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Edited Transcript of OTIV earnings conference call or presentation 11-Nov-19 2:00pm GMT

Q3 2019 On Track Innovations Ltd Earnings Call

Rosh Pina Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of On Track Innovations Ltd earnings conference call or presentation Monday, November 11, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Assaf Cohen

On Track Innovations Ltd. - Interim CEO & CFO

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Conference Call Participants

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* Gavriel Frohwein;Head of Market Intelligence;GK Investor & Public Relations

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome, everyone, to the On Track Innovations' Third Quarter 2019 Corporate Update Call. (Operator Instructions) You should have received by now the company's results press release. If you have not received it, please contact On Track Innovations Investor Relations team at GK Investor & Public Relations at 1 (646) 688-3559 or view it in the News section of the company's website.

I would now like to hand the call over to Gavriel Frohwein of GK Investor & Public Relations. Please go ahead.

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Gavriel Frohwein;Head of Market Intelligence;GK Investor & Public Relations, [2]

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Thank you, operator. Welcome to On Track Innovations 2019 Third Quarter Conference Call. I would like to thank management for hosting this call. With us on the call from OTI is Mr. Assaf Cohen, Interim CEO and Company's CFO. Assaf will use this forum to provide some of the key -- recent key highlights and review OTI's financial performance for the 2019 third quarter. Following the prepared remarks, we will go through investors submitted questions, and Assaf will provide the answers to those questions.

Please be advised that certain information discussed on this call will contain forward-looking statements. This can be identified by the use of the terms such as may, will, expect, believe, intend, plan and other comparable terms, for example, and in addition to what is mentioned in the company's results press release. OTI is using forward-looking statements when it discloses, among others, OTI's belief that there is significant potential in Japan and OTI's expectations for success in 2020 onwards in Japan increases in sales and improvements, launching new products to the market, recovery in the U.S., the timing of the impact of OTI's new TRIO-IQ solution and its sales, growing recurring revenue, OTI's expectations that in 2020 onwards the difficulties will be behind it and its expectations to complete its recovery during 2020 and onwards, and its strong pipeline for 2020.

While forward-looking statements reflect good faith, belief and best judgment based on current information, they are not guarantees of future performance. They are subject to known and unknown uncertainties and risk factors, including those detailed from time to time in the company's filings with the SEC.

OTI assumes no obligation to update any forward-looking statements or information, which speak of their respective date. The full safe harbor provisions, as set forth in the press release we discussed last Wednesday, which are available on OTI's website at investors.otiglobal.com. And with that, I would like to now hand over the call to the company's interim CEO and continuing CFO, Assaf Cohen. Assaf, please go ahead.

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [3]

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Thank you, Gavriel. Welcome, all, and thank you for joining us today. As you all know, OTI has been transitioning over the past few months and has undergone a search for a new CEO. In the interim, I was appointed the Interim CEO. Accordingly, during this time, we changed the format of the conference call with the prepared remarks being prerecorded. In addition, we're taking questions from investors via e-mail. Following my prepared remarks, I will provide the answers to the questions submitted.

I would like to start by summarizing some of the key events of the quarter and more recently. The most significant event has been announcement last Wednesday of the appointment of Yehuda Holtzman as new CEO of OTI. The appointment will be effective from December 1, 2019. Yehuda brings to us a very strong sales background and has previously worked with companies which have demonstrated very strong success in growing sales, increasing their profitability and ultimately realizing significant shareholder value. The Board believes that Yehuda's background is ideal for OTI and will enable us to advance the company's strategy and bring us our next -- to our next stage. We look forward to Yehuda joining the OTI family in the coming weeks, and you will have an opportunity to hear from him in our next Investors conference call.

And now to the summary of the quarter's results. Our revenue in the third quarter amounted to $3.9 million, slightly below those of the prior quarter, which were at $4.1 million, but still well ahead those of the first quarter of this year where we faced an impact from the U.S. tariff on Chinese manufactured products. A positive aspect in our results and in line with our long-term strategy is that the recurring portion of our revenues continuing its growth trend and has been more than 1/3 of our revenue year-to-date compared with 23% in the same period last year.

