Is that fair?

Exactly.

Okay. Last question, the one I ask every quarter; what do you think of the landscape today for acquisition opportunities? You talked about capital availability. In the release, you specifically called out both internal investment opportunities as well as potential growth opportunities that may arise in this environment. What are you seeing in terms of growth opportunities and when do you think you will see more of those?

David, I just read your reports and I'm waiting for the addendum for the changes in CMBS tax laws that they just announced a few days ago. Your report said a lot. There is a lot coming down the path. I don't know what is going to -- I think it depends. There are a lot factors coming to play; the issue of extend and pretend. I actually heard a great one the other day, a rolling loan gathers no loss.

That's brilliant. I can feel that.

To the extent that these things -- your report said it. There is a lot of properties that have a lot of trouble meeting debt service. To the extent these become available -- and we continue to see things, but -- like the (inaudible) we are still waiting for it to come down to part of that snake.

Great. Okay. That's very helpful. Thank you.

(Operator Instructions). Your next question comes from Andrew Whitman from Baird.

Hi, guys. I just wanted to get a little bit of a view as to the hotel business coming up here in fall and winter. You mentioned, Greg, I think that comps get a little bit easier. As you look ahead, do you think that the RevPAR mix goes more towards occupancy or rate from this point? Can you talk about how that might impact your margins if it's one or the other?

Let me start, then -- yes. We did put -- this is -- hopefully, this is helpful to everybody is that in our recently filed 10-K in the MD&A section, we reminded everybody of what the trends were last year. On the first part of your statement, yes, it's true that comps get easier, particularly in the second half of the year. As a general rule, as you know, the industry started feeling this as the second quarter -- our second quarter went along. October, November, it became a little more obvious that there was going to be some pain, but our RevPAR was only down 6.8% for that second quarter for example. And then it was down 13.5% in the third quarter and then it was down 23% in the fourth quarter. It's going to be a progression here as it relates to the comps. Keep that in mind.

As it relates to the rate occupancy issue, also clearly as -- if you look at that trend -- you just noted that -- that it's the same chart we put in there notes that even when things first started happening, the rates didn't change very much. But then it accelerated to down 2% in the third quarter, down 9.4% in the fourth quarter. And now here today, we reported it was down 11%. Clearly, that impacts margins and you've seen results our results that track accordingly. As Greg noted, it still is a tough rate environment and likely will be for the near term. It's not just a buyers market for the leisure traveler, right now as rates are coming up for renewal corporate rates, it's a tough environment. We don't certainly expect the rates to rebound very quickly. That's going to impact the margins a little bit.

Having said that, as Greg did note, on the occupancy side that's where we are hoping -- I mentioned, we are starting to see traction on the individual group -- individual business traveler. Still, the lead time is so short that it's hard to project out any time period, but at least we are starting to see some of that travel return -- the group business still does not. And until the group business which in general -- a generalization of our hotels, we are pretty reliant on the group business traveler. They take up the space that in turn then allows the rates everywhere else to go higher. That's really going to be the key.

That's really helpful. On the corporate negotiations, at this point, can I just try to get some color there? We've heard other people say that they're charging -- the ask right now, at least from the hotelier side, is that they are looking for flat over last year. Does that jive with what you are seeing in these early days of next year's negotiations?

That the ask is that?

You're starting point is you are going in and offering for 2010 what you offered for 29 -- for 2009.

I'm not going to -- the negotiations are ongoing right now. I think that would be -- I don't want to -- since we are having negotiations, I don't think it's appropriate to tell you -- to discuss what we -- where we are in terms of what we are offering or where we would negotiate to. What I would tell you is that as a strategy that we've got is that to the extent that we can not -- given that the economy looks like it's getting better and the hotel business as you all know is in a bit of a -- use the oxymoron term before the lagging indicator that it's -- that we are trying to -- we are trying not to lock ourselves into anything long-term. To the extent that group business -- we are not locking up long-term group rates at low rates. We are waiting to see where that goes. Whereas the corporate stuff that we have been negotiating now, we are negotiating the best we can.

