Guru Organic Energy Corp

TSX:GURU

Earnings Call Transcript 2021-Q4

[Operator]

Welcome to the GURU Organic Energy Fourth Quarter and Fiscal 2021 Results Conference Call and Webcast, being recorded today January 20, 2022, at 10:00 a.m. Eastern time. At this time all participants are in listen-only mode. [Operator Instructions].GURU's press release, MD&A and financial statements are available in the investor section of its website and on SEDAR. During the call, the company may refer to non -- to certain non-GAAP measures. Reconciliations are available in its MD&A. Also note that all financial figures are expressed in Canadian dollars unless otherwise indicated.I would also like to remind you that today's presentation may contain forward-looking statements about GURU's current and future plans, expectations and intentions, results, level of activity, performance, goals or achievements or other future events or developments. As such, please take a moment to read the disclaimer on forward-looking statements on Slide 2 of the presentation.I will now turn the call over to Carl Goyette, GURU's Chief Executive Officer.

[Carl Goyette, President, CEO & Director]

Thank you, operator. [Foreign Language]. Good morning, everyone, and welcome to our earnings call. Joining me this morning is our CFO, Ingy Sarraf.2021 was a remarkable year for GURU. I am so proud of all that we have accomplished as a team and the significant progress we made over such a short period of time, laying the groundwork for our future growth, and all during an ongoing global pandemic.In fiscal 2021, our first full year, as a public company, we achieved record annual net revenues for an eighth consecutive year, reaching a record CAD 30 million in net sales revenues, while being highly profitable for most of these years. We made our first meaningful push across Canada and increased our total doors in North America by 59% to almost 24,000 doors as of today.The post Q4 increase from 21,000 to 24,000 doors comes mainly from the convenience and gas channel in Canada, as a result of our PepsiCo agreement. With the potential to increase even more as grocery, drug, mass retailers in Canada and the U.S. confirm their listing this spring.In addition, we rolled out 2 new product innovations in 2021; Yerba Mate to kick off our fiscal year, and Guayusa Tropical Punch to cap it up. Even more significantly, by Q4 of 2021 and for the first time in GURU's history, we were finally able to really start investing in our brand. This investment is, of course, reflected in our results and will continue to be as we aim to accelerate our growth by driving brand awareness and trial.With over CAD 75 million in available cash and credit, we now have the means to deploy the required marketing efforts to elevate our progressive brand in markets outside of Quebec. That's the plan, we went to the market with a little over a year ago, and I'm proud to say, we are now executing as promised.Some of the major marketing initiatives executed in Q4, and which you can expect more of to 2022 to include, the distribution of nearly 600,000 cans of GURU across Canada to various in-store and field marketing events.The deployment of our first major English Canada digital and out-of-home media campaign, with the help of leading marketing agencies, Sid Lee and Brand Momentum as part of our back-to-university campaign.Beyond campus sampling, our back-to-university campaign included event sponsorships, out-of-home advertising and social media contests, targeting 24 universities across Canada, including 8 in Quebec.The Guayusa Tropical Punch launch in Quebec, supported by a big campaign this past fall on reality TV show, "Occupation Double" and existing partnership in which we invested more heavily in 2021 than in 2020, and by other trade sampling in out-of-home activations.The results generated by these investment so far have been very promising, and we believe a lot more can be achieved as we continue to build our GURU nation.In fact, our most recent market research showed that our brand awareness in the rest of Canada nearly doubled from Q1 2021 to Q4 2021. This increase was mostly driven by one of our key consumer target segments, which increased 17% from 15% to 32%.More recently, we also established unique partnerships with high profile Canadian ski resorts, namely Whistler, Bromont and Sutton, which are being activated at the beginning of the calendar year.These types of partnerships are in line with who we are as a brand and will allow us to connect with a captive, active and health-conscious audience via onsite sampling, and various promotional events. You can expect more of these types of on-brand partnerships going forward, and as the COVID situation normalizes.We also plan on doing more on the sustainability front. Last year, we deployed our first nationwide clean-up programs, and we will accelerate that good energy movement next summer.We grew our team in 2021 to support our long-term growth plans and our increased focus on brand building activities, going from a team of about 40 to almost 70, primarily based in Montreal and California.Notably, Emmanuelle Ouimet joined our team in December 2001 as an Executive Vice President of Marketing. She has an extensive background and leadership experience in brand building, marketing and e-commerce.Prior to joining GURU, she held senior leadership position, including that of CEO at outdoor retailer, La Cordee. She has also worked with a number of brands in the last 20 years, including The North Face and TELUS and through agency work at TAXI and Cossette. We are happy to have Emmanuelle on board as we ramp up our marketing in Canada.While we have significantly increased our workforce over the last year, we nonetheless remain a nimble and asset-light company that relies on strong partners from copackers to distributors. We believe this is the right operating model, as we look to accelerate our brand's growth and focus on elevating our brand in support of our expanding distribution.I'll now during the call to Ingy, who will provide you with more detail on our Q4 results. Ingy, over to you.

