Q3 2019 Earnings Call
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require operator systems. Please press Star then zero key on your Touchtone telephone.
As a reminder, this call will be recorded.
I'd now like to introduce your host for today's conference Ms. Paige Melching, Vice President of Investor Relations you may begin.
Thank you Catherine good afternoon, ladies and gentlemen, and welcome to San Mina third quarter fiscal 2019 earnings call.
A copy of our press release and slides for today's discussion are available on our website at San Mina Dot com in the Investor Relations section.
Let me, let me remind everyone that today's call is being webcast and recorded and will be available on our website.
You can follow along with our prepared remarks in the slides provided please take a moment to review the forward looking statement on slide two.
During this conference call, we may make projections or other forward looking statements regarding future events or the future financial performance of the company.
We caution you that such statements are just projections the company's actual results of operation may differ significantly as a result of various factors, including adverse changes to the key markets we target.
Significant uncertainties that can cause our future sales and net income to be variable reliance on a small number of customers for a substantial portion of our sales.
Risks arising from our international operations and other four factors set forth in the company's annual and quarterly reports filed with the Securities and Exchange Commission.
You'll note in our press release and slides issued today that we have provided you with statements of operations for the quarter ended June 29, 2019 on a GAAP basis.
As well as certain non-GAAP financial information.
A reconciliation between the GAAP and non-GAAP financial information is also provided in the press release and slides posted on our web site.
In general our non-GAAP financial information excludes restructuring costs acquisition and integration costs noncash stock based compensation expense amortization expense and certain other infrequent or unusual items to the extent material.
Any comments, we make on this call as they relate to the income statement measures will be directed at our non-GAAP financial results Accordingly, unless otherwise stated in this conference call. When we refer to gross profit gross margin operating income operating margin taxes net income and earnings per share were referring to our non-GAAP financial information.
I would now like to turn the call over to Michael Clarke, Our Chief Executive Officer Michael.
Thank you Paige good afternoon, everyone and thank you for joining the call today. It with me today is David Anderson our CFO .
Welcome everyone.
I'm pleased to welcome Pablo do we build a new president and CEO all to the call today. He has extensive knowledge of the M.S. industry and one in major complex global organization.
He will help us continue our path of operational excellence and glow.
I'm very pleased to have how much to join this I mean, the team with that I would like to give them an opportunity to say a few words.
Sure. Thanks, Michael So what do you really good to be here.
The initial impressions after four weeks with a company.
Very positive I'm really impressed with the team.
And our bench strength and how we approach our business in a disciplined.
And very consistent fashion.
The pipeline of opportunities and they'll select end markets is strong.
And all that gives me full confidence that we have a great foundation to work from so I'm really glad to be on the team Michael back to you great. Thank you on that.
Just a few comments on the quarter, but full I turn it over to Dave.
We are very pleased with the quarter, which came in as we expected revenues on a buildout I look over $2 billion.
Driven by solid demand for a broad range of customers and markets.
We delivered solid operating margin up 4% at the midpoint and up 4% plus target range.
non-GAAP earnings came in at a high end if I look at 82 cents with solid free cash flow of 139 million.
Our strategy is working we continue to enhance our operational performance and further develop our go to market strategies in the high mix mission critical high margin businesses.
Well on track to achieve mid teen globe for fiscal year 19.
I will now turn the call over to Dave to give you some details on the quarter and Q4 guidance.
After which I will provide more color on the end markets and the business followed by acuity Dave.
Thanks, Michael.
Please turn to slide three.
Overall, our third quarter revenue and non-GAAP diluted earnings per share exceeded our expectation.
Revenue of $2.03 billion was at the high end of our outlook of $1.925 billion to $2.025 billion.
This was driven by solid demand across all of our end markets.
Revenue was down 4.7% sequentially and up 11.8% from the third quarter of last year.
As supply continued to stabilize in the third quarter, we were able to continue catching up to demand from a broad set of customers and are seeing revenue returned to more normalized levels.