That makes sense. Just a couple other questions then. Just on Omaha, I'm just trying to understand the terms of that deal that -- you mentioned that that's going to be a managed theater. Is that fee based? Is there any other things where you would receive a larger portion, either through ancillary businesses or that you set up around the theater management where you get a larger portion of the revenues?

No. It's strictly a traditional management fee. I believe there's an incentive component like in the hotel business. It will show up in our -- the revenues will not be grossed up in box office concessions. It will show up in the other revenue line.

Then I just wanted to touch base a little bit -- I'm not trying to get any guidance on a gain that might be recognized from the asset sales, but at least want to try to get an order of magnitude about the amount of capital that might come in. Are we talking $1 million, $10 million, $50 million in asset sales? Just trying to get a view --

Nothing material. Nothing that will probably impact the type of analysis you are doing. When I mentioned that, we are talking about one up, smaller things. The same stuff we have been trying to sell in the past as well. We still have -- we have [Jaymont] joint venture that's out there. We've indicated that that's on the block. We still have miscellaneous real estate, restaurants, some land, some things along those lines. On a smaller scale, that's the type of thing I was referring to in my comments.

That's fine. Thank you very much. That helps.

Your next question comes from [Marla Backer] from Hudson Square Research.

Hi, guys.

Hi, Marla. How are you?

Good, thanks. How are you?

Good, thanks..

Can you go into a little bit more depth on the 3D that you've installed? I think you said 27 of the complexes now. Are you seeing substantial variance in terms of the -- when you have to same film playing in both 3D and 2D, are you seeing a specific substantial uptick on the 3D versus the 2D which would be consistent with what the industry is seeing overall? And any differences between your -- you have Dolby as well as (inaudible). Are you seeing differences in those two formats, in terms of the -- not the consumer preference, but in terms of your ability to manage the different formats, specifically the returnable versus the disposable glasses?

Two things. On the first half of your question, our experience has been very consistent with the things that I've read on a national level, in terms of the difference in 3D versus 2D. In general, I think it's been two to three times on a per screen basis.

Now, that's not -- to be fair about that when you look at that over the life, you may initially start off with a film playing on two screens, 3D and a 2D screen, and as it holds over, the 2D screen might go away and you keep the 3D screen. When you look at numbers, you have to keep that in mind. But absolutely, we are still seeing that -- picture by picture, it's not always the same, but on the average we are certainly seeing that favorable variance in performance.

Of our 27 locations, I don't have exact count, but we are mostly today Real D. We do still have the active glasses. It's actually not the dolby, a company called Expand. I will just say that the last wave that we did was Real D. We certainly -- this -- I don't think that anyone can say there is any customer differential at all.

The economics between the two, they are just different. With the nondisposable glasses, you have to deal with that. There is a labor component associated with that. You've got to build that into the model. With the Real D, there is a silver screen that you've got to put it. You've got to build that into the model. There is different economics between the two.

The Technicolor technology that you mentioned, this is a technology that they've just launched? Are there any films that are coming up in this technology or this is all in the drawing board state right now and hasn't really been launched commercially yet?

All I know is that I've read in the press, Marla. And I think I assume you read the same thing, is that they've got it. They are showing it to people. Whether anybody is going to buy on or not is your guess is as good as mine. The one thing that I have read -- I have not talked to anybody from Technicolor. The one thing I did read was -- that this not pitched as a permanent solution for 3D, but it was as good polarized glass effect as opposed to the [annual] that they used to use. And that -- but it was still temporary until digital takes over.

Okay. Thank you.

Thank you. At this time, it appears there are no more questions. I would like to turn the call back over to Mr. Neis for additional closing comments.

Thank you. And we certainly want to thank everybody for joining us again today. We hope to see some of you at our annual meeting on Wednesday, October 14 at the Pfister Hotel. For those of you who cannot attend, we will be webcasting the meeting as usual. We also look forward to talking to you once again in December when we release our second quarter fiscal 2010 results. Thank you and have a great day.

Thank you for your participation in today's conference. You may disconnect at any time