HEXO Corp.
Q2 2020 Earnings Call Transcript

Published: 30 Mar 2020

[Operator:]

Good morning and welcome to HEXO Corp.'s Second Quarter Fiscal 2020 Earnings Call. All lines have been placed on mute to prevent any background noise. After the presentation, we will conduct a question-and-answer session. . Thank you. Please note that this call is being recorded today, March 30, 2020 at 8

[Jennifer Smith:]

Thank you, Jessica. Good morning. I am Jennifer Smith, the Director of Investor Relations for HEXO Corp. Thank you all for joining us this morning for our 2020 Q2 earnings call. We will start with a presentation by our CEO, Sebastien St-Louis, followed by a recap of our Q2 quarter results by our CFO, Steven Burwash, before opening the floor to questions from our financial analysts. Before we begin, I would like to remind you that today's presentation contains forward-looking statements that involve known and unknown risks and uncertainties and other factors that could cause actual events to differ materially from current expectations. The forward-looking statements are based upon and include the company's current internal estimates, plans, expectations, opinions, forecast, projections, targets, guidance or other statements that are not statements of fact. Any statements contained herein or discussed during the presentation that are not statements of historical fact may be deemed to be forward-looking statements. Such statements can often, but not always, be identified by the use of forward-looking terminology and other similar words and expressions that are predictive or indicative future events and future trends, including negative and grammatical variations therein of statements that contain certain events or conditions may or will happen or by a discussion of strategy. These statements should not be read as assurances of future performance or results. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from those implied by such statements. Those risks and uncertainties include, but are not limited to, those relating to the company's ability to execute its business plan; renew required permits and licenses and related regulatory compliance matters; implement its growth strategies; obtain and maintain financing on acceptable terms; maintain and renew required licenses; maintain good business relationships with its customers, distributors and other strategic partners; keep pace with changing consumer preferences; protect intellectual property; manage and integrate acquisitions; retain key personnel; and relating to the company's competitive advantages, the development of new products and product formats for the company's product, changes in laws, rules, regulations and the absence of materially adverse changes in the industry or global economy.

[Sebastien St-Louis:]

Thank you, Jennifer. Good morning, everybody. There's no way we can begin this conference call without discussing COVID-19. This virus is having an enormous impact on humanity. It'll certainly have an impact on the global economy. The dramatic steps taken by our federal and provincial governments, along with most other nations of the world over the past few weeks, have presented significant challenges for all businesses, and ours is no different. As per our press release on March 24, the cannabis sector has been deemed an essential service in Quebec and Ontario. While we're fortunate enough to keep operating our business, we've created a set of priorities that will guide our actions during this difficult period. Number one is to protect the health and safety of our employees. Number two to continue to supply high-quality cannabis to our customers. And number three, our operational effectiveness, strategic priority to focus on our near-term goal of EBITDA positive. It's difficult in these early days of social distancing and self-isolation to know the long-term impact on our business. As long as we can keep our people healthy, we're confident in our ability to produce.

[Steve Burwash:]

Thank you, Sebastien. Hello, everybody. We'd like to go through our Q2 quarter results, and I'm happy to report that there's been some positive movement for HEXO.

[Jennifer Smith:]

We will now take questions from analysts. Due to the large number of analysts joining us today, I would ask you to limit your questions to two at a time. You're welcome to rejoin the queue after that. Thank you.

[Operator:]

Thank you. . Your first question comes from David Kideckel with AltaCorp. Please go ahead.

[Venkata Velagapudi:]

Thank you very much. This is Ven pinch-hitting on behalf of David. First of all, congrats on the quarter. Just wanted to know more about your positive EBITDA guidance for 2021? For instance, it would be useful to know your estimated percentage of revenue coming from cannabis derivatives in 2021 and the range of gross margins you are expecting to achieve.

[Sebastien St-Louis:]

Thank you. We are expecting to improve the amount of products that are coming from 2.0 in derivatives and that that's the fundamental problem for our whole industry right now. How much revenue can we generate from trim, which is effectively a byproduct of production in order to get the best portfolio margin available? So, we're not giving specific numbers in our forecasts. We can tell you it will be improving. In terms of a portfolio gross margin, we're targeting 40%.

[Venkata Velagapudi:]

Okay, thank you very much.

