Sleep Number Corp (SNBR) 2008 Q2 法說會逐字稿

Thank you for standing by and welcome to the Select Comfort second-quarter 2008 earnings conference call. At this time all participants are in a listen-only mode until the question-and-answer period. (OPERATOR INSTRUCTIONS) Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now I'd like to turn the meeting over to your host for today's call, Mr. Mark Kimball. Sir, you may begin.

Thank you, Matt. Good afternoon, and welcome to the Select Comfort second-quarter 2008 earnings conference call. Thank you all for joining us. I'm Mark Kimball, Senior Vice President and General Counsel. With me on the call are Bill McLaughlin, our President and Chief Executive Officer, and Jim Raabe, our Senior Vice President and Chief Financial Officer.

In a moment I'll turn the call over to Bill. Following our prepared remarks we will open the call to your questions. Please be advised that this telephone conference is being recorded and will be available by telephone replay. It also will be archived on our website. Please refer to the details set forth in our news release to access the replay on our website.

The primary purpose of this call is to discuss the results of the fiscal period just ended. However, our commentary and our responses to your questions may include certain forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties outlined in our earnings release and discussed in some detail in our annual report on Form 10-K and other periodic filings with the SEC. The Company's actual future results may vary materially.

Before I turn the call over to Bill -- we have prepared a few slides to supplement our discussion today. To access the slides, please go to the Investor Relations section of our website at selectcomfort.com/investors. I will now turn the call over to Bill for his comments.

Thanks, Mark. Good afternoon, and thank you for joining us. Our second quarter is always the most challenging because it is the seasonal low point of our sales. This year the second quarter was particularly demanding, given the need to demonstrate progress in moving the Company towards profitability in the face of an extremely challenging business environment. It's clear that our actions have begun to pay off, as our second quarter met key performance expectations, and we made real progress in stabilizing sales and reducing our cost structure. Having said that, we recognize that we still have work ahead of us.

As you'll recall, the plan we shared during our first quarter call focused on returning our business to profitability in the second half of the year. This plan involved specific initiatives to reduce costs, increase margins, and preserve cash, while selectively investing to stabilize volume. Specifically, we said that we would implement cost and margin actions to benefit the Company by approximately $30 million in 2008, and stabilize volume declines by restoring media spending to year-ago levels. We did, however, anticipate an operating loss in the second quarter, given that this is historically our seasonally low point of sales. Importantly, we did what we said we would do in the second quarter, stabilizing revenue and profit versus the first quarter. And we are now more strongly positioned to achieve our second half goals.

Turning to specifics in the quarter, revenue declined versus prior year by 15%, which is far from our ultimate goal, but is about the improvement we were looking for over first quarter's rate of negative 22%. On a relative basis, earnings improved ahead of first quarter on $16 million less in sales. And the Company achieved its cash preservation goals during the quarter, with strong work done controlling inventory and reducing CapEx.

During the quarter we restructured our bank agreement, a significant accomplishment, especially in the current financial sector's challenging environment. And we appreciate the work of our team and our bank partner's support.

While we are no means satisfied with declining volume and continued operating losses in the quarter, we are increasingly confident that we are controlling all that we can control, and executing well against our plans. We are now focused on the second half and remain committed to delivering a profit, despite continued challenging market conditions.

Looking ahead, I don't believe anyone can predict what the macro environment will look like over the next six to twelve months, let alone the next three months. Therefore, our goal is not to try to project the future economic situation, but rather to focus on maintaining flexibility through actions within our control, specifically those that focus on cost and margin improvements, product innovation, and selling and marketing.

Let me begin with costs and margin. Incremental to the actions we took in the first quarter, we have identified an additional $6 million in savings and margin improvement that will benefit the second half of the year. These additional enhancements will allow us to at least offset what could be up to another $3 million in incremental inflation, driven by oil and currency risks. This margin protection comes from stronger productivity across the Company, and from additional tactical price increases and delivery charges implemented in July.

We have also identified an additional ten stores that we plan to close, which will bring our total closures to 25 stores. Initial EBITDA benefits will be limited, as there will be offsetting revenue decline. However, closures will improve profitability as we transfer sales within a market and spread sales across lower fixed costs. We will continue to evaluate additional store closures for EBITDA growth.

