Noah Holdings - Q4 2023

Transcript

Operator (participant)

Day and welcome to the Noah Holdings Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Melo Xi, Director of Investor Relations. Please go ahead.

Melo Xi (Director of Investor Relations)

Thank you, Operator. Good morning and welcome to Noah's 2023 fourth quarter earnings call. Joining me on the call today are Ms. Jingbo Wang, our Co-Founder and Chairwoman; Mr. Zhe Yin, our Co-Founder, Director, and CEO; and Mr. Grant Pan, our CFO. Ms. Wang will begin with an overview of our recent business highlights, followed by Mr. Pan, who will discuss our financials and operating results. They will all be available to take your questions in the Q&A session that follows. Before we begin, please note that the discussion today will contain forward-looking statements that are subject to risks and uncertainties and may cause actual results to differ materially from those in our forward-looking statements. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC and the Hong Kong Stock Exchange.

Noah does not undertake any obligation to update any forward-looking statements except as required under the applicable law. In addition, today's call will include discussions of certain non-GAAP financial measures. A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures can be found in our earnings release. Lastly, this call should not be interpreted as a solicitation to sell or purchase any interest in any Noah or Noah-affiliated products. Please also be aware that a link to a live webcast with presentation materials is available on our Investor Relations website. With that, I would like to pass the call over to Ms. Wang. Please go ahead.

Jingbo Wang (Chairwoman)

{Foreign language}

Melo Xi (Director of Investor Relations)

I'd like to begin today's call by sharing some recent thoughts on the industry and macroeconomic landscape before I review our performance for the fourth quarter and full year and dive into our strategy going forward. Over the past year, the Chinese wealth management industry faced considerable challenges. Fundamental shifts are taking place across the sector that require a different strategy and approach to asset allocation for Mandarin-speaking high-net-worth individuals. Noah's relentless focus on client needs spearheaded our transition from a product-focused model to a solution-driven approach over the past year, ensured our ability to increase the resilience of clients' portfolios in a challenging market environment. Our proactive decisions to prematurely exit domestic real estate in 2016 and non-standardized single-counterparty private credit products in 2019 earned us significant trust from clients.

Our semi-annual CIO House View and CGI model continue to reflect our strategic foresight over the past three years, which resonated strongly with clients. We adopted a three-pronged strategic approach to navigate this challenging market environment over the past year. Firstly, we're laser-focused on ensuring our resilience and adaptability through economic downturns. Secondly, we are actively accumulating strength to emerge as a leader in the forthcoming recovery. And finally, prioritizing the development of our core capabilities to position us for future growth when opportunities arise. Noah is a company built on both pragmatism and ambition, allowing us to strike a careful balance between fortifying our position and seizing new opportunities. By enhancing operational efficiency, retaining top talent, strategically cutting costs while simultaneously investing in new international markets, channels, technologies, and the development of a global product and service matrix, we are ideally positioned to help clients traverse this market.

Over the past year, we've strengthened our full suite of wealth management products and services for Mandarin-speaking clients globally. One key focus has been expanding our ability to offer clients alternative investment on a global basis. We're also seeing global fund managers increasingly focusing on underserved private wealth channels to fill primary market fundraising. As a leading private wealth manager, recognize our expertise in alternative investments and extensive network of Mandarin-speaking professional investors. This trend presents enormous opportunities for Noah. Going forward, we'll be amplifying these strategic global investments. This includes expanding our service network, bolstering investment research capabilities, and significantly enhancing product selection and technological infrastructure. These investments will solidify our foundation as a leader, enabling us to meet growing demand among clients for globally diversified wealth and asset management services.

Jingbo Wang (Chairwoman)

{Foreign language}

Melo Xi (Director of Investor Relations)

Looking at our financials for the year, Noah generated total revenues of CNY 3.3 billion, an increase of 6% year-on-year. Our domestic business contributed CNY 1.9 billion, an increase of 18.1% year-on-year, and accounting for 56.8% of the total revenues. Within revenue from our domestic business, revenue generated by legacy distributed products was CNY 1.4 billion, accounting for 73.9% of the domestic revenue. Our overseas business generated CNY 1.4 billion, a significant increase of 73% year-on-year, driving overseas revenue contribution from 26.5% of the total net revenues last year to 43.2% this year. Of revenue generated from new business and product in 2023, our overseas and domestic business accounted for 68.1% and 31.9% respectively. Breaking it down by segments, our wealth management business generated CNY 2.5 billion in 2023, an increase of 13.1% from last year.

