Good morning, and welcome to the Mekonomen Group Q1 Report 2020. My name is Anna, I will be your operator to today's meeting. During this meeting, you are listening only. However, in the end of the presentation, you'll have opportunity to have questions. If you need assistance, please press star zero on your phone and you will be connected to an operator. I'm going to hand you over to CEO Pehr Oscarson, the host for this meeting. Thank you.
Thank you. Welcome, everyone. I'm glad you can join us today. I have Åsa Källenius, the CFO, with me, and we're going to guide you through Mekonomen's Q1 in 2020. We had a solid start in the quarter, with growth and EBIT level in line with the same period as last year. In March, we started to see clear effects from the COVID-19 pandemic. We acted forcefully and with a bold range of measures to mitigate the effects. Thanks to this, our EBIT level in the end of April is at comparable level at the same period last year. Mekonomen is an international company that enables mobility. We have done so for decades, and we will do so in the future. We have a stable and proven business model, and we are well-positioned for the future.
If we move on to page three in the presentation, I'd like to talk a little bit more about the extraordinary events which we had in March, where we experienced a significant impact from the pandemic in early March, foremost in Norway and Denmark, where the mobility restrictions were deployed very early from the government. In Sweden, we have had less restrictions, resulting in less impact, but still noticeable. We believe that the negative development in the markets will continue for some time before it gradually gets better as the mobility restriction are being eased on all markets. We see now clear signs of mobility relief in all our markets, which has led to an increased demand. Why we believe that the pandemic is not going to have long-term impact to our industry.
At the same time, it's still unsure situation at this point, and we will adapt our business as needed. In the end of March, we were exposed to a data breach affecting the business area MECA Mekonomen and with businesses in Sweden and Norway. Overall, we were successful in handling the breach. We had good backups and the system are restored and in full use since April 15th. We estimate that the incident had a minor negative financial impact to our reported EBIT in Q1. We also expect a negative financial impact in Q2. Losses in both quarters are estimated to be covered by the terms and condition in our cyber insurance agreement. Move on to page four, a little bit about our actions. We acted forcefully and implemented a broad range of contingency measures to mitigate the impact on earnings and cash flows.
The main priorities have all the time been the health and safety of our employees. We have continued to focus on the core business and to make sure that we have a high level of service to our customers. I'm now on slide five. We have taken measures to reduce costs to ensure a strong position going forward, such as secure logistic chains and availability to improve our EBIT through forceful actions. We are re-evaluating approved and planned investments and focusing on improving working capital and secure the future financing through early discussions with the banks. To compensate for the collapsed Norwegian krone, we have sharply increased prices in Norway from early May, complemented by further adjustments to our pricing in other markets. Approximately 30% of our cost cuts will be permanent, which is positive for the future efficiency of Mekonomen Group.
I will hand over to Åsa and some numbers.
Hello, and good morning, everybody. I am at page six. As we heard earlier in the presentation, we had a solid start in the quarter with a growth of 3% and an EBIT level in line with the same period last year. In March, as Pehr said, we started to see clear negative effects from the COVID-19 pandemic. In the quarter, sales declined with 1% and EBIT was NOK 59 million. So far in this pandemic, we have acted very fast and forcefully to safeguard EBIT levels. In April, we will see a decrease in sales, but due to the forceful actions, EBIT is on similar level as the same period last year when adjusted for expected reimbursement from the cybersecurity insurance. In May, sales has recovered notable in most of our markets except for Poland.
They are still more in closed-down mode than the Nordic countries. Over to page six, some explanations how the results distribute over our business areas. Three of our four business areas are not very affected on EBIT level from the COVID-19 in Q1. FTZ is minus NOK 9 million on EBIT. Inter-Team on the same level as last year, and Sørensen og Balchen in Norway, minus NOK 1 million. Mekonomen was affected from COVID-19 in two ways, lost sales due to lower demand and heavily affected by FX, both on gross margin and FX in the balance sheet. FX is mostly related to the collapse of the Norwegian krone during March. Over to gross margin on next page. We had gross margin amounting to 44% in this quarter. It is a decline compared to the same period last year.