We also benefited in the quarter from the ongoing ramp of new programs to volume production.
non-GAAP diluted earnings per share at 82 cents was at the high end of our outlook was down 9.7% sequentially and up 48.4% over the third quarter of last year.
On a year to date basis non-GAAP diluted earnings per share have grown 66.7%.
I will discuss our end market revenue non-GAAP margin and non-GAAP diluted earnings per share performance in more detail in a few minutes.
Please turn to slide four.
From a GAAP perspective, we reported net income of $42.9 million, which resulted in diluted earnings per share of 60 cents for the third quarter.
This was up three cents sequentially and 13 cents from Q3 of last year.
The sequential improvement in GAAP diluted earnings per share was largely a result of our ability to make further operational improvements that partially offset the negative contribution margin flow through on the sequential drop in revenue.
The improvement over Q3 of last year resulted from higher gross profit driven by the positive contribution margin flow through on the increased revenue as well as operational improvements.
My remaining comments will focus on the non-GAAP financial results for the third quarter of fiscal 2019.
At $149.7 million gross profit was down 5.4 million from the prior quarter.
Gross margin came in at 7.4%, which was 10 basis points higher than Q2.
Operating expenses were up slightly on a sequential basis and in line with our Q3 outlook at $68.6 million.
As a percentage of sales operating expenses were up 20 basis points sequentially to 3.4% and flat compared to Q3 of last year.
Operating expenses were up sequentially, mainly due to higher incentive and professional services costs.
Operating expenses continued to be one of our key operating loan leavers and we are focused on containing operating expenses as a percent of sales.
On a year to date basis operating expenses as a percent of sales are down 50 basis points to 3.2%.
Operating margin was 4%, which was down 10 basis points sequentially and at the midpoint of our outlook and up 100 basis points compared to Q3 of last year.
In Q3, we continued to be in line with our goal of driving operating margins for the 4% plus range.
Other income and expense at $9.6 million was up $600000, when compared with last quarter and up $3.8 million from the third quarter of last year.
Oh, why he was up slightly sequentially.
We started to see a reduction in net interest expense from lower short term borrowings throughout the quarter that were driven by our efforts to reduce our inventory levels.
This reduction in net interest expense was offset by reduced gain in deferred compensation assets on a sequential basis.
As I mentioned on last quarter's call the gain in deferred compensation assets has no net impact on non-GAAP diluted earnings per share as changes in deferred compensation are equally offset in gross profit and operating expenses.
The tax rate for the quarter was 17.25% pre tax non-GAAP income, which was in line with our expectations.
Our tax rate is impacted by the geographic distribution of our profits.
We earned $59.2 million in non-GAAP net income with our non-GAAP diluted earnings per share coming in at 82 cents, which was at the high end of our outlook for the third quarter.
non-GAAP diluted earnings per share were down nine cents or 9.7% from Q2, and up 27 cents or 48.4% from Q3 of last year.
This was based on 72 million shares outstanding on a fully diluted basis for Q3.
Please turn to slide five.
I will now give you some color around our end market segments for the third quarter.
We continued our solid progress in fiscal 2019 with better than expected revenue across each of our end markets.
Communications networks was $736.3 million or 36.3% of Q3 s total revenue.
This was down 3.2% sequentially and up 9.4% year over year.
Year to date revenue in this end market is up 14.2%.
Industrial automotive defense medical was $1.12 billion or 55% of revenue for the quarter.
This was down 4.1% on a sequential basis and up 19% compared to the same period a year ago.
Year to date revenue in this end market is up 29%.
Revenue is up year to date and year over year across all four sub segments.
Cloud solutions consists of cloud computing storage systems point of sale and can see no gain.
This segment was $176.4 million or 8.7% of revenue in the third quarter. It was down 13.2% sequentially and down 13.6% compared to the same period a year ago.
Year to date revenue in the end market in this end market is up 8.7%.
Well in aggregate customer demand remained fairly stable a key contributor to the better than expected Q3 end market revenue and yearly growth was the continued stabilization of component lead times and our team's ability to partner with our customers and suppliers to meet demand requirements.