In addition to tightly controlling expenses, margins, and cash, we intend to further stabilize sales. Our second-half plans call for introducing exciting product innovation in both beds and bedding accessories, and continued investment in marketing. We expect to spend advertising at year-ago levels, while maintaining the flexibility to adjust commensurate with sales performance.

As you know, marketing is an important driver of consumer consideration and sales. As both a branded manufacturer with relatively low awareness, and a multi-channel retailer benefiting from destination visits, we are acutely focused on our marketing approach. In the second quarter it was difficult to definitively read the impact of the revised advertising that we introduced in March. The external environment presented ups and downs through the quarter. We saw improvement in both volume trends and brand awareness tracking when advertising was launched; however the lift was not consistent through the quarter. And, while our sales trends did improve, we are making further improvements to our marketing.

In the second half we are adjusting our media plans to enhance efficiency, and we are making the message even more relevant and actionable for the consumer today. Our testing shows that our unique benefit of individualized comfort and its importance to better sleep are highly important and relevant to our target consumers. And we know that spending on advertising continues to directly impact sales -- and, the better the execution, the better the impact. So improving the impact of our Sleep Number campaign continues to represent significant increased opportunity for our business.

We also remain focused on product innovation, and we are on track to launch a new bed model nationally in September, and to introduce several new accessory programs throughout the second half. We expect our enhanced bedding accessory business to contribute incremental revenue, as well as to bring in incremental customers to consider Sleep Number bed purchases. Sales momentum in accessories increased in the second quarter to 10% of our total sales, and we expect this to build, through our new initiatives, which include the unique create-your-own-pillow launch, to as much as 15% or more of total revenue in the fourth quarter.

The senior team and I are more committed than ever to restore profitability this year. We are now focused on execution of our plans and selectively pursuing additional opportunities to create further flexibility and improvement. With normal seasonality, and relatively stable conditions, we believe our initiatives position us to deliver a profitable second half.

I'll now turn the call over to Jim for more detailed analysis on the second quarter and how it projects into the second half. Jim?

Thanks, Bill. It's been a challenging first half of the year, but we feel we have made significant progress, adjusting our margin structure, aggressively managing our cash and working capital, while investing against our sales opportunities.

I'd like to start by providing an overview of our second quarter results. Sales in the quarter declined 15%, from $179 million a year ago, to $152 million this year. Sales in all channels declined on a year-over-year basis, with comparable store sales down 20%. Sales have fluctuated on a week-to-week and month-to-month basis, with no discernable trend, other than to say we, along with the rest of the mattress industry, are certainly experiencing a challenging consumer environment, one that we expect will continue for the foreseeable future.

Net operating profit declined from $4.8 million in income last year to a $10.3 million loss in the second quarter of 2008. In addition to a decline in sales, lower gross margins also negatively impacted our profitability. While product mix is in line with a year ago, pricing actions have covered cost increases but have not restored gross margin percent. The most significant cost impacts compared to a year ago have been fire-retardant regulation, which took effect mid-year 2007 and which will began to lap in the third quarter, and rising oil prices, which directly affect logistics costs and input costs for several of our components.

We have a number of initiatives and plans to restore gross margin percent to historical levels, which will improve margins in 2009 and beyond. For the remainder of 2008, we expect to maintain gross margins of approximately 60%.

Below the gross margin line, our selling, general, and administrative costs improved by approximately $4 million compared to a year ago. Marketing costs were slightly lower, even though media was essentially flat to a year ago at $25 million. Selling costs were slightly higher than last year, with 18 more stores than at this time last year, partially offset by cost reduction initiatives and variable costs. G&A costs were $2.5 million lower than last year, reflecting our various restructuring actions. In addition, we took store asset charge-offs totaling $700,000 in the quarter.

In an important indicator that our initiatives are stabilizing the business, our second-quarter performance improved compared to first-quarter results. Our rate of sales improved to minus 15% versus minus 22% in the first quarter, and we reduced our operating loss to $10.3 million, compared to $11 million in the first quarter, despite $16 million lower sales due to seasonal trends.

Sales trends improved due to factors outlined in our first-quarter call. First, we restored media investments to equal to prior year levels, while media spend declined by 23% in the first quarter. Second, the factors impacting our decline in wholesale sales generally, and QVC in particular, were isolated to the first quarter. And third, our sales mix improved, due to the introduction of our 6000 model and a reduction in our entry-level price point activity.