Compared to last year, we had positive effects from synergies, and this is to seen as additional synergies because we already had synergies at this point last year. We have a positive impact from bonuses and synergies, even though we had to decrease our forecast for supplier bonuses this year due to lower volume. It impacts gross margin with +0.4%. We have this heavy effect from currencies as earlier described from Norwegian krone, Polish zloty, and Swedish krona towards the euro, affecting gross margin negatively by almost 1% in the quarter. In addition, we have a negative effect from market pressure, product mix, et cetera. This is a combination of lower sales in the business area Mekonomen, who normally has higher margins. We have also an unfavorable product mix due to the mild winter. We sold less winter-related products with high margins.
Also during the data breach in Mekonomen, we had sales with lower margins due to the fact that the stores needed to purchase from local competition to a higher price than normal, resulting in less margins. A combination of more than one thing. Now over to the business areas and how they performed in Q1. FTZ is the entrepreneur market leader in Denmark with over half of the market share in the independent market. Net sales grew 2% in the quarter with a slightly lower margin, resulting in an EBIT of -9 compared to 2019. Despite the slow market development and the comprehensive lockdown from early March due to the pandemic, we believe that we gained market shares in Denmark and will have advantage in the future. Forceful action has been taken to mitigate impact from COVID-19 going forward. Over to page 11.
FTZ recently launched a certification for workshops within electric and hybrid technique, where the first 50 workshop will be certified shortly. The FTZ Akademi is expanding in size and are now way ahead of the competition in Denmark. The expansion of the academy means that FTZ will be in the forefront and the leading independent player in electric and hybrid training in Denmark. Independent workshops have not previously had access to this kind of extensive training opportunity. Over to next page, Inter-Team, our Polish company. Inter-Team is growing in a fast-growing market. In January and February, year to date February, that is, they grew by 10%. In March, we see a negative effect of COVID-19. Net sales ended at same level as 2019. EBIT margin and EBIT was stable.
Here, we have taken forceful action to mitigate the impact from COVID-19, and the EBIT margin will be a strong focus going forward as it was during 2019. Over to page 13. In Poland, we have increased our service level to customer in Southern Poland by successfully implementing a new warehouse management system. In the recently opened regional warehouse in Tyczyn, close to Kraków. Apart from increasing service levels to customer, we will also gain increased efficiency and optimization of cost going forward. Over to MECA Mekonomen. MECA Mekonomen are by far market leaders as number one and two in both Sweden and Norway. In the quarter, net sales decreased by 3%, this is due to lower demand followed by COVID-19, and also data breaks, of course. EBIT was negatively affected by the lower sales and the unfavorable exchange rate, mostly the collapsed Norwegian krone.
To mitigate that, we in early May increased our prices in Norway very sharply to compensate for the weak Norwegian krone, complemented by further price adjustments also in Sweden. Our recently implemented country-based organization in MECA Mekonomen will further contribute to better efficiency in the business area. Also here, very forceful action throughout the operation has been taken and will be taken to mitigate the COVID-19 pandemic going forward. We have a very strong focus within the business area to receive permanent efficiency by cost reductions going forward. Over to page 15. The merging of the central warehouse is proceeding as planned, where a large part of the project will be finalized during next month. Deliveries to both MECA Sweden and Norway are now made from Strängnäs instead of Eskilstuna. By this time, we have no deliveries from Eskilstuna.
Both MECA and Mekonomen in both Sweden and Norway have their distribution from Strängnäs. Over to Sørensen og Balchen. Sørensen og Balchen is, as you know, a very well-maintained and very efficient business. Net sales did decrease by 6% in the quarter due to low demand due to COVID-19. Forceful actions was taken very early and resulted in stable EBIT margins and EBIT in line with the same period last year. Page 17. During March, Sørensen og Balchen initiated click and collect to integrate e-commerce with the BilXtra stores. It was a very successful start, where the initiative has increased the number of online orders in total, and approximately 40% of online orders since beginning of April are now click and collect orders. That was some information regarding our business areas. Now over to Pehr regarding market and footprint.
Thank you. We will move on to slide 19 where we have updated with the numbers for 2019 on this slide. It's slowly changed over time. Most of the changes in Poland, which is the fastest growing market. As you all are aware of many of these numbers when we talk about GDP and so on, which will of course change during this year. I will move to slide 20, where this is how we normally show our market shares, 15% in Sweden, 25% in Norway, 28% in Denmark, and 4% in Poland. This is the market share when we reflect the whole market, both independent and branded, authorized and other workshops. Almost none of the other players are competing with us when it comes to size in any of the markets. Page 21, here we look at the competitors who are most comparable to our business.