Within wealth management, domestic business contributed CNY 1.4 billion, a decrease of 11.7% from last year, which was primarily composed of CNY 0.9 billion in revenue generated by legacy distributed products, accounting for 67.7% of the domestic wealth management revenue. Our overseas business contributed CNY 1.1 billion, a 71.3% increase year-on-year. Our asset management business generated CNY 769 million in revenue during the year, a decrease of 8.4% from last year. Within asset management, our domestic business generated CNY 469 million, a decrease of 30.3% from last year, which was primarily composed of CNY 467 million in revenue generated by legacy distributed products, accounting for 99.4% of the domestic asset management revenue. Our overseas business contributed CNY 299 million, an increase of 80% year-on-year, driven primarily by growth in overseas AUA and AUM.

On the comprehensive services side, revenue from domestic insurance products increased by 1.6% in 2023, of which 88.9% was generated by new businesses. Revenue from overseas insurance, trust, and other comprehensive services surged 301.5% from last year. In tandem, the number of active overseas clients for comprehensive services also grew by 76.3% year-on-year. Over the past year, we continued to make upgrades to our technology stack aimed at improving client experience globally. We're working with leading insurers to streamline our underwriting process across markets globally. We were the first broker in Hong Kong to launch a fully online underwriting process and allow clients the option to make insurance premium payments through our Hong Kong nominee account, which was a significant enhancement for client experience. Operating profit for the year came in CNY 1.1 billion, with an operating profit margin of 33.3%.

Jingbo Wang (Chairwoman)

{Foreign language}

Melo Xi (Director of Investor Relations)

Looking at our domestic wealth management business, we continue to carry on the strategy to focus on first-tier and core cities in China. Through our ongoing organizational restructuring, we decreased the number of offices we had from 77-44 by the end of the year, and further relocated resources to 18 core cities as of now. As of the end of 2023, the number of domestic relationship managers decreased by 7.6% year-over-year and 12.6% sequentially to 1,163. On the domestic wealth management front, our primary focus has been on strengthening the service capabilities of our relationship managers and enhancing the user experience of technological upgrades to our stack, allowing us to continuously generate new leads from ongoing client services. The Smile Treasury platform for corporate and institutional clients we launched in 2022 now serves nearly 6,000 clients, a 28.9% increase from last year.

Over the past year, the number of active client serves increased by 73.7% year-over-year, with average client AUA exceeding CNY 600,000. Turning overseas, our wealth management business continued to expand its presence as more relationship managers are brought on board in Hong Kong and Singapore. As of the end of 2023, we had 89 relationship managers onboarded, an increase of 15.6% sequentially. We're committed to further expanding our international RM team, targeting a headcount of 200 by the end of 2024. As of the end of 2023, we had over 14,900 overseas clients, reflecting a 14.2% increase from last year. The number of clients who purchased our cash management products reached 3,093, a sequential decrease of 19.1%, while the number of discretionary investment clients reached 803, an increase of 23% sequentially.

Jingbo Wang (Chairwoman)

{Foreign language}

Melo Xi (Director of Investor Relations)

We continue to expand the product offered through our overseas wealth management app, providing an expanded array of solutions for clients, businesses, and agencies. The number of overseas active high net worth clients reached 4,629 in 2023, a significant 38% increase from last year. Total transaction value during the same period reached $3.3 billion, up 83.4% year-on-year. The number of active clients for our USD mutual fund products reached 3,130, up 72% year-on-year, with transaction value of $1.2 billion, up 110.1% from last year. On the 2B side, we have successfully onboarded more than 230 overseas corporate and institutional clients, which resulted in transaction value of overseas mutual funds reaching approximately $200 million.