Our gross margins improved significantly to 59.6%, 200 basis points higher than the first quarter, this despite the fact that lower margin wholesale sales made up a greater percentage of sales in the second quarter. The improvement reflects several actions -- staffing reductions in our plants, improvements in product mix, and price increases, all of which more than offset the pressure of commodity cost inflation.

Selling, general, and administrative expenses declined by a total of $7.5 million from first-quarter levels, including $2 million in G&A. While some of the decrease is associated with sales levels, it also reflects reductions in staffing and discretionary spending in our stores and our home office.

In addition, our store count declined from 481 stores at the end of the first quarter, to 478 stores at the end of Q2. We plan to close an incremental 10 stores, for a total of 25 store closures during the year. We now expect 477 stores at year end, versus our original plan of 493 stores.

We continue to evaluate margin opportunities and are making further improvements to productivity and discretionary spending, as Bill outlined.

On the balance sheet, we made progress with our cash flexibility and working capital management. Despite difficult economic conditions and challenging sales trends, we have maintained positive operating cash flows for the first six months of the year, covering the lowest seasonal sales period. We have significantly reduced inventory levels by $12 million since the beginning of 2008, and $5 million since the end of the first quarter.

We also have renegotiated the terms of our credit agreement in a difficult banking environment. We worked with our bank partners to restructure our debt covenants to reflect current economic conditions.

Our priority for the balance of the year is to return to profitability. We are assuming no improvement in macro trends, but do expect historical quarterly seasonal sales comparisons to hold. As noted in our release, second quarter sales historically are 10 to 15% lower than other quarters. We are focused on what we can control, our cost structure and working capital. We have now reduced costs and offset inflationary pressures by approximately $50 million on an annual basis, and continue to look for opportunities to further adjust.

I would now like to turn it back to Bill for some final comments.

Thanks, Jim. Let me just summarize by emphasizing that we believe we have stabilized the business and are now single-mindedly focused on returning the Company to profitability in the second half. We will continue to benefit from actions we took in the first quarter, along with the additional initiatives we have recently identified to further stabilize the business and support our unique brand.

Thank you for joining us today. And Matt, I'd like to now open the floor to questions.

Thank you, sir. (OPERATOR INSTRUCTIONS). Our first question comes from Budd Bugatch of Raymond James. Your line is open.

Good afternoon, gentlemen. I know it's difficult out there. I am glad to see some of the improvement you've demonstrated in this quarter and some of the cost savings that you've done. So I hope that continues and I hope the year unfolds better. If you would, just address for me a little bit on the comps. If I look at the two-year and three-year stacked kind of comp rate for the retail segment, it seems to me that you're running pretty much similar at the two-year rate right now, or you were, even with the additional media spend. Do you see that improving as you go forward in the third and fourth quarter? Can you give us any feel about that?

Well, Budd, as you know, we don't provide guidance overall, but I think, as we said earlier, we expect that we're going to see the normal -- we're planning for the normal type of seasonality, which would give a different outlook on the two-year comp versus what we've experienced recently. And I don't think we have any reason to believe that we shouldn't see that seasonality at this point.

So you think it will be slightly better than where we've been running for the first six months of the year, which has been relatively similar either the two or three year?

If you're looking at it on a two-year comp basis, yes.

Right. And did the quarter unfold differently to give you that kind of -- did you have momentum coming into the beginning of the third quarter that gives you some comfort that that's correct?

I think as we said in the comments, there's been a fair amount of movement in both directions without a lot of consistency throughout the quarter, but no specific trend that I would point to that says that Q3 is going to be any different than what we've seen in Q2.

Okay. You talked a little bit, Bill, I think, about increased, enhanced efficiency with the advertising. Could you maybe put some meat on those bones and give us an idea, without going into anything that might be a competitive issue, as to what you might be thinking of in that range? Is it a different campaign or is it more promotionally based, in terms of pricing? Or how should we think about that?

Budd, when I talked about the efficiency adjustments that we were going to make in the third quarter, it was really more about the national versus regional or local emphasis of the media plan. In the second quarter we had a fairly heavy component of the media plan that was more locally oriented around our highest growth potential markets. And what we showed -- what we proved to ourselves is that we can influence the business, but that local spending premium was such that we think there's a better way to do it by allocating more of our weight on a national basis. So when I talk about efficiency, that's really what I was implying.