As you can see there, and I would also like to say that when it comes to the branded chains, it's very few who comes up to the same size as we are. As you can see, we are very clearly market leaders and with a good distance to our competitors in three of the four markets. I will move on to page 22 or 23, actually. As a large player, we will continue to drive the industry through innovations. We have a proven core business, which is stable on demand on mobility. Our size and expertise in the industry makes us market leaders. For example, we are the leading aftermarket player within automotive technical training, and that's in all our markets. If we move on to page 24, we are also the leading aftermarket player within electric and hybrid car competence.
As Åsa mentioned, we most recently launched electric and hybrid training in Denmark, and the competence is very well appreciated. When we launched the trainings, it was fully booked for a long time, almost directly. It's a very high interest in those trainings. Now at page 25, where we would like to mention that we now also offer the first upper secondary school education for mechanics through distance learning. This is, of course, something which was invented or even fast-invented due to this COVID-19 crisis, but this secure continued growth of mechanic despite the ongoing pandemic, and it creates possibilities for the future when distance is not an obstacle. We are well-positioned for the future. On page 26, EFTERSET, strong sales culture and high availability. We have Inter-Team who's acting on a strong growing market and have a strong growth.
MECA Mekonomen, with an unbeatable logistic operation and market leaders in Sweden and Norway. Sørensen og Balchen, a very well-maintained and efficient company. I would like to mention that we are in the forefront and very highly digitalized in this changing market landscape as we see now. Focus forward, as you can see on page 27, is profitability, it's growth. With growth, I mean organic growth. We have a huge potential to gain market shares in all our markets, and we will succeed by creating the best value for the customers. Finally, Mekonomen Group enables mobility. We have done so for decades, and we will do it in the future as the technology develops and creates new opportunities. Our strong position and stable business model makes us well-positioned for the future. With that, we'd like to open up for questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. We would then introduce you with your name when it's your turn to ask a question. The first question comes from Mikael Löfdahl from Carnegie. Please go ahead, your line is now open.
Yes. Thanks. Hope you can hear me. I wondered if you could perhaps elaborate a little bit more on MECA Mekonomen and the huge year-on-year earnings drop that you experienced in Q1. I can see the bridge on page seven and so on, given that the data breach as such was so late in March, you also mentioned that the financial impact from that was rather limited. I think some of these items that you mentioned on page seven is worth commenting. The other effects that you mentioned, they are combined some SEK 25 million on a year-on-year basis. What are they? Given that a lot of these effects are related to FX, apart from you raising prices in Norway in particular going into Q2, the other items will remain on a year-on-year basis, I guess.
How come you are so optimistic on earnings recovery in Q2, which you have in the outlook statement?
Well, I can start. Good morning. You see the bridge, we are optimistic also for MECA Mekonomen going forward, even though the gap towards Q1 last year is very large in MECA Mekonomen. If we look at the bridge we made, you can see that lower volume, that's both due to COVID-19 and it's due to the data breach. The data breach will be over. Going forward, we are up and running since April 15. The COVID-19 effects from sales, we see April, yes, there is a decrease, but in May it looks really good for MECA Mekonomen. Nobody knows what COVID-19 will mean going forward. From what we see today, we see a recovery of the volumes in MECA Mekonomen. To the FX. We have FX-related costs on gross margin. They are SEK 19 million in this bridge.
That negative effect we mitigated with the price increases we've done in Norway. They are approximately 8%, they are very sharply increased of sales price in Norway. We expect the gross margin to also recover going forward. It's a effect we had from the exchange rates from Swedish krona to Norwegian and Norwegian krone to euro was exceptional during the end of March. That's also we have a very large item on the OPEX from FX, and then that's from revaluating the balance sheet items, accounts payable and receivable. That's also to be considered as long as we do not see extremely drop again, that's to be seen as a one-off item because it's just how it looked like in the end of March. Of course, when the Norwegian krone and also the Swedish krona were very weak, we have a great effect.