Our top 10 customers were 55.2% of revenue for the quarter.
We continue to diversify the programs we participate on within our customer base as we strive to improve our program and customer mix.
Please turn to slide six.
The integrated manufacturing solutions segment represents printed Circuit Board Assembly and test final system Assembly and test as well as direct order fulfillment.
As you can see from the graph on the left the IMS segment revenue was $1.72 billion down $73 million sequentially.
Imus gross margin was flat at 6.4% compared to the prior quarter.
I am as gross profit margins came in better than we expected largely driven by the profit contribution flow through on higher than expected revenue and operational improvements, including the resolution of certain cost recoveries from our customers.
On the right is our second segment components products and services.
Components include printed circuit board fabrication, Backplane assemblies cable assemblies enclosures precision machining and plastic injection molding.
Products include computing and storage products defense, and aerospace products memory, and SSD modules as well as optical and RF modules.
Services include design, and engineering, as well as logistics and repair services.
In aggregate the revenue for this segment was down sequentially by $32.9 million to $362.1 million with gross margin up 100 basis points from Q2 at 11.2%.
Cps segment gross margins improved sequentially, mainly driven by improvements in the gross margins within our products sub segment.
As you can see on this chart Cps revenues have dropped from a high of $456 million in the first quarter of 2000 $19 million to $362 million in the third quarter.
This drop is largely due to the project nature of the tier one cloud solutions providers program that we started ramping back in the fourth quarter of 2018.
As you can also see Cps gross margins have been improving steadily in 2019.
This is largely due to operational improvements that we've been making across this segment as well as some continued benefits flowing through this segment from the restructuring actions, we announced back in January of 2018.
Please turn to slide seven.
Here, we are showing you the quarterly trend in our key non-GAAP PNM metrics.
Revenue was down 4.7% from last quarter and up 11.8% over Q3 of last year to $2.03 billion, which was slightly above our outlook.
Gross profit was down 3.5% from last quarter to $149.7 million.
Gross margin at 7.4% was up 10 basis points from last quarter and consistent with our outlook.
Our operating profit was down 7.2% from last quarter to $81.1 million.
This led to operating margin of 4%, which was down 10 basis points compared to Q2.
We continued to be in line with our goal of driving operating margins to be in the 4% plus range.
non-GAAP diluted earnings per share were at the high end of our outlook at 82 cents and on a year to date basis non-GAAP diluted earnings per share of growing 66.7%.
Please turn to slide eight.
Our balance sheet remains strong our cash and cash equivalents were $414.3 million at the end of the quarter cash was up $8.8 million from the previous quarter.
Counts receivable was down $77.9 million.
Contract assets were down $14.4 million and inventory was down $91.4 million.
We'll talk more about contract assets and inventory in a moment.
From a liability standpoint, we had an $89.3 million decrease in accounts payable during the quarter.
Our short term debt was $154.6 million down 488.7 million from the prior quarter.
Short term debt includes the current portion of our long term debt.
Our long term debt increased to $351.5 million.
On May 30, Onest, we borrowed $375 million under the secured delayed draw term loan that was available under our credit agreement and we used the proceeds to discharge the senior notes loan indenture that was due on June onest of 2019.
The $375 million secured delayed draw term loan has a maturity date of November the Thirtyth 2023.
In conjunction with the setting up of the delayed draw term loan we have entered into forward interest rate swap agreements that effectively convert our variable interest rate obligations to fixed interest rate obligations through December onest of 2000 2023.
Through June 29, 2019, we had entered into interest rate swaps with an aggregate notional Matt.
Approximately 4.3%.
We also improved the flexibility of our capital structure by increasing the revolving commitments under our credit facility by $200 million to a total of $700 million and we maintained the flexibility to increase our commitments by another $200 million under you under the accordion feature that is subject to lender approval.
As of the end of the third quarter, our gross leverage was approximately 1.27 based on our total debt.