In October, we announced an order for 5,000 contactless readers for the smart ATM market. In fact, during this year-to-date, we have delivered more than 20,000 advanced contactless readers to the important markets. These orders continue to be one based on our leading technological capabilities, and it is demonstration of the highest level of security. Russia remains an important market for us with our MIR's certification. During the first 9 months of 2019, we have delivered more than 8,000 advanced systems to the ticketing self-checkout system for the Russian market.

In mid-June, we received a purchase order for 1,000 cashless payment systems from Japan via our partner, Billing System Corporation, a leading regional payment service provider. This order gave us a substantial runway to continue our growth together with our strategic partner, and we continue to broaden our footprint in the vast Japanese unattended retail market. And we already have more than 11,000 OTI systems operational in the Japanese market. With the potential of 6 million units countrywide, the total size of the Japanese electronic vending machine market is very significant for us.

And now I would like to cover the financial results. Last Wednesday, we issued the results of the third quarter of 2019 in a press release. A copy of the release is available in the Investor Relations section of our website. As usual, I will be covering some non-GAAP metrics, including adjusted EBITDA from continued operations. We believe this provides a good understanding of our ongoing performance. Please see the earnings release on our website for further details about this non-GAAP metric, including a reconciliation of adjusted EBITDA to our comparable GAAP results.

In addition, as you know, we announced the sale of MediSmart in December 2019. The result of MediSmart are therefore included as discontinued operation, and all the prior periods information have been reclassified to confirm with the current period's presentation.

Revenues in the third quarter of 2019 were $3.9 million. This is compared with $6.1 million in the third quarter of last year and $4.1 million in the prior quarter. In terms of the breakdown of where revenues were derived in the third quarter of 2019. Retail and Mass Transit ticketing revenues were $3 million or 76% of total revenues. And petroleum revenues were $0.9 million or 24% of total revenues.

Looking at geographic breakdown in the third quarter of 2019. The Americas accounted for $1.5 million or 37%, Europe was $1.7 million or 44%, Africa was $0.5 million or 13% and APAC was $0.2 million or 6%. Recurring revenues in the third quarter of the year were $1.2 million or 32% of revenue versus $1.3 million or 22% last year.

Gross margin in the third quarter was 44% compared to the 53% reported in Q3 last year and 58% in the prior quarter. The reason for the lower level of gross margin was due to a product mix sold in the quarter and inventory adjustments. In the third quarter, operating expenses, including a gain of $0.3 million related to the sale of the building by OTI's South Africa subsidiary were significantly reduced to $2.8 million. This is compared to $3.5 million in the third quarter of last year and $3.2 million in the prior quarter. Net loss in the quarter was $1.2 million. This is compared to $184,000 loss in the third quarter of last year and $899,000 loss in the prior quarter.

Now turning to our non-GAAP results. Adjusted EBITDA in the third quarter of 2019 was a loss of $1.1 million compared with an adjusted EBITDA of $181,000 in the third quarter of last year and adjusted EBITDA loss of $442,000 in the prior quarter.

Looking at our balance sheet. As of September 30, 2019, cash, cash equivalents and short-term investments totaled $5.3 million. Short- and long-term debt was $2.6 million. At the year-end 2019, we had $5.9 million in cash, cash equivalents and short-term investments and $0.3 million in debt.

And now we will respond to your questions. Gavriel, please go ahead.

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Questions and Answers

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Gavriel Frohwein;Head of Market Intelligence;GK Investor & Public Relations, [1]

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Our first question is from [Ariel Legit]. The sale recorded so far in the Japanese market has been disappointing. Please comment on the type of obstacles OTI is facing there.

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [2]

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We already have more than 11,000 OTI systems operational in the Japanese market. With a potential of 6 million units countrywide, the total size of the Japanese electronic vending machine market is very significant for us with significant potential, realizing that potential is taking much longer than we would have liked and the sales process is long. We believe that we will have more success in 2020 onwards and will increase deployment of our solution, and an important one that the new CEO will have early on is to grow our sales in Japan.