And going forward we will continue to evolve the Sleep Number campaign emphasizing personalized comfort. The SHeDAISY spot was always a single spot within that Sleep Number campaign and our intent is to continue to develop around personalized comfort, but making it even more relevant for the consumer in the marketplace today.

So the mix will gravitate more to national, even in the face of what's going to be, obviously, a cluttered advertising calendar until early part of November?

We have the flexibility within our media plan to move it around between print, particularly with print and radio, to achieve what we want to achieve on a reach basis.

Okay. And my last question, and then I'll let others have it, is can you kind of give us a feel of gross margin at retail in the quarter, year over year, and how that fared? I know you said 60% overall margin for the rest of the year. I take it that's in each quarter or there will be -- should be some difference, I guess, quarter by quarter. But how did retail gross margins fare year over year and what do you see for that?

The retail gross margins improved on a similar basis, on a year-over-year basis actually a little bit better than what the overall margin is. So we're in that kind of low 60's, 62 kind of plus range from our Company-owned channels. And that's a similar improvement to what we saw in the business as a whole.

Okay. Thank you very much. Good luck on the next quarter and the next two quarters.

Our next question comes from Tony Gikas from Piper Jaffray. Your line is open.

Thank you. Good afternoon, guys. A few questions -- historically category sales, declines in category sales, have been relatively short-lived. Is there any reason to think that this industry downturn could be prolonged? What's perhaps different this time around, recognizing maybe the housing market is worse than previous downturns that we've seen?

Second question -- how about consumers? Do you see them trading down or are they holding off on purchases? Some other higher-end mattress manufacturers have indicated that consumers are holding off and not necessarily trading down. Continue to have interest in that.

And how about sales trends during the first few weeks of July -- have they shown any improvement to the quarter? Then I have one follow-up.

All somewhat difficult questions to answer for different reasons. In terms of commenting on the decline of the category and how long we would anticipate it, as I said, I don't think anybody's got a real crystal ball on how to project. And it's really tied to consumer confidence and I think what we are doing is influencing what we can influence. And I think, from a Select Comfort standpoint, our share of the category is still so low that our focus is on presenting our product benefits, and how they're relevant to people today, and the value of our product today.

From a consumer holding off, and I think the second part of the question was, are they trading down? As Jim indicated in his comments, our average selling price actually increased during the quarter. And so we're seeing a continued solid mix. Our issue is total overall units and, to the degree that there are people not entering the market, possibly holding off, we don't -- I don't have a way to comment, really, on whether they're holding off or not. I don't have that kind of a measure.

In terms of sales trends within a quarter, we just don't talk about that, by rule.

Okay.

The one thing I would add, Tony, as I think you're aware, on your first question, I think it is difficult to predict how long it lasts. I think we feel as if we're pretty well-positioned for when it does turn around and, as you're probably aware, historically within the industry, when the industry turns and consumers start buying, there's a lot of pent up demand. So we're just trying to make sure we're best positioned for when that happens.

Okay. And then my last question, -- kind of with the valuation coming in to where it has over the last year, have you had any interested buyers, anyone knocking on the door at this point?

We cannot comment on any type of speculation on that (inaudible).

All right. Thanks, guys. Good luck.

Our next question comes from Joel Havard of Hilliard Lyons. Your line is open.

All right. Thank you. Good afternoon, everybody. Jim, I don't know if this one would be for you, but could you give us a little tutorial on how your relationship with UPS is shaking out, given the fuel price environment?

Well, I think our relationship is good. We've always been -- they've been a strong supplier for us and one in which we've got a very committed relationship with, in a number of respects, in particular, the fact that it's door to door. But I think the relationship is as strong as it ever has been. They obviously have pressures from fuel that are very directly impacting their business. And that's a pressure that we discuss with them and that we work with them on the pricing side.

That's really the heart of my question. Are you all set up, and I'm sorry I don't know this offhand already, but are you all set up on sort of, let's call it a contract that covers certain volumes at certain prices for a certain length of time? Or is this more flexible in nature, which could go either way, I understand.

We do have a contract that is set up, but I think that there are surcharges available to them when there are increases like we're seeing in the fuel environment.