Our strong capital structure provides san Mina with the flexibility to be opportunistic.
Overall, our balance sheet and capital structure remain in great shape.
Please turn to slide nine.
Here, we are showing you the quarterly trend in our balance sheet metrics.
Cash was consistent with prior quarters in the $400 million range.
Cash flow from operations for the quarter was positive $165.5 million.
Net capital expenditures for the quarter were $26.1 million, which was down from Q2 and below our expectations for the quarter.
We ended the quarter with positive free cash flow of $139.3 million.
Our cash generation for the third quarter was positively impacted by strong cash collections, coupled with our teams continued focus on reducing our inventory levels.
In the upper right quadrant, we are showing you the trend in inventory turns and dollars with the fiscal 2019 quarters shown on the old versus new bases for comparative purposes.
As of the first quarter of fiscal 2019.
San Mina adopted the new revenue recognition standard referred to as AMC six so six on a modified retrospective basis.
As I previously indicated we did not expect the adoption assay six so six to materially impact our revenue or earnings per share, which was again the case for our third quarter of 2019.
However, as C. Six so six does have an impact on our balance sheet.
With the recording of revenue on an overtime basis for the majority of our non product revenue stream.
We are required to reflect work in progress and finished goods inventory along with the profit element as contract assets, which is essentially unbilled receivables.
As a result at the end of Q3, we had $387.3 million of contract assets and 950 million $915.2 million of inventories on the balance sheet.
For comparative purposes from an inventory turns perspective, we have provided the inventory turns calculation for fiscal 2019 under the old methodology and the new methodology.
Our inventory dollars under the old methodology were down $107 million sequentially to $1.28 billion and our turns were 5.6 times.
We remain focused on reducing our inventory levels and improving our turns.
Inventory continues to be a challenge largely driven by ongoing material constraints on certain commodities, such as resisters capacitors and discrete semiconductors.
While we saw continued improvement in lead times during Q3, we still anticipate the supply environment will remain constrained.
Particularly on legacy technology commodities.
We expect this to at least be maintained through the remainder of calendar 2019 with supply potentially further tightening by the first half of calendar 2020.
Lead times are still extended compared to a more normal market.
We continue to work with our customers to better understand the demand outlook. So that we can plan for the requirements with our suppliers.
Our supply chain organization and operations teams continued to do a good job partnering with our customers and suppliers to secure constrained parts to continue to help us catch up with our customer demand requirements, which was instrumental in the a bit in our ability to generate revenue at the high end of our guidance and reduce our inventory by over $100 million.
We will continue to work with our customers and suppliers to maximize the fulfillment of our customers demand will also working on addressing our inventory levels and the negative impact on our cash flow.
We expect to continue to make improvements in our operational efficiencies and materials execution in the areas. We can control during Q4.
In the lower left quadrant, we are showing cash cycle days, which combines our cycle time for inventory contract assets counts receivable and accounts payable.
Overall cash cycle time was up slightly on a sequential basis to 53 days, which was largely driven by unfavorable customer payment terms mix.
Finally pre tax ROI see was 22.2% this was down 0.9 percentage points from the prior quarter.
Compared to the third quarter of last year pre tax ROI see improved six percentage points and remains above our target of 20%.
Please turn to slide 10.
I will now share with you our outlook for the fourth quarter of fiscal 2019.
Our pipeline remained strong and as supply continues to stabilize we expect revenue will start to normalize in the range of $1.9 billion to $2 billion.
GAAP diluted earnings per share will be between 61% to 71 cents.
This includes estimated stock based compensation expense of 12 cents per share.
On a non-GAAP basis, we expect the gross margin will be in the range of 7.3% to 7.7%.
Operating expense should be $67 million to $69 million. This leads to an operating margin in the range of 3.8% to 4.2%.
We expect that other income and expense will be in the range of $10 million to $11 million and our tax rate should be around 17.25% and we expect our fully diluted share count to be around 72 million shares plus or minus half a million shares.