That effect is also to be seen as one-off item because we won't have it again as long as the exchange rates stay as they are today. They had recovered, so in April and May, we have positive effects also from the revaluating of the balance sheets. I guess that's explanation and overview, Pehr.
From a more operational point of view, we also changed the organization in MECA Mekonomen in mid-February to a country-based organization, which will lead to possible synergies and cost savings. Some of that potential we got a little bit delayed due to the COVID crisis where we needed to focus on other things. I would also like to say that the cost-saving activities which we have done since the crisis started, very much of them is in the business area MECA Mekonomen, and it's also there where we see a large portion of them actually to be permanent and that the cost will not come back. We'll have that in future. That also contributes to the positive view which we have.
Yes. I can add to that also. We say in the report that in April, we have a decline in sales from both the data breach, of course, and then COVID-19. With the forceful action we have taken, we are able to save EBIT, and most of that is, of course, from MEKO Mekonomen business area taking actions to mitigate this drop we saw in March. We are quite confident that we will deliver better in MEKO Mekonomen going forward, and March is very exceptional, and it's very exceptional with the extremely movements in FX for our most essential currencies.
Just a question there on April and also March. Is it fair to say that March typically is a rather big and important month for you in Q1? If so, how would you describe April for Q2? Is that a bit of a smaller quarter, or is it more evenly spread over Q2?
It's a difficult question because it varies. It's difficult to split the quarters in that way because we have Easter, we have spring, and we have tire changes and so on. There is a lot of, let's say, movement, especially between April and May due to, let's say, outer circumstances. We usually tend to combine the two months to get a better grip on how we're performing. I don't think we can be more clear than that.
Okay, thank you. Just one also to clarify April. You mentioned the data breach, and also what you expect to get from the cyber insurance. April, on a year-on-year basis, you expect to be unchanged before any payments coming from the cyber insurance, or how should we interpret that?
Well, we expect April to be the same level of sales drops, forceful action take down costs, together with the reimbursement we expect due to the terms and condition in our insurance, we expect EBIT level to be on the same more or less than last year.
Okay.
Yeah. it's when we
Nothing including what you get from the insurance company?
Yes.
Yes.
Yes, it is.
Okay. Excluding the actual operational impact, or do you expect the insurance to cover the operational impact from the data breach in April?
Yes.
What you're saying then is that April, on a year-on-year basis, we can take the data breach and put that aside, then the business in April is expected to be unchanged on a year-on-year basis, despite the drop in sales?
Yes.
Yeah, thanks to the forceful actions in cost savings and of course, in those markets where we can use help from the local governments, that's also something which we, of course, have used. We compensate with lower costs.
Yeah.
Okay. Just one also on the synergies, the purchasing synergies with FTZ and Inter-Team, where are they in terms of size, and how much is left?
We said we will have all synergies, the NOK 100 million, during 2021. Last year we have about 70% of those in the result. We are perhaps now at 75% or 80% or something like that. We have the synergies, but each quarter we make a forecast for the year volume, and since volume dropped, we also need to adjust the supplier bonuses percentage. That's why you don't see more synergies in the bridge for gross margin. You reach certain tiers in the supplier bonus there, and we needed to take that down a bit due to less sales forecasted for this year.
We can say like this, that to reach the 100% of better conditions, that is a target which we still are very confident if that will lead to NOK 100 million. As we said, it will be difficult because of the drop in the volume.
Percentage-wise, it's working as planned.
Yeah. When the volumes recover to what they were ahead of COVID-19, they will be in the result, of course, then.
Okay. Just one final from me. Sorry for all the questions, back to your guidance for Q2, I'm rather amazed by the fact that if you say that it's unchanged EBIT in April so far, and you say that in May, sales have actually then recovered from April, then one could interpret that as May earnings could even be up year-on-year. Now you have basically May in your books. Your comment on that, last year you had, if you look at EBITDA levels, you had NOK 292 million for the entire Q2 versus NOK 116 in this quarter. Those NOK 292, are they representative for your Q2? If you're speaking about April unchanged and maybe May and June unchanged or even better, that implies more than a doubling of your results on a quarter-on-quarter basis.
You say that the earnings or profitability is expected to increase significantly quarter -on -quarter. If a doubling of earnings, is that on the cards?
We don't do guidance in that way. That would be your job to do that.