Was that a big problem in Q2?

I wouldn't say any more so than would be indicative of just what's going on with oil prices overall.

All right. That's all I've got right now, guys. Thanks. Good luck.

Our next question comes from Mark Rupe of Longbow Research. Your line is open.

Hi, Bill and Jim. Just a quick question -- you mentioned the accessories business being, I believe, 10% in the second quarter. And I believe you said it was going to ramp to 15% in the fourth quarter. I'm just curious to see how that related to previous fourth quarters. And I know that -- I believe that's a lower margin segment for you and I was just curious to see if that's built into kind of the 60% gross margin assumption.

It's about two to five points higher than the historic. And you're right historically the gross margin has been a bit less. The total contribution margin has been about equal. But we're doing some pretty good work on improving the gross margin of that line as well. So yes, it has been incorporated in our forecasts.

Okay. And then on the September new mattress model introduction -- can you provide any kind of information on that?

I can't provide much more than it is in the premium or the upper price point segment of our line.

So maybe fill in the seven and the nine?

It's in that area, yes.

Okay. Thank you.

Our next question comes from Bob Evans -- your line is open -- of Craig-Hallum Capital.

Good afternoon, everyone, and thanks for taking my question. Can you talk a little more about what we should think about for free cash flow trends, second half and for the year?

Well, roughly getting back to profitability in the second half obviously gets us to -- in a positive EBITDA situation, because we'll (technical difficulty) non-cash comp and depreciation we're going to run in the range of $30 million-plus in non-cash charges. So getting back to profitability in the back half obviously gets us pretty positive there. And, as we've mentioned, we have about $30 million planned for CapEx, some $20 million of it we spent in the first half. So we've got about $10 million left for the balance of the year. From a working capital standpoint there could be some fluctuations, but I would expect that, roughly, we're going to be slightly positive to slightly negative overall from a free cash flow in the back half. But we should be pretty close to even, assuming we get back to profitability in the second half.

So we shouldn't expect a lot out of working capital from a free cash flow standpoint? View it more net-net neutral?

Yes. I mean, we've done really good work on the receivables and the inventory side of things. And, in particular, on the inventories, as we get to the back half and the accessory business that we're building will put a little bit of pressure on accessories, on the inventory side, and then similarly on receivables, I think. You know, there's a little bit more QVC business and those types of things in the back half, so the receivable balances could go up some as well. So wouldn't expect that that improvement that we've seen in the working capital in the first half will continue in the back half. We'll continue to get the improvement; we just won't build on it.

Sure. And I know it's early, but how should we view CapEx for next year? Should we -- you've had some larger items this year that probably don't recur, so what should we think about kind of as we head into next year?

You know, we have not provided a specific number there, but as we're thinking about 2009, certainly our focus is getting to positive same-store growth. And until we get to positive same-store growth, we're not going to do a lot with stores. So that's obviously a big piece of our capital. Our SAP will be completed in February and that was a large capital item. So minimal CapEx items, maybe in that $5 million to $10 million range, although that's obviously subject to changes as our planning develops.

Okay. And I know you've talked about profitability in the second half, but can you give us some sense of how you view the quarters second half? Is that in total, or do you view both quarters as being profitable? Or can you give us a little bit of sense of how you view Q3 versus Q4.

We're really only speaking to the second half, from a total standpoint. There's obviously kind of seasonal volatility that occurs just naturally within those two quarters. So we'll just have to see how that plays out from quarter to quarter, [see how it plays.]

Okay. And SHeDAISY marketing campaign -- is that something that you're going to continue second half here, or is that going to be modified at all? Can you give us some level of how successful or not successful that's been?

Again, the SHeDAISY spot was an individual execution within the campaign. The campaign will continue into the second half and there will be -- well, assume there will be continued use of SHeDAISY as it exists, but what we're building on is the insight that personalized comfort leads to better sleep. And that is getting developed in other campaigns as well and other executions -- I should have said other executions within the campaign. And that will be rolled out through the second half of the year.

So we should expect to see new spots from a radio and TV standpoint?

The mediums are not yet decided. We're working on the development of the concepts and everything from infomercial to radio and print. And so you'll see continued evolution of the creative through the second half of the year.

Bob Evans. Okay. Thank you very much.