When you consider all this guidance, we believe that we will end up with non-GAAP earnings per share in the range of 73 to 83 cents.
For your cash flow modeling, we expect that net capital expenditures will be around $35 million, while depreciation and amortization will be around $30 million.
We expect net capital expenditures for 2000, Nineteens fiscal year to be in the range of $130 million to $140 million.
We expect to generate positive cash flow from operations in Q4, as we continue to drive better materials planning and execution by continuing to partner with our customers and suppliers in the supply constrained environment.
Overall, we delivered solid third quarter results at the high end of our outlook.
Our revenue at $2.03 billion was at the high end of our outlook. We continue to drive our operating margins in line with our goal of 4% plus non-GAAP diluted earnings per share of 82 cents was at the top end of our outlook and we generated $139.3 million of free cash flow during the quarter.
Taking the midpoint of our fourth quarter revenue outlook. We are on track to finish fiscal 2019 with year over year revenue growth in the mid teens. This is consistent with the outlook we provided on our prior earnings call.
We will continue to focus on our operational execution productivity and cost structure that will leverage our operating model and help further expand our operating margins earnings and free cash flow.
I will now turn the call over to Michael the further comments on our outlook for the fourth quarter fiscal 2019.
Thank you Dave could you please turn to slide 12.
End market outlook, which I'd like to provide some additional information.
Communication network native wireless networking and optical products, we continue to see a strong pipeline in the communications market.
With traction on the Fourg, LTE, and Fiveg, which drives not only the wireless infrastructure, but also the network and optical with some Mena is well positioned.
We see sustained demand in the optical space, both metro long haul as well as on Micrel that John eight capability.
We expect fourth quarter revenues to be down sequentially as we enter into a more normalized level coming off a very strong first quarter.
Overall based on that outlook for the full year, we expect communications market to grow in the low double digits.
It does feel defense medical and automotive we continue to benefit from programs. We have won and we continue to win that will support that growth in these markets in the future.
These markets on mission critical products.
That have higher qualification requirements.
Customers recognize our capabilities and the value added we offer.
As an example, we have seen increased activity our defense business as we expand and optimize our manufacturing footprint to service government classified programs for multiple product offering in multiple locations.
Based on the forecast from our customers, we expect fourth quarter to be flat sequentially. However for the full year. We expect these combined markets to grow in the 20% plus range.
We see good growth potential in these markets and we are well positioned for long term.
Cloud solutions, we have been fairly selective in this market and continue to focus on building a strong pipeline, we die a margin business.
Based on the forecast, we expect the market to be down sequentially for the fourth quarter, but flat for the full year.
Overall, we really excited about the opportunities ahead of us.
We have a solid customer base with a healthy pipeline and we continue to work closely with our customers on new programs.
Some highlights about call. It drivers we are focused on profitable growth that aligns with some maintenance strengths. We are committed to controlling costs driving the efficiencies and leverage in our operating model to continue to improve profitability.
We are laser focused on excellence in quality delivery and meet customer needs.
And our goal is to live it delivered consistent and predictable results for our customers and shareholders alike.
Please turn to slide 13.
In similar.
Q3 was a good quarter follows mandate maintained operating margins in the 4% range solid cash generation provide us with a strong balance sheet and the flexibility to be opportunistic for new business opportunities.
Fourth quarter revenue outlook reflects a more normalized demand with the most stable I supply environment and we are confident revenue for the full year will be in the mid teens.
I sincerely wish to thank our employees worldwide for their hard work and dedication.
I think I customers and suppliers for that that Paul and I share, though does for their continued confidence in some manner.
With that operator, I would open the call for questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then the one key on your Touchtone telephone. If your question Thats been answered or you wish of yourself from the queue. Please press the pound key.
And our first question comes from Reflow bought a Charles with Bank of America. Your line is open.
Hi, Thanks for taking my questions and congrats on the margin improvement in.
In the components and products site.
Michael I was just wondering for my first question can you drill a little bit deeper into the communications networks side.