Yeah. No, exactly. I think COVID-19, it's too early to say it's over. We do not know what will come later in even this quarter. What we can say is that April is on the same level as last year. Sales in May have recovered for all markets except for Poland. They are still in lockdown situation, and we do not know when they would ease up Poland. What we can say from the fact we have today is that Q2 will be looking better than Q1.
Definitely.
Okay. Thank you very much.
Thanks.
Ladies and gentlemen, before we let the next person through, if you would like to ask a question, please press star one on your telephone keypad. The next question comes from Andreas Lundberg from SEB. Please go ahead, your line is now open.
Thank you, and good morning. Sorry, but I need to get back to your Q2 outlook, because as you touched upon now, you expect EBIT including reimbursement to be rather flat in April. Doesn't that suggest a pretty sharp improvement of your EBIT margin? If so, you also say that the second quarter do you expect substantially lower sales and EBIT margin compared to comparable quarter last year?
Yeah.
Thank you.
Yeah. You are absolutely right. We need to correct that because EBIT margin should increase when EBIT is on sales level and sales go down. We need to correct that in the report. Shouldn't be said like that.
It's the Q2 comment that is incorrect?
Yeah.
Got it. Also your comments on no need for liquidity as of now, is that based on your Q2 outlook as well?
Yes.
Yes.
We had good liquidity and in Q1, we still have good liquidity today. It's an outlook, yes.
Okay. You are going back now to your old covenants, is that fair to say? After March 31st.
We have some financials and good liquidity, but we are in discussions with the banks for Q2 and onwards regarding additional amendments to adapt and update the loan agreement with change we see due to COVID-19. We will make an amendment with the banks. We are in discussion right now.
Okay.
There is no need for extra liquidity. Our liquidity is good.
Okay, thank you. Lastly, on the demand side, have you seen so far any, or what you think about going forward when it comes to pent-up demand, given that it's been a lockdown in some of your markets?
Again, I lost-
No, I mean, on the demand side.
Yeah
Have you seen a pent-up demand now? Have you already seen it, or do you expect to see it now when at least some of your markets have been in lockdowns?
I think it's a bit difficult to know exactly because markets like Denmark and Norway are still in partly lockdown. It's not fully open. As restrictions are lifted, we see an increase in demand. It was definitely an effect in, I would say, the end of April and beginning of May, where it was postponed services and postponed tire changes and so on, which made a bit higher demand than normal for a couple of weeks. That's probably more back to normal. It's different in all the four markets. Poland is still very slow and it's still a very restricted society. Sweden has been quite stable all the time, but it's not like 100% anywhere. It's still, I would say, possibilities to improve better when restrictions are opened up or lifted.
If you have no restrictions during the summer or more easing of restrictions, do you expect that to help your demand?
Yeah.
People also have more time and will stay at home.
There's a lot of speculation and it's difficult to summarize, for example if there will be no restrictions in traveling domestic but still very difficult to take the vacation abroad, then of course more people will use the car during July and August. That will definitely help us. On the other hand, if there will be a continued recession as a result of the pandemic, then we know that a lot of company cars may be standing still because offices are closed and so on. There is a big mix of effects. Again, Mekonomen and independent aftermarket, usually in this kind of crisis when it's financial crisis, is very seldom affected. We're not following much when it's up, but not so much down either. We expect that if it goes back more to normal, then we will have a very stable business going forward.
Thank you so much.
Next question comes from Mats Liss from Kepler Cheuvreux. Please go ahead. Your line is now open.
Yeah. Hi, can you hear me?
Yes.
Thank you. Yeah, a couple of follow-ups, I guess. First the price increases there in Norway were quite substantial and I guess positively affected earnings going forward. Did you experience any pre-buy impact from customers there trying to stock up on the old price level, or can you say something about that?
No, because most of our customers, I don't have the numbers, but the very large portion of our customers is workshops, and they don't stock themselves. They buy from us on a daily demand. There could be some wholesaling business, but we didn't see any of that effect.
Good. Coming back to these April earnings, I guess the reimbursement from the insurance was partly March related and also April related, and there was not a monthly reimbursement. It covered a longer period. Have you adjusted for that in your indication of the earnings level in April?
Yeah. When we say that April earnings will be in line with last year, taking into account that according to the terms and conditions and the insurance, what that will give us. That includes the reimbursement from insurance, yes.