Our next question comes from Steve Denault of Northland Securities. Your line is open.

Hey, guys. The questions about -- it looks like from a retail standpoint the price mix was up considerably. I'm calculating 8.5% in the quarter. Sounds like the 6000 intro may have contributed to that, and I think you referenced maybe the 3 or 4000, some of those entry-level price points, there weren't a lot of transactions at that level. Number one, am I calculating it correct? And, number two, can you give a little bit of color in terms of what you think went on, where you -- the traffic that was coming through the store, were you getting the trade up or was there any change at the store level in the quarter?

Yes, I'll just to speak to it a little bit and let Bill add in. But if you're looking at it relative to the second quarter, certainly the 6000 has contributed to the overall mix and it's created an opportunity for our sales professionals to address a price point that really wasn't available to them, which I think is a real positive for them. In addition, I wouldn't say the 3000, 4000 that we're not seeing transactions there. It's more back to the historical mix that we've seen, where in the first quarter it was the heavier mix when we were doing some things from an advertising standpoint to really highlight those price points and that really drove more traffic and more volume at those entry-level price points. But I think our mix in the second quarter was more normal from a historical standpoint.

And I think the other piece that I will add to that is that certainly part of what's contributing to the ASP is things like accessory sales and the incremental sales that we're getting there. Because, as you know, the ASP a lot of times from our perspective gets measured by total sales divided by mattress units. And so you're certainly seeing some improvement from that as well. Do you have anything to add?

You did a pretty complete job, between the 6000 and changing the promotion schedule and the accessories. The only thing I would add is that we have taken some tactical pricing through the end of last year and right through this year. You're seeing some of that reflected in that average selling price increase as well.

So let me ask you this. If the price mix at the retail level was up 8.5%, that implies that unit volumes were down 28.5%, which is a little bit worse than what we've seen coming out of both industry and some other alternative bedding manufacturers. How do you think about that? How should one interpret that?

I'm trying to figure out your 28%.

Well, when you look at the -- you had a 20% comp at the retail level, but your average mattress sales per unit was up 8.5%, which implies that's your price mix. The other component of a comp would be volume. So the two, in effect, net to your comp.

Well, I would say the other thing that you're looking at as well, and one of the reasons why the ASP growth was so high was because we did have a wider mix last year in the second quarter and some other activities as well. So I think there's a number of variables going on there. But you know, it's a difficult environment overall. And I think we are doing the things that we need to do in order to really get the volume that we need to get back to profitability in the second half.

Okay. Thank you.

Our next question comes from Stanley Elliott of Stifel Nicolaus. Your line is open.

Hello. Thank you for taking my call. Most of them have been answered, but are there any sort of covenant issues since the amended agreement that we need to be aware of?

As we said -- as you're aware, we have amended the agreement and we believe that that amendment provides flexibility that we need to operate in the current environment.

Okay. And when we're looking at interest expense going forward, something similar to what was in the most recently reported quarter?

Should be higher going forward because the amendment took effect in the middle of the year and the rates are higher in the new agreement.

Great. That's all. Thank you very much.

Okay. And our last question comes from Robert [Dannaher], an individual investor. Your line is open.

Yes, Bill and Jim, I have a question for you regarding the RV industry. I'm an RVer myself and I bought an air mattress nine years ago to put in my RV. And I noticed you had a dramatic improvement in sales in the higher-end RVs, putting Select Comfort beds in there. I'm curious to know, is that direct sales from you? Or is it through a third party?

It's sales that we have directly to the RV manufacturers. We've had a lot of success selling into that RV manufacturer business, but we do also sell through some RV retailers as well, where we sell a bed that can be installed into an RV as well. So it's been a combination of those things.

You sell directly to the RV industry like Camping World and likes of that?

Yes. That's right.

Are those considered doors with your company or is that just --

No. No, they are not. The only things that are considered doors are our stores and then we also report a -- excuse me -- we count stores in our retail and doors in our retail partners, but the camping world is not included in the door count for retail partners.

All right. Well, congratulations on your improvement in the RV industry. You're doing a great job there. Keep it up. Thank you.

Well, that will conclude our call for the second quarter. Thank you all for joining us and we thank you for your support. And we look forward to next quarter's call. Thank you.

Thank you for participating in today's conference. At this time, all parties may disconnect. Thank you.