On the 2A agency side, our overseas online wealth management business began trial operations in late 2023, aiming to empower EAM and family offices clients with a SaaS platform integrated with our full suite of products. As of today, we have signed nine agency clients, with a long-term target of serving 300 EAMs and family offices in overseas markets.

Jingbo Wang (Chairwoman)

{Foreign language}

Melo Xi (Director of Investor Relations)

In terms of asset management, Gopher's total AUM was CNY 154.6 billion in 2023, a decrease of 1.6% year-over-year. CNY AUM decreased by 4.8% from last year to CNY 118.6 billion. This was primarily driven by exits from CNY private equity assets and decline in the net asset value of some CNY public market products. Internationally, we continue to enhance our global investment product matrix. Overseas AUM reached $5.1 billion in 2023, an increase of 7.6% from last year, driving from an increase in its contribution to total AUM from 20.7% to 23.3%. Overseas AUA, which include distributed products, reached $8.4 billion, an increase of 10.2% year-over-year. Beyond traditional PE and VC products, we have gradually expanded our alternative offerings to include infrastructure, GP stake, PE secondary, and private credit products to provide a more comprehensive product matrix.

We also recently launched the Series 4 of our actively managed U.S. real estate fund, focusing on development opportunities in the suburban rental apartments in the U.S. Sunbelt area. This fund is well positioned as an upstream player within the institutional real estate value chain. As of the end of 2023, AUM for overseas private equity and other primary market funds reached $4 billion, an increase of 4.7% year-on-year. Turning to public markets, we intensified the screening, coverage, and inclusion of top hedge fund managers globally. We have launched 10 of the top global top 50 hedge fund products, with 10 more in the due diligence process. While enhancing the diversity of fund managers and product strategies, we are simultaneously expanding to include structured products with principal protection mechanisms.

In 2023, the transaction value of overseas public markets and structured products reached $180 million, an increase of 95.9% from last year.

Jingbo Wang (Chairwoman)

{Foreign language}

Melo Xi (Director of Investor Relations)

Lastly, we announced a change to our leadership structure last year by separating the roles of Chairperson and CEO. Mr. Zhe Yin was appointed CEO, while I will retain my position as Chairwoman of the board. This decision will enhance corporate governance, organizational efficiency, promote collective decision-making, and facilitate Noah's succession plan, and generate opportunities for Noah's deep bench of management talent. As a Co-Founder, Zhe Yin has been part of Noah's journey since the beginning. He played a pivotal role in building Gopher Asset Management and possesses a deep understanding of Noah's operations and our client-centric company culture. I'll firmly support Zhe Yin in his new role, while continue to steer Noah's overall strategy and be responsible for board management and corporate governance. Please also kindly note that our CEO Zhe Yin and CFO Grant Pan will be reporting quarterly results starting from last quarter.

I will still take part in the Q&A sessions. I would now like to turn the call over to Grant Pan to go over our financial results in more detail. Before opening the call to Q&A, where Zhe Yin and myself will also participate. Thank you, everyone.

Grant Pan (CFO)

Thank you, Melo. Thanks, Chair Lady. I'm sure most investors are already very familiar with Mr. Zhe Yin, and we welcome him to join our future earnings releases and also meetings and calls with our investors. 2023 was a challenging year for China's wealth management industry. China's post-pandemic economic recovery proved to be a little slower than initially anticipated, as housing and local government debt problems remained widespread and persistent, dragging domestic capital markets and growth. The performances of China's domestic A-share market and Hong Kong stock market also took some heavy adjustments, impacting the issuance of new investment products domestically. The new issuance of mutual fund products, for example, in the domestic market fell 22.7% throughout the year. In contrast, in 2023, the Dow Jones Industrial Average Index rose by 13.7%, with the S&P 500 Index and MSCI World Equity Index up over 20%.

On the alternative side, global fund managers are increasingly focusing on underserved private wealth channels to fuel primary market fundraising. According to McKinsey, as of June 30, 2023, the total AUM in private markets reached $13.1 trillion, growing nearly 20% per annum since 2018. The sharp divergences in economic and capital market conditions between onshore and offshore markets have created considerable challenges for high net worth clients. While demands for global asset security and diversification, insurance products, and other defensive-driven strategies continue to grow. As a leading wealth management company recognized for its expertise in alternative investments and extensive network of Chinese professional investors, these trends directly align with our strategic transition from a product-based to a solution-based offering and our ongoing investment in overseas products and services.