[Operator:]

Your next question comes from Aaron Grey with Alliance Global Partners. Please go ahead.

[Aaron Grey:]

Good morning and thanks for the question. First, I just want to touch back again on gross margin. It was nice to see the sequential improvement during the quarter. Can you talk a little bit more in terms of what drove that? I know you mentioned the change in yields, but also heard you mention a one-time cost that should go away. So, is there anyway you could kind of quantify that? And then also, going forward, in terms of once the Belleville license is received, how that helps to improve the gross margin as well in terms of improved automation as well? So, just any kind of color to help quantify the one-time hit during the quarter and how that should be normalized? Thanks.

[Sebastien St-Louis:]

Yeah. Thanks, Aaron. So, it's not just yields. It's across the organization, we've taken – funnily enough, we found opportunity amidst this COVID thing. We've had a renewed focus on health and safety, which has really driven efficiencies. So, that's been a huge success. When I say one-time costs, the purchases in the quarter, some onerous contracts, et cetera. So, if you normalize and if we only had sold in the quarter, or had only needed to take into account current costs of our product, current manufacturing costs, we can see the 40% right now. And I remind everybody on the call that that's including Original Stash, which accounts for a large portion of our sales. So, very, very bullish on our ability to drive long-term portfolio margin at 40% once we get these one-time issues out of the way.

[Aaron Grey:]

Okay, thanks. That's helpful. And then, just second one will just be just touching on in terms of market share for Quebec. You mentioned the strong share again during the quarter. And then, maybe you could help kind of quantify the market share and how it's kind of compared quarter-over-quarter for Quebec. And then just any color you've some kind of quarter-to-date just with kind of a hoarding product that people took in anticipation of moving in isolation with COVID-19? And then also, just any color you could provide in Ontario where you also did launch Original Stash and what you've seen in terms of market share trends there as well? Thank you.

[Sebastien St-Louis:]

We're still completely dominant in Quebec. We've chosen to share the 33% number as we think that's a good, sustainable, conservative number. Some of the monthly data just blew that out of the water, quite frankly. But we're waiting for that to normalize. In any consumer packaged goods business, it's highly unlikely, almost impossible, that any brand will maintain above a 40% market share. And so, we're being conservative there, but we're definitely number one and not going anywhere. In terms of Ontario, the introduction of some new products have worked very well, but we've really focused in our attention on servicing the Quebec market fully. The other markets in Canada, we're really focused on 2.0 until we can properly service them with flower, so as a full line offering. So, in terms of total national market share, we're amongst the top. If you look at adult use market share, you compare us to any of the top five names, we're right in striking distance and we're quite pleased with those results and we anticipate that to continue.

[Aaron Grey:]

Great, thanks.

[Operator:]

Your next question comes from Rupesh Parikh with Oppenheimer. Please go ahead.

[Rupesh Parikh:]

Good morning. Thanks for taking my questions. So, I guess, Sebastien, getting back to the comments on getting to a positive EBITDA near term, any more granularity you can provide in terms of the timing of achieving that target?

[Sebastien St-Louis:]

Right now, we're still – we're shooting for within the next couple of quarters. But in terms of giving a precise window, given all the uncertainty in the market, no, Rupesh, we're not giving more appropriate guidance there. What I can tell you is that, with continuing increase in sales quarter-over-quarter and with a 40% gross margin and an ability to reduce OpEx, it gets very certain pretty soon.

[Rupesh Parikh:]

Okay, great. And then, on the operating expense front, is there any more color you can provide in terms of how you guys are thinking about G&A sequentially in marketing? I guess, Q3 and q4. Yeah, just want to get a sense of what type of dollars we should be thinking about going forward.

[Sebastien St-Louis:]

Absolutely. I think one of the biggest successes to come out of our acquisition of Newstrike, we certainly had our challenges and you saw it this quarter with the impairments, but one of the greatest successes was the Up brand. And we've come up with new marketing initiatives that are actually quite low cost. And so, we're very confident in our ability to keep those costs under control going forward, while continuing to deploy those brands nationally and getting resonance. The brand will always rely on two things. Distribution, first; and then product innovation, second. That's what's going to build, I believe, long-term brand success. And so, on top of that, we have great banners like Original Stash, Up and HEXO to put this technology under and we're having great success in that, with things like launch of our Original Hash.