You expect to receive the reimbursement during the Q2, or is it the final decision from the insurance company is already taken?
It's an ongoing discussion with the insurance company, so I would like not to comment on that.
We could say that it's not 100% certain we will have it in Q2. Could be Q3 as well.
Okay.
Partly. It's two parts in the insurance. It covers extra cost we had due to the data breach, and it covers also loss of gross profit. It's two parts in the discussions we have.
It's only a matter of time. You have the box ticked, so to speak.
We are in discussions, but.
We are very confident in what we are saying in the outlook of Eggeric.
Yeah.
Yeah. Finally, just about gearing and the covenants. You adjusted them, or from the bank adjusted them in the Q1 there, and they are still there, and I guess the cost of service, the debt have gone up a bit. Could you give some indication there for the Q2 going forward?
No, we do not give any updates there. We are compliant with our covenants in Q1, and due to the extraordinary situation, we are discussing with the banks to update our loan agreement according to that.
Okay. So far, so good. You haven't changed the covenants. They are still in place, and basically, all the liquidity is sufficient, so you don't need to have any adjustments made. Could be the case given the QCER pretty off after the Q2 also.
Our liquidity is good as we speak, and we are compliant with the covenant in Q1. Due to the extraordinary situations, we are in discussions with the banks to adjust our present loan agreement when it comes to the covenant.
Okay. Just the same area there. You didn't make the amortization, EUR 5 million amortization at the end of the quarter. Do you expect to do the same in the Q2 ?
When we did that, the situation with COVID-19 was very new, and we had an amortization coming up just in one week's time. Nobody know then what this would lead to. That was taken to be certain to have liquidity, but we have very good liquidity, and as we stated in the report, our financials are sound. It's our intention to repay our debt as in the loan agreement. I do not see that we will ask for, not to repay the debts. We are following the bank agreement when it comes to amortization.
The first quarter amortization will be made, had been made or will be made in the Q2 .
No, that will not be made in the Q2 , but we will make our ordinary repayments in the Q2 .
Okay. Thank you very much.
Before we let the next person through, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Next person is Mika Karppinen from Handelsbanken. Please go ahead, your line is now open.
Yeah, hi, this is Mika. Can you hear me?
Yeah.
You said that in the April, sales were down 17%. Could you give more details on how the sales were developing in different operating countries? Bit more info on sales growth in Sweden, Norway, Denmark, and then the Central Europe as well.
We don't have that detailed in our report. Just to give a very high level, I would say that a large portion of that is due to the data breach in MEKO, Mekonomen in Sweden and Norway. It's Poland who also are still not recovered or still very restricted, where the sales is down. Better in Denmark, I would say, or closer to a normal situation in Denmark.
Okay. The biggest hit is actually coming from this database, and that is visible in MEKO, Mekonomen unit. Okay, good. Thank you.
The next question comes from Mikael Löfdahl from Carnegie. Please go ahead, your line is now open.
Yes. Hi guys again. Sorry for bothering you. Just to follow up on the FX impact for you. I think if I'm not wrong, there is a lag of around three months from what you purchase for and when you sell the products, which means that there's a lag in the impact on gross margins as well from any spikes or declines in FX rates. If this is true, the spike we had in the euro against both the NOK and the SEK was in March, and after that it has declined sharply. Just by looking at the FX rates in Q1, that effect should rather come in Q2 or late Q2, and the price increases that you have implemented now, the question is will those have time to compensate for that? Could you elaborate a bit on the impact from FX, please?
Yes. The large impact we have from FX comes from the margins in Norway, and that will be compensated with the price increase. Because we buy from Mekonomen, we buy goods into our central warehouse in Strängnäs. We didn't buy that much due to COVID-19 because we had bought a lot ahead due to the Chinese New Year, et cetera. I do not see any large impact from the purchasing prices in Mekonomen warehouse going forward, because we have had a Euro SEK for a long time to 10.60, and during the time it was almost 11 now, we didn't buy that much due to the COVID-19.
Okay. Thank you.
Sure.
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Okay. Thank you all for listening and thank you for good questions. That will be all for us. Thank you and bye.
Thank you.
Thank you for joining today's conference. To end the call, you may now replace the handset. Thank you.