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Gavriel Frohwein;Head of Market Intelligence;GK Investor & Public Relations, [3]

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OTI Poland took a $2 million loan in the summer of 2019. Can you comment on the rationale for that loan?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [4]

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This was mainly to strengthen our balance sheet and increase our cash position, which currently stands at $5.3 million. It is also to provide more working capital for our sales operation in the region, and we see potential for increases in sales there in the near term.

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Gavriel Frohwein;Head of Market Intelligence;GK Investor & Public Relations, [5]

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Beyond the Japanese market, what are the main difficulties OTI is facing in realizing an increased level of sales?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [6]

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2019 sales have indeed been slower than we would have liked. As you know, at the start of the year, we faced significantly lower sales due to the tariffs placed by the U.S. on Chinese imports, where our products were made at that time. Furthermore, the lack of a full-time CEO who should be focused on customers and growing sales also has impacted us. However, looking ahead, I do expect to see improvements. In our Payment and Mass Transit segments, we are focusing on strategic markets of the U.S. market, but also pushing deeper into the European and the Japanese market as well.

During 2020, we hope to see an increase in sales in those markets with primary focus in the U.S. market, which is definitely a key growth engine. I believe that a new and fresh CEO, at the helm of OTI, will spearhead the process forward.

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Gavriel Frohwein;Head of Market Intelligence;GK Investor & Public Relations, [7]

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Overall, what do you see as main priorities for an improved performance during the next 6 to 12 months?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [8]

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Increasing top line results by recovering our sales operations and engaging with strategic accounts as well. Again, this will be a key priority for our new CEO. Additionally, launching new products to the market, including our state-of-the-art TRIO-IQ solution, should give us a push in increased sales in the coming quarters as well.

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Gavriel Frohwein;Head of Market Intelligence;GK Investor & Public Relations, [9]

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Please comment on the manufacturing and supply chain situation at the new facility in the Philippines.

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [10]

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As you all know, by the end of the first quarter of 2019, we had successfully completed the process of shifting our production out of China to another manufacturing zone, the Philippines, where there is no impact from U.S. tariff on imports. During the second quarter of 2019 onwards, we started our recovery in our sales in the U.S. market. We believe that the recovery in the U.S. market will be completed by 2020.

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Gavriel Frohwein;Head of Market Intelligence;GK Investor & Public Relations, [11]

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Our next questions are from Tony (inaudible) from Manulife Securities. Prior to his departure, former CEO, Shlomi Cohen, mentioned that the OTI TRIO-IQ presentation at the NAMA Show in Las Vegas, received excellent feedback. He also mentioned that it would be ready for distribution at the end of Q3. Has this technology hit the market yet? Do we expect to see any significant sales with respect to this product in the last quarter of 2019?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [12]

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The real impact of our new TRIO-IQ solution on our sales is expected to take place during 2020.

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Gavriel Frohwein;Head of Market Intelligence;GK Investor & Public Relations, [13]

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In August 2016, OTI received a letter of intent from a major Japanese retailer to purchase 10,000 FeliCa-Certified contactless readers and telemetry system. To date, this remains the only major order from the Japanese market. Considering the opportunity in this market, what has been the major obstacle that OTI is facing in successfully penetrating this opportunity? Going forward, is there a strategy in place to improve penetration, market share in this area?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [14]

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As I mentioned earlier, the Japanese market is a strategic market for the company. And we are working consistently to increase our deployment in this market. With the drive from a new CEO, we hope to increase penetration in this market during 2020 and onwards.

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Gavriel Frohwein;Head of Market Intelligence;GK Investor & Public Relations, [15]

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Recurring revenues have been at the $1.2 million area in the last 4 quarters. Is the game plan to work towards improving these numbers by remaining focused on selling the full-service package?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [16]

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Our strategy of transitioning from a pure product company to a solution company that utilizes software in the cloud is ongoing. While the process is a long one, we have been increasing the portion of our sales, which are recurring revenue, and our goal is to generally grow this portion over the coming quarters and years by selling this type of full solution with recurring elements.