[Rupesh Parikh:]

Great. Thank you.

[Operator:]

Your next question comes from Tamy Chen with BMO Capital Markets. Please go ahead.

[Tamy Chen:]

First question is – so just wanted to touch back on the growth in the volumes sold seen this quarter. So, my understanding is most of it came from sequential growth in Quebec with Original Stash. I think the sell in of Original Stash to some of the other provinces this quarter was a bit less than what I thought. I just wanted to understand, is that function of just timing for when you launched into those provinces? And at this point now, are these other provinces – are they now meaningfully increasing their ordering of Original Stash?

[Sebastien St-Louis:]

Well, one of the challenges outside Quebec – and I want to congratulate the SQDC for how they've managed their supply relationships. So, they're one of the few that don't have this issue. But one of the issues is, as LPs sell into retail networks, so into other provinces outside of Quebec, as those provinces load up the retail channel, if there's any price adjustment or concessions need to be made or margin concession need to be made in the future, those concessions don't flow through to the retailer and don't flow through to the consumer. So, what that ends up doing is it ends up jamming the store with a bunch of inventory and then we can't reload. So, in certain cases, we have retail stores choosing to take a different manufacturer suggested retail price. So, instead of taking the HEXO suggested price for Original Stash, they're taking prices that affect the velocity. And then in turn, when we go to adjust, then the province itself will prevent the price adjustment. So, we are getting better on those things and we are learning more, but that's causing the slowdown outside of Quebec.

[Tamy Chen:]

Okay. So, will this be a continued bit of a challenge for the next couple of quarters, or is this something that can be addressed?

[Sebastien St-Louis:]

I think it's an industrywide challenge for the next couple of months at least. But we are seeing meaningful improvement in all provinces.

[Tamy Chen:]

Okay, thanks. And my second question is, I think you adjusted some of the covenants in your term loan. One of the ones mentioned was, there's some EBITDA-related criteria within the covenants. Just want to understand if that has changed because I think in the prior credit agreement, there were certain covenants related to EBITDA that were going to come in at a certain point. So, just wanted to understand if you could kind of clarify if these EBITDA covenants, if they've changed, or what they are in the new covenant agreement.

[Sebastien St-Louis:]

We're in full compliance of all our bank covenants and we're working very closely with our banking partners. They're super supportive. Both CIBC and BMO have been fantastic to work with.

[Tamy Chen:]

Great, thanks.

[Operator:]

Your next question comes from Owen Bennett with Jefferies. Please go ahead.

[Owen Bennett:]

Morning, guys. And your first question is just on the requirement for additional funding over the next 12 months. I was just hoping you could give bit more specifics around that, assuming you hit your timeline for EBITDA positive, how much cash you think you're actually going to need. And then the second one is just around Up and HEXO, those brands. Could you give any kind of color on the sales or market share trends we're seeing for those two brands specifically? Thank you.

[Sebastien St-Louis:]

Thanks, Owen. From a cash need perspective, we certainly know what our wish list is versus the hard requirement. From a wish list perspective, you'll recall, I used to talk about a global cannabis company. Global cannabis dominance would require billions of dollars of capital. HEXO is now solely focused on being profitable in Canada first and driving profitable operations here. And to dominate in Canada and be one of the top players, a wish list number is about CAD 150 million. The bare bones requirement could be quite a bit less than that, significantly less. So, we're waiting to see how the markets are going to respond, how our ATM performs, et cetera. And in the short term, there is no cash pressure. So, we're in good shape in the very short term. So, we have a lot of options as well as strong supporting shareholders. From a brand perspective, we're not breaking down the success of specific brands. What I can say right now is Original Stash working very well and we're working on an Up relaunch that we're super excited about that will tie into introducing more higher margin product, but also more advanced 2.0 products into market. And, of course, HEXO keeps doing very, very well in Quebec.

[Owen Bennett:]

Thank you. Appreciate it.

[Operator:]

Your next question comes from Matt Bottomley with Canaccord. Please go ahead.