[Ingy Sarraf, CFO & Corporate Secretary]

Thank you, Carl, and good morning, everyone. [Foreign Language]. In Q4 2021, GURU generated record revenue of CAD 8.5 million compared to CAD 6.1 million last year, a growth of 38%. The increase was mainly driven by sales velocity growth, and increased points of sale in Canada, as we continue to execute our growth plan.Sales in Canada grew 39%, as a result of higher volume in Quebec and high triple digit growth in Ontario, Western and Atlantic Canada, mainly due to the initial large order from PepsiCo in Q4 2021, to kick off our partnership, which is partially offset by distributor product returns as a result of this exclusive agreement with PepsiCo coming into effect.U.S. sale, which represent about 14% of net revenue on an annual basis grew by 43% in U.S. dollars in Q4 or 37% in Canadian dollars, as a result of new doors and increased product demand. We expect the U.S. to continue to perform well in the coming quarter, based on SPINS data, showing us 32% growth in retail sales nationally in Q4 2021 versus Q4 2020, as well as strong momentum in California with 42% for the same period.As previously discussed, with this new Canadian distribution and sales model and the significant ramp up of our marketing activity to execute our growth strategy, there has been an adjustment in some of our key metrics, namely on the gross margin and SG&A front as anticipated.As a reminder, cost associated with PepsiCo services are included in our net revenue at the top of our income statement. In parallel, Canadian sales related costs have also been reduced, partially offsetting this lower gross margin. The overall impact to our bottom line is minimal. And in the long run, we expect the benefits of this PepsiCo agreement to greatly outweigh these short-term adjustments, which started in Q4 and will be fully reflected in our 2022 results.Q4 gross profit totaled CAD 4.3 million compared to CAD 3.7 million a year ago. Gross margin was 51% compared to 61% last year. As mentioned, this decrease in gross margin was mainly due to the change in our business model in Canada as a result of the PepsiCo agreement effective on October 4. It includes distribution, selling and merchandising fees.Gross margin was also slightly impacted by increased promotional activities and higher product costs, driven by higher input and transportation costs.SG&A was CAD 10.3 million compared to CAD 4.2 million, an increase of CAD 6.1 million. CAD 5.4 million of that represents the ramp up of our sales and marketing activities in support of the launch of our distribution agreement and the execution of our growth plans as we entered into new markets.We made investments in several targeted marketing and advertising campaigns during the quarter, including the back-to-university media campaign in Western Canada and Ontario, and out-of-home and digital campaign, the launch of a Quebec-specific marketing campaign this past fall with reality TV show "Occupation Double" and existing partnership in which we increased our investment in fiscal 2021 compared to 2020, as well as supporting ongoing field and trade marketing investments, notably in California and continued investment in our online sales platform.Note, that the increased quarterly marketing spend in Q4 2021 is more indicative of what we can anticipate going forward, as we aim to sustain our brand awareness and trial activities, although it is expected to fluctuate from quarter-to-quarter, due to timing of certain investments and seasonality.Driving brand awareness over the coming quarters in support of our national distribution campaign -- national distribution in Canada is key to our success, as we aim to grow our Canadian market share, while also sustaining our leadership position in Quebec.Now, back to our results. Adjusted EBITDA was negative CAD 5.7 million, compared to negative CAD 0.4 million a year ago, due to higher SG&A partially offset by an increase in gross profit. Net loss for the quarter totaled CAD 6 million or CAD 0.18 per diluted share compared to a net loss of CAD 3.1 million or CAD 0.11 per diluted share a year ago.In Q3, the closing of our financing has considerably enhanced our already strong financial position, which now stands at CAD 67 million of cash and equivalent and unused credit facilities totaling about CAD 10 million as of October 31, 2021. These funds will allow us to make significant and meaningful investments in our brand in Canada and in the U.S. over the coming years in support of our growth objectives.We remain prudent in the context of COVID-19 and the Omicron variant, which has resulted in another round of restrictions and lockdowns in various regions, including restrictions on gathering and pushing back the reopening of on-campus learning in many regions of Canada, amongst many other measures.Obviously, this isn't ideal for us, considering our core consumer base. But the important thing is that any near-term impact on sales or our ability to execute certain marketing activations will be transitory and really a question of timing.On the operational front, we also continue to have contingency plans in place and are holding higher inventory level to ensure that our operations run as seamlessly as possible in the context of ongoing supply chain and logistics pressures.Carl, back to you to discuss our next steps and outlook for 2022.