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Gavriel Frohwein;Head of Market Intelligence;GK Investor & Public Relations, [17]

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Our next set of questions are from [Bruce Geller]. Bruce asks, why was revenue -- why were revenues weak considering management originally touted expectations for return to revenue growth this year?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [18]

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2019 turned out to be a transition year, which started with challenging events, such as impact from U.S. tariffs on imports and then continue with the management change. We believe that in 2020 onwards, the difficulties will be behind us, the company will see a sales recovery, and our focus for 2020 is both -- on improving both top and bottom line results.

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Gavriel Frohwein;Head of Market Intelligence;GK Investor & Public Relations, [19]

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In the past, weak revenues were cited due to changeovers in manufacturing locations. But with this behind the company, why was there no catch-up benefit?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [20]

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There has been a clear improvement from revenues in Q1, even though Q3 was weaker than those of Q2. Recovery in the U.S. market already started in Q2 and has continued into Q3 2019, and we believe we will continue to improve our complete -- and complete, I'm sorry, our recovery during 2020 onwards.

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Gavriel Frohwein;Head of Market Intelligence;GK Investor & Public Relations, [21]

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What does the backlog look like? What does the bidding pipeline look like? What are the opportunities right now?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [22]

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We don't public -- I'm sorry, we don't publish the backlog figures, but we believe the company will have strong pipelines for 2020, including having higher recurring revenue portion which will have positively impact on our top line and our margin as well.

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Gavriel Frohwein;Head of Market Intelligence;GK Investor & Public Relations, [23]

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Why were gross margins down when recurring revenue was 32% this year versus only 22% last year?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [24]

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This change is mainly attributed to inventory adjustment and to a change in our revenue mix.

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Gavriel Frohwein;Head of Market Intelligence;GK Investor & Public Relations, [25]

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Why does the company remain public? Is the Board making a concerted effort to sell the company and capitalize on the value of its technological expertise and patents?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [26]

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We believe remaining public offers benefits to our shareholders at this time. The Board has worked intensively recently to recruit a new CEO, which was completed last Wednesday. His mandate is to take actions to promote the company's business in order to maximize the value of shareholders.

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Gavriel Frohwein;Head of Market Intelligence;GK Investor & Public Relations, [27]

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Our next questions are from [Ramona DaCosta]. What are the priorities for turning the business around into cash flow positive?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [28]

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Our goal is to increase top line results by recovering our sales operations and engaging with strategic accounts as well.

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Gavriel Frohwein;Head of Market Intelligence;GK Investor & Public Relations, [29]

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When do you expect to return to NASDAQ?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [30]

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Currently, we are in the OTCQX market, which is the highest tier in OTC, other than the OTCQX Premier. The OTC offers ample trading opportunities to investors and is the right place for companies of our size. Right now, we don't have intention to return to NASDAQ until our share price and market cap return to much higher level. In general, we will continue to work in order to maximize the value of our shareholders, which we believe will come about as the business revenue and the profitability recovers.

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Gavriel Frohwein;Head of Market Intelligence;GK Investor & Public Relations, [31]

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Are the Board of Directors considering an M&A, going private or other potential avenues to realize shareholder value?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [32]

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I can't give guidance, but I can say that the Board is working intensively on promoting the company's businesses and maximizing the value of our shareholders.

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Gavriel Frohwein;Head of Market Intelligence;GK Investor & Public Relations, [33]

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That concludes the question-and-answer session. Assaf, please make your concluding statements.

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [34]

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On behalf of OTI, I would like to thank you for your continued interest and long-term support of our businesses. I look forward to speaking with you next quarter and updating you on our progress. Thank you.

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Operator [35]

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The conference has now concluded. We thank you for attending today's presentation, and you may now disconnect your lines.