[Matt Bottomley:]

Hi. Good morning, everyone. Thank you for taking the questions. Sebastien, maybe just if you could provide a little more color on any sensitivity in pricing that you might have, given that it seems like a lot of your peers are also starting to target this value brand segment. I know you guys were first to do it. But just as your recreational pricing seems to be offsetting overall market penetration growth, is there sort of a bottom line price that you guys have set that would be of concern, given where the market is going? Or is the overall OpEx leverage and overall growth in your facility infrastructure expected to absorb a lot of that pressure?

[Sebastien St-Louis:]

Thanks, Matt. I think that HEXO assets are some of the best in the world, quite frankly. I've seen most of what's around. And I think we can rely on that, on our processes and our methods that, given a set quality, I really don't think most of our competitors can compete at the same price. So, we're going to continue to drive up gross margin. We're going to continue to drive down OpEx. And as we do that, I want to keep flowing through that value to our customers and our consumers. And so, as long as we maintain a portfolio gross margin above 40%, we are quite comfortable in continuing to lower prices. I think that the overall price in the industry is starting to stabilize because we've achieved, with Original Stash and HEXO, the disruption of the black market, and that has been a fundamental change in how people consume product. And so, I think we'll start to see that stabilization on value. And I only think there's HEXO and maybe one or two other licensed producers that can compete in that segment because they have the asset base and cost structure to do so.

[Matt Bottomley:]

Appreciate that. And just second follow-up question, just with respect to your sales and marketing, that basically came down to zero this quarter over last, from I think about CAD 6 million. So, can you frame how much of that might have been upfront investment during the launch of maybe cannabis 2.0 versus any sort of change in strategy in how you allocate dollars to marketing?

[Sebastien St-Louis:]

Yeah. There was a big change in strategy in terms of how we were doing a portfolio marketing. So, we were marketing brands before – really at the – from a top level, from a corporate level. We've stopped all those activities, and now we're taking product launches on a project by project basis and being very selective in how we go to market. And that's been very successful. Original Stash is one of the best performing cannabis products of all time across all licensed producers. And that was done on a shoestring marketing budget. So, the marketing team is doing a fantastic job in doing more with less.

[Matt Bottomley:]

Great, thank you.

[Operator:]

Your next question comes from John Chu with Desjardins Capital Markets. Please go ahead.

[John Chu:]

Good morning. Just first question would be just on the positive EBITDA. Now, previously, you had mentioned 800 retail stores as kind of the benchmark for being able to reach that. I believe we're over that number now across Canada. So, the question is, is the current retail infrastructure enough for you to reach positive EBITDA? Or do you need more stores open in Ontario and other provinces to get to that, to get to positive EBITDA?

[Sebastien St-Louis:]

Well, John, it will certainly take – more stores will make it easier. I think the distribution of stores need some right-sizing. We're still probably overloaded a bit in Alberta and light in Ontario. So, that needs to be adjusted a little bit. The third pillar really that could balance out the store count is the competitive pressure. So, as we start to see more and more licensed producers outside of HEXO filing for bankruptcy and failing, that's creating less competition, which then allows us to gain more share and more sales. And so, given that continued trend, confident that with or without more stores, we can get positive. Now, with that in mind, we do need more stores for the market and for consumers to be properly serviced in this country.

[John Chu:]

Okay. And then, has COVID-19 impacted the progress of Belleville in terms of construction, bringing in equipment and everything else? And did I hear you right that Gatineau is now going to actually be producing 2.0 products for sale now because I thought that was really for more testing purposes than producing for distribution?

[Sebastien St-Louis:]

Yeah. So, we are we are pilot still in Gatineau. So, what we did is we took our testing purpose facility and we're going to market with certain products. Now, it's a more limited offering than what we can do with our full scale in Belleville. The intention is to manufacture everything from Belleville eventually. And right now, construction is substantially complete, which is why we've been able also to reduce our CapEx ongoing and go forward. But the Belleville facility has been affected by COVID just in terms of timing of inspections, et cetera. So, Health Canada, of course, completely occupied with coronavirus and we completely understand, but we're working closely with them to see how we can address that for licensing timelines, et cetera, and we're quite happy to see that they're still doing their good work.

[Operator:]

Your next question comes from Douglas Miehm with RBC Capital Markets. Please go ahead.

[Douglas Miehm:]

Good morning. Just wanted to go back to the stores for a second. When you look at your EBITDA guidance with respect to, say, Ontario, I know that Ontario – talked about 250 stores. We thought that was going to be a challenge to begin with. But given the current setting, can you maybe tell us what your EBITDA positive outlook is based on? Is it based on the 250 stores? And let's say if it were half of that, would you still be able to meet your EBITDA outlook?