[Carl Goyette, President, CEO & Director]

Thank you, Ingy. In 2022, our focus is on the execution of our marketing and selling strategy to increase GURU's brand awareness, to stimulate product trial and ultimately our sales in Canada as well as in the U.S. with a focus in California.As we move forward, and as reflected in our fourth quarter results, we will continue to invest in our brand. These types of investments are a prerequisite to compete on a bigger scale and make sense now that we have a strong partner and high levels of national distribution in place in Canada. With a strong cash position, we can now compete more effectively with larger brands and increase our brand awareness as we solidify our leadership as a national energy drink market disruptor.Based on recent and ongoing surveys and field assessments, which confirmed our #1 brand status with the 18 to 25 age group in Quebec, we know we are in the right track to attract the next generation of energy drink consumers, whether they are existing energy drink consumers or new to the category.We aim to achieve this by leveraging and adapting our learnings and key success factors in Quebec, and to deploy these across Canada and California, while continuing to reinforce our position in Quebec.The first few months of the current calendar year will be critical. This is when retailers make their annual planogram and product listing decision for the next 12 months. Given that this is our first year of our partnership with PepsiCo, we expect the coming weeks to be very busy as we continue to receive product listing confirmations.From a timing perspective, a lot of those decisions are expected to be confirmed in Q2. So, we can expect some seasonality impact in Q1 on account of that timing, and given PepsiCo's sizeable initial order in Q4.In Canada, we anticipate that in addition to our partnership with PepsiCo, the positive impact of our fall brand marketing campaign will support an increase in the number of doors in 2022. The latest numbers provided by PepsiCo are showing significant distribution gains in Western Canada and Ontario, reaching over 85% weighted distribution in the C&G channel, this past December.Our number of doors is moving rapidly every day, now reaching almost 24,000 doors. We will provide a full update on the door count after the review period next spring. For now, the weight of distribution gains we are experiencing reflect impressive ramp up in Canada since the adoption of our new distribution model on October 4.On the product and innovation front, we will be introducing a new larger 500 ml format for GURU Original and GURU Lite starting in Quebec this spring, to compete against the leading brands as 45% of the Quebec energy drink volume is consumed in 473 ml formats. This will bring more choice to consumers.We will also be launching GURU Guayusa Tropical Punch across Canada in this spring, which has been a true success in Quebec, already generating record sales among all 2021 innovations in industry since its official marketing launch last November.Specifically, Guayusa's market share jumped to 3.5% of the overall market and made the top 10 selling SKUs over a 4-week period in December '21, a record among all 2021 industry innovations, which is an even stronger performance than the Yerba Mate launch a year earlier.New product innovations like Yerba Mate and Guayusa Tropical Punch continue to be an important part of our growth strategy and will continue to diversify our product offering in the future.In the U.S., we continue to make inroads in California with increased product demand, and the signing of additional banners, independent retailers as well as regional distributors, which will result in an increase in doors in 2022.Our U.S. strategy remains threefold, continue to focus on California, negotiate regional distribution agreements and continue our expansion in select recognized banners with a regional and national presence.Online activities also continue to show solid results, having grown threefold since the onset of the pandemic. Our strategy for this sales channel will remain the same, meaning continue investing in consumer acquisition and our e-commerce platforms.This concludes our formal remarks. I will now turn the call over to the operator for the Q&A.

[Operator]

[Operator Instructions] Our first question is from the line of Martin Landry with Stifel.