In this context, we deliver solid financial results, and our business has proven again to be resilient and adaptive in the face of challenging market environments. Net revenues for the year continue to grow, along with a healthy operating margin of 33.3%. Combined with our asset-life model generating strong operating cash flow and ample cash on balance sheet, we're extremely confident in the resilience of our business and ability to thrive even in complex economic conditions. With that, let's get into the details of our quarter four and entire fiscal year 2023 financial performance. Quarterly net revenues came in just shy of CNY 800 million, a 6.6% increase sequentially. Net revenues for the year was CNY 3.3 billion, up 6.3% year-over-year.

In terms of breakdown of net revenues for the year, one-time commissions were CNY 1.1 billion, up 60% year-over-year, primarily due to strong distribution of insurance products. Recurring service fees, a key stabilizer in revenue mix, were CNY 1.8 billion, slightly down 4.8% year-over-year due to a decrease in onshore AUM resulting from changes in NAV and structured products. Performance-based income was CNY 137 million, down 55.5% year-over-year, mainly due to the underperforming domestic capital market and limited exit opportunities. Other service fees were CNY 258 million, up 23.4% year-over-year, primarily due to more value-added services provided to our clients. Breaking down net revenues by region, overseas net revenues of the year were CNY 1.4 billion, increased by 73% year-over-year, accounting for 43.5% of total net revenues.

We've been following our clients' demands and made significant progress in expanding our international presence in 2023. Managed to recruit over 100 overseas relationship managers as of today. At the same time, we'll continue to enrich our product offerings and enhance cooperation with top global primary and secondary market funds, managers, and insurance companies, driving an increase in overseas transaction value and AUA by 83.4% and 10.2%, respectively. In 2023, we officially launched our office in L.A., and we're actively exploring the opportunities of rolling out services and products in many other places in the world, such as Dubai and Japan, probably Southeast Asian nations. With respect to transaction values, we distributed CNY 16.5 billion products during the quarter, down 8.1% year-over-year and 25% quarter-over-quarter.

By region, transaction value for CNY products in the quarter was CNY 10.7 billion, down 17.4% year-over-year and 30.5% quarter-over-quarter, while transaction value for USD products increased by 12% year-over-year and down 13.4% quarter-over-quarter to $828 million. Total transaction values for the year reached CNY 74.1 billion, up 5.4% year-over-year. Breaking this down by region, the transaction value for CNY products was CNY 50.3 billion, down 13% year-over-year, while the transaction value for USD products increased 83.4% to $3.3 billion, driven by USD cash management and structured products. As of the end of the year, our overseas AUM grew 7.6% year-over-year to $5.1 billion, accounting for 23.3% of the total AUM.

Operating costs and expenses increased by 9.2% during the year, primarily due to the low base effect created by COVID lockdowns in 2022, which curtailed both marketing activity and business traveling, as well as an increase in international travel this year in support of global expansion. Combined with our strategic cost controls, operating costs kept reasonable and in line with revenue growth. Factoring into operating costs for the year were a number of one-time expenses that would generate cost savings over the long term, while the continued urbanization of China, Chinese high-net-worth investors increasingly migrating to first-tier cities. We have been consolidating teams and resources in smaller cities to nearby hubs, mostly capital and first-tier cities, and international regions accordingly. We expect to benefit from consolidations of these networks to save approximately CNY 10 million annualized going forward. We also looked closely at improving human capital efficiency.

The total headcount decreased by 10.4% overall in 2023, most of which would stem from mid and back office personnel, which decreased by 17.2%. This will save CNY 64 million annualized going forward. At the same time, we're allocating resources and firmly implementing overseas talent developments. Total overseas headcount increased by 16.1% to 426 in 2023. Operating profit during this quarter was CNY 221 million, effectively flat when compared to the same period last year and down 11.3% sequentially. Operating profit margin during the quarter improved on a year-over-year basis to 27.6%, but decreased compared with the previous quarter as we typically have more marketing and client activities during the fourth quarter. Operating profit for the year was CNY 1.1 billion, a slight increase of 0.9% year-over-year, while operating profit margin for the year remained at a healthy level of 33.3%.