[Sebastien St-Louis:]

Yeah, Doug. I think Ontario is still going to have a lot of challenges getting to that number. They need to fundamentally fix the distribution center. The distribution center can't really support more than 40 to 50 stores at the end of the day. So, that needs to be fundamentally upgraded. It's not just a question of store count. You also have the reduced throughput of stores, given the capital environment, which reduces that count. So, I think it's prudent to expect a slow rollout. And that, of course, all in the context of COVID, which is deprioritizing store openings for the Ontario government for the moment. So, in terms of EBITDA positive, as I've said, I don't think the store count is the only factor you need to look at. You need to look at the total competitive environment. You need the market share of our new value offerings and our entrance into the higher end segments with our brands. That should contribute meaningfully. And so, I'm not overly worried. We don't need to get to a 250 store count in terms of a specific store number. We're not disclosing our specific plan. And we'll – as everything is moving so quickly that we are adapting in real time.

[Douglas Miehm:]

Okay, that's fair. My other question just has to do – you mentioned that you're having a real impact finally on the illicit market, especially in Quebec? Can you expand on that to give us a bit more details? Maybe with respect to pricing, what type of market share you're taking from the illicit market. I think that'd be very helpful. And I'll leave it there. Thanks.

[Sebastien St-Louis:]

Thanks for that. We're really seeing new consumers come in. What it comes down to in our conversations with SQDC, we're seeing consumers that have never shopped at SQDC start to walk in in a significant amount. And they're walking in asking for Original Sash and HEXO products. And so, that's really where the first success comes from. From a pricing perspective, everything we do with the Original Stash line revolves around attacking the black market pricing. So, we'll go out and we'll look at what the cost per gram is on dried flower. We'll go look at what the cost per gram is on hash, for example, and we make sure to come in – excise tax in with very competitive products. Anecdotally, I get calls – with the launch of Original Stash, I got calls from black market dealers for the first time saying what are you doing to our business. And so, that's when I knew we were succeeding.

[Douglas Miehm:]

Perfect. Thank you.

[Operator:]

. Your next question comes from Graeme Kreindler of Eight Capital. Please go ahead.

[Graeme Kreindler:]

Hi. Good morning and thank you for taking my questions here. I just had a follow-up question regarding the ongoing capital needs, as well as the covenants. I noticed some language in the financial statements about an additional covenant that was put in about the need for CAD 40 million raised on or before April 30. So, I was just wondering if that covenant and the language in there that includes the activities that were done towards the end of fiscal Q2 or if that's sort of well within the next 30 days here. Thank you.

[Sebastien St-Louis:]

Steve?

[Steve Burwash:]

Yeah. Thanks for the question. Yes. So, that CAD 40 million is something that's required new money before the end of April. The fundraising and capital raises we did in Q1 of – I think we've got CAD 130 million is outside of that and this is going to be new money.

[Graeme Kreindler:]

Okay, thank you for the clarification there. And then, just another question here. Sebastien, you mentioned earlier on the call the significant increase, 22,000 kilogram equivalents in Q2. I was just wondering if you could provide the breakdown of what the flower versus the other equivalents were in that number. Thank you.

[Sebastien St-Louis:]

Yeah. So, we're really excited about that, actually. And this is what's really signaling to me the bottom of the trough is that we're now over half flour, and that trend continues. So, you'll see a continued improvement in our next quarter, I believe. And so, you have a number of factors here. Sales increasing, gross margin increasing at the same time that we can get additional penetration with a value product, and our fundamental problem of flower versus trim is getting fixed. The guys in operation are doing a great job. So, all those things put together, coupled with the launch of new products is really giving me confidence here.

[Graeme Kreindler:]

Appreciate the color. Thank you very much.

[Operator:]

Your next question comes from John Zamparo with CIBC. Please go ahead.

[John Zamparo:]

Thanks. Good morning. I wanted to touch on your upcoming 2.0 launch. The majority of flower sales come from Quebec, but, of course, the province isn't allowing for most of the derivatives portfolio. So, how do you think about capturing market share with your brands in other provinces?