[Martin Landry, Managing Director of Equity Research]

My first question, I want to touch on your gross margin. I was wondering if it'd be possible to get a bit more color on the change on a year-over-year basis. It eroded by roughly 1,000 bps. And you talk about promotional activities being one of the reason, you talked about higher input costs in Pepsi, and just trying to understand a little bit how much of the change goes into each buckets?

[Ingy Sarraf, CFO & Corporate Secretary]

I'll take this one if it's okay with you Carl?

[Carl Goyette, President, CEO & Director]

Sure, go ahead.

[Ingy Sarraf, CFO & Corporate Secretary]

Okay, so as expected, our gross margins were lower in Q4. And I'll break out the 10% -- the 10-point decline there from 61% to 51%. So, if we look at it, 80% of it is really due to this change in new business model in Canada. Of course, a portion of which is being recovered lower in the financial statements, right, the sales expenses declined.The other -- another 1% or one point, you could say, is due to the promotional activities and that will vary from quarter-to-quarter. And the last one is really due to the higher cost and transportation. So, as you can see, the majority of it is really due to the change in business model.And we expect this really to be the lowest it's going to get from our gross margin standpoint. So, it should be getting better. And of course, this will vary based on the cost pressures, pricing opportunities in the market and the promotional environment.

[Carl Goyette, President, CEO & Director]

If I may add, this was all expected. Obviously, when we negotiated this agreement, we knew this was coming, and we -- when we looked at our business model, we really thought it was worth it. If you look at the gains in distribution that we have made over the last few months, going from, let's say, in April last year, going from roughly a 30% distribution in convenience stores to 85% now.If you compare the cost of gross margins versus what the cost would have been for us to do this ourselves, just comparing, it would have taken years for the growth salesforce to get to those levels of distribution. So, it's -- it was all planned, and we're very happy with this decision.

[Martin Landry, Managing Director of Equity Research]

And just want to touch a bit on the promotional activity. In their analyst day last week, Monster indicated that they, they were doing less promotional activity given the inflationary pressure on costs, and that this was kind of acting as a similar way to a price increase. I'm just wondering, what are you seeing here in Canada? Are you seeing less promotional activity versus last year?

[Ingy Sarraf, CFO & Corporate Secretary]

Yes.

[Carl Goyette, President, CEO & Director]

You can go ahead Ingy and I'll jump in.

[Ingy Sarraf, CFO & Corporate Secretary]

Yes. Okay, perfect. Yes, so we're seeing competitors doing that type of behavior in 2 different modes, right. So, one of our competitors is taking price increases, while the other maybe reducing promotional spend to protect themselves from these increases in costs. So, as you mentioned, like you heard on the call, so both strategy are coming up to say that, yes, there is less promotional activities or pressures. And we are seeing these opportunities, and I want you to be assured that, we will remain on the strategy from a price positioning standpoint, and we are evaluating this. So, we will not be leaving any money on the table. We just don't want to do it well.

[Carl Goyette, President, CEO & Director]

Yes, nothing to add.

[Martin Landry, Managing Director of Equity Research]

And then maybe my last question is on Guayusa. The launch seems to have been very successful. And, I'm wondering now that you have a bigger portfolio, you probably are seeing a bit -- an impact on your velocity. And I was wondering if you can discuss high level, how's your velocity gone up in Quebec since the launch of both the Yerba Mate product and Guayusa?

[Carl Goyette, President, CEO & Director]

Yes, I don't have the exact numbers in front of me, but the velocities of Guayusa, obviously with 3.5% market share -- 3.5% market share is reflective of very high velocities, obviously. It's been -- Guayusa exceeded our expectations for sure. There's no doubt. Obviously, when you launch a new product, there's always a little bit of cannibalization. And if indeed, you're launching a new, there's a big campaign going on, a lot of our GURU consumers are also trying the new innovation.But, overall, this is all very positive for the brand. There's a positive upside in total velocities and market share for the brand. Now, we need to wait a few more months to see if how many new consumers are really using the brand versus just changing -- switching SKUs within the family.But, overall, we're very happy with not only with execution of the marketing plan, the distribution gains we made with Guayusa when we launched it, but also making the list of the top selling -- top 10 selling SKUs in Quebec in December is quite an achievement, thanks for new innovation. So, obviously, a very big success.