What did you specifically see in networking optical and wireless in terms of which one was stronger or weaker did they meet your expectations or did they beat and can you talk about the trends as they continue in the current quarter.
And as I said as I said.
Early on.
The communication markets all late.
We've been we've been well positioned, especially on the wireless and when you're well positioned on the while as you get the networking and optical and over the past several years, the team that being way strategizing of which which areas of the communication market. We've been playing and we can see the benefits now in that market.
And I think when I look at.
I will overall business, sometimes you can see that.
This probably some inventory in the supply chain that needs to be done to offset some of that customers, but generally speaking we see a good future for this business.
Okay, just one more question on related to that.
Some of your competitors saw some weakness and routing and switching have you seen the same thing in networking or did you see generally positive trends and networking.
Well wed seen general positive trend.
Everybody is on different programs and that sort of led cannot comment on what they say.
Got it Okay and then one question for Dave I mean, the TPS margins improved 100 basis points sequentially. So that was good margin growth I was just wondering I mean can you talk to us about how how much more growth could there be in that segment are there more efficiencies to drive how auto FYI there the components products and services and how should we think about segment margins going forward.
Yes, so roof, where yes. Good question no. We've been as you know we've been focused on our components products and services business.
And we have been working hard to get improvements both operate operationally in there.
And as I mentioned on the call we saw some continuing flow through from the previous restructurings we did.
As we mentioned before in this business.
We we see this one over the.
Mid term to be to be growing in the 10% to 15% range and our operating margins that of course, we we've said before that we are targeting to get to is is in the 60% range. We said that overall for the company. We are trying to get back to the 4% range overall for the company. So as we continue to make improvements inside of the various pieces of this business the components and then in the products and the services and by doing that.
Inclusive of adding more volume to it which gets US a contribution margin around 25%. We we think that there is continued.
<unk> ability to improve the margins going forward.
Okay. Okay. Thanks for taking my questions and congrats again on the quarter. Thank you. Thanks for your color. Thank you.
Thank you and our next question comes from Jim Suva with Citigroup investment Research. Your line is open.
Hi, Jim Thank you.
Thank you so much for the detail so far it's been great.
You're coming off.
One of your strongest sales growth years, and she is my memory probably about.
910 years, so very very strong and with that.
An opportunity for people to some maybe expect that growth to continue or decelerate or facing some difficult comps. So I'm wondering if you can just maybe help us.
Think about expectations, so theres not a miss alignment as we exit such a strong year. This year kind of what we should think of for next year, maybe not in details, but at least kind of directionally because it's been such a robust stream of sales growth this year.
Yeah, So Jim I think as you know we don't.
Like like you just said we know we don't give guidance beyond this quarter and and we have we have obviously.
We're seeing that we're coming out this year as you mentioned with strength.
With our growth on revenue being in the mid teens.
As far as far as the future is concerned I guess the indicator for US is that at this point, we are still seeing a very strong.
Pipeline of demand from our from our customers and.
As we continue to monitor the situation in terms of the supply constraints.
Which which still haven't totally gone away they are getting better.
We expect to continue to be able to fulfill our customers' requirements, but we we were really not in a position to toe to say other than what we've said before that we expect the IMS business to be in that 5% to 10% growth range and the.
Cps to be in that 10% to 15% growth range over the over the mid term beyond that I can't give you anything further.
Can I, just add something I and obviously, we can add to that but I would said in an earlier slide I'd say that strategy is working.
And we focusing lately on the high mix mission critical high margin business and this has been going on for many many years and I do see coming to fruition, where we've had a really well positioned.
Great maybe a follow up question.
The segment of industrial medical and defense automotive lots lots of big pieces within that segment was up very strong year to date.
Can you give us any commentary are there a couple that are really standing out you'd I think you'd mentioned kind of broad.
Strength across every movie any details around which of those may be doing better are they all kind of the same.
No.
As we said before the all the four sub segments, we're actually we're actually a fairly strong.
So we did we don't break out the sub segments, but they're all up the roll up year to date is about what we can say there. Yes, we said that it plays with all of them.