[Sebastien St-Louis:]

So, our brand strategy essentially is Original Stash to displace black market and that's a national strategy. But as you've seen our launch in Ontario with hash, so we're taking products that can be made with other products and flower. Quebec is consuming most of the flower we produce. And so, we're maintaining that share. We're going to add markets one at a time from a flower perspective on top of that. And then, our 2.0 strategy is going to roll up into the Up brand outside of Quebec, which is going to have a full premium offering, is how we're how we're planning on attacking that. So, you should see that within next two to three quarters from a full rollout perspective, the full portfolio rollout.

[John Zamparo:]

Okay, thanks. So, my other question is on Truss. Your level of cash injections expanded pretty significantly in the quarter. Can you give us an update on where Truss is in terms of financing, how much more it might need and also just how it's progressing on the operation side and when we might see those products launched nationally? Thanks.

[Sebastien St-Louis:]

Yeah, the Truss facility is absolutely amazing. It is the largest, as far as I know, beverage facility in the world and most advanced from an oxygen control perspective, which is critical when you talk about the quality control of your cannabinoids. So, the beverages taste fantastic. There's no added preservatives which makes them even more appealing, we believe, to consumers. From a cash perspective, Truss has been funded with about CAD 90 million so far. It's fully funded from both a CapEx and OpEx perspective for the next while. And that has been – of course, those contributions came 57% from Molson Coors, which remain very actively engaged in Truss. So, we're all very excited about what that's going to bring. From a product launch portfolio, we have multiple brands going out. So, definitely, in this calendar year, you'll have a full product launch, but expect some select launches of select brands in the meantime.

[John Zamparo:]

Okay, that's great. Thank you.

[Operator:]

Your next question comes from Andrew Carter with Stifel. Please go ahead.

[Andrew Carter:]

Thanks. Good morning. I wanted to ask, we've all seen the anecdotal evidence suggesting a surge of demand in Canada and then a significant increase where we have the visibility here in US markets, but can you give us a sense of how the provinces and retailers are managing inventories? Are you kind of seeing a commensurate increase in orders from the provinces? Are they kind of taking a wait-and-see approach to the new environment?

[Sebastien St-Louis:]

So, the new environment, especially with COVID, has resulted in the provinces asking for bigger load-ins. I think the provinces are being cautious as to their supply chain, given this uncertain environment. But the demand is real. So, when we look at the till sales, we're seeing meaningful throughput. HEXO has been managing our provincial partners very closely because we have learned our lessons of not stuffing the channel. And we are making sure to feed the stores with what they need and what they can sell through before necessarily responding to the aggregate purchase orders that are coming in. So, really focused on what sells through versus sell-in.

[Andrew Carter:]

Thanks. And then, kind of a second question now that you've kind of transition to doing some of your second generation products from Gatineau. You obviously made that change a couple of months ago kind of targeting a stronger kind of gross margin profile. Is leaning on this versus waiting on Belleville going to be a drag on that 40% gross margin target or could we expect that the incremental launches here will be significantly increased accretive to your gross margin profile? Thanks.

[Sebastien St-Louis:]

No. It's not a drag. So, Belleville is actually – when it first comes on, there's going to be a couple of months of negative hit to gross margin when Belleville first turns on because we're going to have to take on all that amortization. But then it rapidly corrects. Belleville is upside to our margin profile. It's all automated facilities. It's built for manufacturing, it's in-line processing. To give you an idea of the supply chain, today, our products get made in Masson, go to Montreal for radiation, go to Belleville for some package and go back to Masson and then ship up to Quebec. So, it's a five point supply chain. Once Belleville is fully licensed, we actually in house. So, it's not a radiation. We in-house other inoculation techniques. And so, the product is grown in Masson, sent to Belleville, shipped to customers. So, a three-point supply chain. So we're going to realize significant cost savings there.

[Andrew Carter:]

Thanks. I'll pass it on.

[Operator:]

And we have no further questions at this time. Please proceed.

[Sebastien St-Louis:]

Okay. Well, thanks, everybody, for joining the call. I'm going to end again by wishing you and your families the best of health. Keep staying safe and washing your hands as best as possible. In the meantime, HEXO will continue to focus on our market share, our operational effectiveness and our product innovation and look forward to talking to you next quarter.

[Operator:]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.