[Operator]

Our next question comes from Nauman Satti with Laurentian Bank.

[Nauman Waqar Satti, Vice President]

So, yes, my first question is, I think in your prepared remarks, you've mentioned that there was a large PepsiCo order. So, I'm just wondering if there was some sort of pull forward from that order and you may see some light first quarter. So, if you could share some color, how much of it would be -- like how big that order was and if the first quarter would see that impact?

[Carl Goyette, President, CEO & Director]

Ingy you want to go ahead or you want me --?

[Ingy Sarraf, CFO & Corporate Secretary]

Okay.

[Carl Goyette, President, CEO & Director]

I can start. I can start. There is -- we're -- this is -- we're all -- we're learning to dance with PepsiCo, right. So, this is transition period. We started on October 4, as you know, which was the end of our fiscal year. At that time, it was very difficult to forecast for both our teams and the PepsiCo team, exactly what type -- what the amount in inventories we would need. There were so many new doors we were going in, and with high velocity we were launching Guayusa. And so, they placed orders, and over the course of the quarter we realized, well, there are some inventory readjustments that need to be made, right. So, they started the quarter with some higher levels of inventory that needs to be depleted through the Q1. That's all we're going to say for now. It's just transitory adjustments in the new relationship, but overall, it's all positive.

[Nauman Waqar Satti, Vice President]

And just maybe, I think Ingy you mentioned that this is probably the bottom of gross profit margins, and they're going to improve. I'm just wondering, how gradual that process would be? Like, is it every quarter a few basis points or is it like after one year that we can see some substantial improvement? Like, what's the pace going to look like for that?

[Ingy Sarraf, CFO & Corporate Secretary]

Yes. Well, I'll go back right to the basis, right. Of course, there's a change in business model, so there's an impact on the gross margin that will remain some of it, right. Because don't forget, we went from just moving the product at the gross margin level, we're now -- they're also doing moving, selling and merchandising the product.However, like we said, this is the lowest because we are seeing some -- the treatment is less than originally anticipated. So, we are seeing some advantages there. But, of course, it's going to vary based on pricing opportunities promo, like I said, and cost pressures. So, we will see some improvements.And I believe that, yes, we'll see a couple of points improvements coming throughout the year. And again, it's going to be reevaluated every quarter. Of course it's -- you know, we're learning to dance, like Carl said, right? So, it's the first year, it's a setup year, it's a transition year, all for really making sure that we're well set up doing the groundwork for future growth.

[Nauman Waqar Satti, Vice President]

And maybe just one last one from my end. So, if I heard that correctly, so for next year, we should expect advertising and marketing budget in the range of CAD 20 million - CAD 21 million?

[Ingy Sarraf, CFO & Corporate Secretary]

Yes. We don't really give guidance on these things. But you can expect -- we went public to make sure that we accelerate our growth. And we make sure -- and by accelerating our growth, we need to invest in our brands, right? And this is what we promised to do and that's exactly what we're doing, we will continue to invest in our brand. So, yes, that's what I could say. Carl, I don't know, if you want to add?

[Carl Goyette, President, CEO & Director]

Yes. I know, I want to add on this and say, you know, if you look at -- as we often discuss, we went public and we raised money to invest in marketing. So, this is, again, all very much planned, and we're executing as promised the marketing plan that we said we will execute.Now, if you look the SG&A, you're going to see the SG&A, you've seen in the last quarter the SG&A increase. Well, what we can say about this is, 85% of the SG&A increase is indeed sales and marketing, right? So, this is really money going towards building our brand and making sure that we build this foundation for the growth in the future.But, yes, you will be seeing continued investment in our brand for the next quarters. And I don't think you should see investments we made in our brand and I think Q4 as exceptional. We want to be continuing to invest in our brand over the next few years, right. So, this is why we have money that we raised to invest, and I'm repeating here, to invest in our brand. So, expect that to continue in the markets. This is our plan and this is what we want to execute.

[Operator]

Our next question comes from John Zamparo with CIBC.

[John Zamparo, Associate]

I wanted to start on the distribution points, the increase to 23,700, I think it was. Can you talk about the cadence of that growth? I think you'd said 21,000 in the last MD&A. I'm trying to get a sense of how much of the increase was prior to the PepsiCo deal versus subsequent to it?