Total other income for the year was CNY 111 million, increased by 82.2% year-over-year, mainly due to optimization of our capital management and currency mixes. This was partially offset by non-cash investment losses from certain balance sheet investments due to mark-to-market adjustments. Non-GAAP net income during the quarter was CNY 234 million, up 56.7% year-over-year, and CNY 1 billion during the year, a slight increase of 1% from the last year. Turning to the results of each segment during the year, net revenues from wealth management were CNY 2.5 billion, and net revenues from asset management were CNY 766 million, accounting for 75.26% and 23.3% of total net revenues, respectively. On the client side, as of the end of quarter, we had 7,369 Diamond Card clients, down 2.8% year-over-year and 1.2% quarter-over-quarter.

However, the number of Black Card clients, higher-tier clients, increased by 8.8% year-over-year and 1.7% quarter-over-quarter, reaching a total of 2,289. The total number of diamond and Black Card clients was 9,658, slightly down 0.3% year-over-year, primarily due to a sluggish equity market and downbeat investment sentiment. That being said, we're still confident to capture more market share by continuing enhancements in our global product service offerings and achieving a 1% market share in the high-net-worth individual wealth management market as a goal. Overseas registered clients at the end of the year increased by 14.2% year-over-year to 14,929, and overseas active clients of the year increased by 38% year-over-year to 4,629 as we continue to build up overseas presence.

Turning to our balance sheet, we have maintained a healthy liquidity position with our current ratio at 3.8 times and our debt-to-asset ratio at 17.8% with zero interest-bearing debt. We have CNY 5.2 billion in cash and cash equivalents, providing ample resources to support our global expansion plans and making improvements in our shareholder return, which the board has always considered the priority. Therefore, I'm very delighted to announce that based on our strong and clean balance sheet and strong liquidity position, and after considering the necessary investments associated with global expansion plans, the board has approved an annual dividend of CNY 509 million for 2023, which is equivalent to 50% of the year's non-GAAP net income attributable to Noah shareholders, in accordance with the capital management and shareholder return policy announced last quarter.

In addition, the board has also approved a non-recurring special dividend for the year of CNY 509 million in total for 2023. Thus, the amount of total shareholder returns for 2023 in the form of cash dividend will be CNY 1 billion, equivalent to 100% of 2023 non-GAAP net income, subject to final approval of the AGM in June 2024. At the current market value, our recurring payout plan provides a very attractive dividend yield of over 10%, and the total payout plan with the additional special dividend will yield over 20% for shareholders. In summary, we believe that the share price of NOAH is significantly undervalued to its intrinsic value. We remain extremely confident in our long-term growth prospects. We're also committed to improving our return on equity and to creating more values for shareholders through enhanced shareholder returns.

Once again, we sincerely appreciate all shareholders' support for your ongoing trust. Thank you for listening, and I'll now open the floor for questions. Operator.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one, on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Heqing Li with UBS. Please go ahead.

Heqing Li (Executive Director and Equity Research Analyst)

{Foreign language} Let me transfer my question. So this is Heqing from UBS two questions if I may. First the number of covered cities declined to 44 and RMs declined 11% in the fourth quarter.

Is it because of loss of RM from bench closure or are you laying off RMs? And what's your future plan for the onshore business in terms of RM? And my second question, at last year's open day, you talk about structural product and hedge fund products, which could be a driver for one-time commissions going forward. What's the penetration rate of this product and what's your product strategy this year and what's the business outlook for 2024? Thank you.

Grant Pan (CFO)

Thank you, Helen. I think I will take the first question. {Foreign language} So to your first question, Heqing, it's, I guess it's probably a result of both. One is obviously the consolidation of networks. You know obviously some of the relationship managers choose to not leave the smaller city and work in the hub city.