For the year for the year, that's great and then my last question is hitting your operating margin goal, you're kind of there now and you're very consistent with hitting that should we think about the focus of your company now is really kind of both feet on revenue growth and keeping that part of the engine going or are there other.
Avenues that you are looking at that we should be aware of as we plan kind of the next you know.
How longer term ahead. Thank you well I can answer that but we've just brought on a new president and COO. So if we were not went up at all backing off on to include improving our margin as well as continually improving our sales.
Yes, I would add to what Michael says I mean, as you know Jim I mean, our operating leverage model includes not just filling the plants, but we're trying to leverage both.
Our efficiencies in the plants.
Getting everything whether its linearity of shipments in the plants things of that nature that add to the efficiencies using automation constantly looking at ways in which to.
Use automation in our plan. So we were always driving things aside from just filling the plants, but definitely filling the plants with by the way I would say the right mix I mean, we're we're focused on diversifying our customer our customer program. So the programs inside of our customers to get the right mix for San Mina.
Thank you so much for the details and clarifications that was greatly useful and appreciate it. Thank you.
Thank you.
Thank you again, if you would like to ask a question Press Star then the one key on your Touchtone telephone.
And our next question comes from Christian Schwab with Craig.
<unk> capital your line is open.
Hey, Thanks for taking my call.
Do you guys believe that the environment is getting.
Potentially more competitive as it appears some of your peers are also now a 100% focused on higher margin longer product cycle customer wins and.
Letting.
Business that ramps up and down aggressively with a lot of velocity.
And lower margin stepping away and firing those customers.
And I don't think this business that gets easy and it's always competitive business and you just keep focusing on what you need to do in this business.
You know I think a lot of it as we as we mentioned I think it I mentioned about.
Defense business, you've got to keep increasing your capability, keeping increasing you'll engineering and then that's how you stay competitive.
Yes, I think Christian as well I would add to what Michael as the say the San Mina, we're focused on on what we do well and we have been focused on these high growth high target markets that are highly regulated for some time and I think I think that you know we're seeing that we're getting traction there. So.
Well as Michael said, you know, it's a highly competitive industry, but we're we're trying to.
Continue to be on our path and our plan and our and our strategy, which I don't think Weve deviated from and I think we're showing that we're starting to producers and some of these.
Mark It's a win took a long time to penetrate these markets you have to get certified and qualified and they just station period. It can take years and I think we were really well positioned in them.
Great and then my last question relates to a follow up to the Gentleman's question about expectations going beyond this quarter I understand that you don't want to give specific topline guidance, but can you directionally as you guys plan for your business over the next three to five years, what is the growth rates that you are assuming that your three different business segments.
Without.
Global economic disruption.
Should grow at a broad range, yes, so the broad ranges that we've given and we actually have break it into the two.
Two groups the integrated manufacturing solutions segment in the Cps.
We've we've mentioned before that and we still believe the these growth rates again, if the economy holds up.
Our relevant is that for the Cps, we're looking at 10% to 15% annually.
And this is in the two to three year time time horizon and.
The Imus, we've been looking at 5% to 10% annually and we also mentioned as well you know I mean, taking that from the growth rates in the revenue down to the operating margins.
On the IMS as we get that back up into the gross margins back up into the seven up into the 7% range, we start to get close to where we are achieving the 4% to 5% operating margin range, depending on how you allocate SGN a and and then we're also driving the Cps back into the 6% to 8%. So thats really where were focused on we're focused on leveraging our operating model in order to do that we see targeting. These these target markets that we are talking about that they impact and benefit of both of those segments as we as we look at our business and as we manage our business. So so I think I think I think we're still feeling good about the fact that we're on track to those tools targets.
And Fabulous no other questions. Thank you.
Thank you.
I'll put it I believe we've answered all the questions.
With that I. Thank you for joining the call today, we look forward to speaking with you next time next earnings call and have a great summer. Thank you. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program you may all disconnect everyone have a great day.
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