[Carl Goyette, President, CEO & Director]

Now, subsequent to the PepsiCo deal is really the C&G increase, where the Canadian doors went from 10,000 to 12,700. All of these doors pretty much since the PepsiCo deal are C&G -- convenience and gas, right? So, there's 2,700 new convenience and gas doors since the start of the PepsiCo unit. Now, as we've discussed in the past, the grocery, drug, mass channel is a little bit more strict around the review period, right, which means even though we started in October 4, the PepsiCo sales team and key account managers are meeting their retailers right now, they're having the discussion. But the grocery, drug, mass retailers are really doing their resets during the spring, and they're very strict about that.So, this is why we mentioned in our call that we're going to be doing a full review of our door count in the spring once we have all the confirmations and we've aligned with the retailers on both when the product is going to be on the shelf and the marketing plan, so we can give you an update.But, obviously, very impressive growth in door count or the weighted distribution since the start of the PepsiCo agreement. Very proud of that.

[John Zamparo, Associate]

My second question is a follow-up on the prior one about pricing. And I kind of, wonder how you'd think about the strategy as you increase doors so much with PepsiCo as a partner. And as you get the brand in front of consumers who maybe haven't seen it before. Do you view that as an opportunity to leverage promotions even more or is margin protection a greater priority in the near term?

[Carl Goyette, President, CEO & Director]

I'll jump into, Ingy on this.

[Ingy Sarraf, CFO & Corporate Secretary]

Okay.

[Carl Goyette, President, CEO & Director]

We haven't built this brand on price in the past, and we -- our goal is not to have consumers pick GURU for a cheap price. We want consumers to pick GURU because of better ingredients and a brand that better connects with their value. So, in some ways, it answers your question.Now we want to be competitive, right? Our strategy has always been to try and be at parity or close to parity with the market leader, that's not changing. So, from a promotional environment, if most of the promotions are being run, let's say, at 2 for 6 instead of 2 to 5, while we will start running promotions at 2 for 6 instead of 2 to for 5, right? It's the environment and that's a significant increase just on promotion.Now, if there is opportunities on pricing, as Ingy mentioned, we will take full single unit pricing as well. So, there's really 2 ways, and that's what the industry is discussing right now. This is what the reference was made to some of our competitors in their investor calls as well. They're looking at the promotional structures, but also the pricing to see what's the best way to take -- to offset some of the costs that are inflation in the COGS. Does that answer your question, John or you want more color on that?

[John Zamparo, Associate]

Yes, that's helpful. And sticking with the Monster call from last week, their data seem to suggest that the convenience store channel was growing a little slower than the overall energy drinks market. Is that what you've seen in Canada as well or do you think that's unique to the U.S.?

[Carl Goyette, President, CEO & Director]

Overall, the industry is doing well. I don't know I can come back to you on the convenience stores versus the grocery stores in Canada, specifically, but we're reading the same documentation as we guys -- we're all getting the same information. So, I'm assuming what you're reading is right.Convenience is still by far the leading channel for energy drinks, so it is something around 75%. For our consumers, our consumers who are more white-collar, more educated sometimes grocery, drug, mass and natural channel is very important for us as well. So, we view both channels as being very important for our future, just as well as online, right? We haven't spoken about online, but online in a pandemic in order to access the progressive educated white-collar consumers, working in front of their computers, is a great way to excess consumers, right?So overall, the industry is going well. Consumers can need energy and they need a healthy energy more than ever before. And I think it's the right time to reaching the consumers regardless of the channel.

[John Zamparo, Associate]

And one more, just a housekeeping question. You mentioned a partial offset to the sales growth was the return of products to the prior distributors. Can you share the approximate size of that return?

[Carl Goyette, President, CEO & Director]

That will be more a question for Ingy.

[Ingy Sarraf, CFO & Corporate Secretary]

Yes, yes, yes. So yes, there were not significant major returns. We had a very good smooth transition, but there were some returns, right? So that's all I can say.

[Operator]

And this concludes our Q&A session. Now, we'll turn the call back to Carl Goyette for his final remarks.

[Carl Goyette, President, CEO & Director]

Thank you. I just wanted to say thanks to everyone for attending. And stay safe, stay healthy. Have a great day.

[Operator]

Thank you, ladies and gentlemen. This concludes today's program, and you may now disconnect.