So it's still a little bit of a commute between the hub city and their original city. So there's some natural loss, but it actually doesn't account for too much of the decrease. And two is really you know obviously the optimization. We're increasingly improving the threshold in terms of assessment efficiency of these RMs. So naturally for the RMs they have to reach a higher threshold if you will to be continually to remain in the team. But we're actually actively adjusting the structure obviously with heavier investments on the global side overseas RMs. We're probably also emphasizing you know on the overall comprehensive capabilities of the skill set of the RMs. {Foreign language}

Melo Xi (Director of Investor Relations)

Yeah, Grant, so I will take the translation for Zhe.

So, in terms of the optimization of our domestic network, you know, we always adhere to the strategy of following the footsteps of our clients. You know, over the past few years, we have noticed the trend of high-net-worth individual clients to, you know, relocate from lower-tier cities where they basically accumulated their first bucket of gold to core cities and first-tier cities. You know, as our strategy follows them. So, and also, on the other hand, given the current challenging macroeconomic condition, we need to, you know, concentrate and reallocate our core strengths and resources to improve operational efficiency. Therefore, in the fourth quarter last year, we basically, you know, eliminated some of the underperforming RMs and professionals. So this is quite different from our expansion strategy in the past.

So now we are more focusing on allocating our strengths and resources to the individuals, high performers. And in fact, the top performers over the past year, they're basically their KPI and the AUM more transaction value per head has increased more than 30% over the past year. {Foreign language} So in conclusion, you know, in the past few quarters, we have rather focused on, you know, consolidating our domestic network. So you can probably see that the speed of the RM headcounts domestically, the decrease of the headcount, is actually slower than the decrease of the number of cities we consolidated, which means, you know, we are currently still under further evaluation of our workforce.

So in terms of your second question on the penetration rate for hedge fund products, structured products, and cash management products, so we're not seeing that the penetration rate for hedge fund and structured product is still very low. However, in the first quarter this year, in 2024, the penetration rate for structured product, especially with the principal protection mechanism, has been increasing. And we are also seeing the potential of clients whose wallet with us is currently in cash management-related products as, you know, the interest rate starting to, or is expected to, trend down in the future. We see the opportunity to convert these wallet shares into other alternative investment products, including hedge fund and structured products. Helen?

Heqing Li (Executive Director and Equity Research Analyst)

Very clear. Thank you. {Foreign language}

Operator (participant)

As a reminder, if you have a question, please press star and one to be joined into the question queue.

The next question comes from Peter Zhang with JPMorgan. Please go ahead.

Peter Zhang (Analyst)

{Foreign language} My first question is about the dividend. I wish to check with the management what's the rationale behind on the special dividend payment in for this year. And given that we still have a very strong cash balance on our balance sheet, looking ahead, do we have any share buyback plan or other, say, long-term shareholder return plan? My second question is about the investment income in the other income in our P&L. There's 54 million investment losses in fourth quarter due to investment losses. I wish to understand what's the rationale behind and what are the underlying investments. Thank you.

Grant Pan (CFO)

Thank you, Peter. I'll take the first question, and Nora and Zander will jump in as needed.

So for the special dividend, you know, after ample discussions with our investors and we have basically passed on the message to the board, we'll continue to anticipate strong cash flows from our future operations. And after carefully evaluating the capital need for global expansions, and really not any, I guess, clear target for heavy capital utilization, we believe that it's the right time to return to our shareholders with heavier ratio in terms of special dividend in the form of special dividend. I guess with the depression on Chinese ADRs share price, mostly actually not too much associated with the fundamentals, we don't believe stock repurchase actually adds too much value at this point. We obviously will not exclude that option going forward, but for this year, we prioritize on the cash dividend payout in the form of special dividend.

{Foreign language} Adjustment on the valuation, is pretty much on par with the market。{Foreign language} Thank you very much. Yeah, {Foreign language}

Peter Zhang (Analyst)

That's very clear. Thank you very much. Yeah.{Foreign language}

Operator (participant)

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Grant Pan for any closing remarks.

Grant Pan (CFO)

Okay. Thank you very much for, you know, our shareholders and analysts for your continued trust and support. And this will conclude today's earnings release. And, if you have further questions, we have arranged one-on-one sessions. I'll be very happy, to share more insights with you. Thank you.

Operator (participant)

The conference is now concluded. Thank you. Thank you for attending today's presentation. You may now disconnect.