Earnings Call: Q3 2018

Oct 24, 2018

Good afternoon, ladies and gentlemen. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Celestica Third Quarter Earnings Call. I would now like to turn the call over to Paul Carpino, Vice President of Investor Relations. Paul, you may begin. Good afternoon, and thank you for joining us on Celestica's Q3 2018 earnings conference call. On the call today are Rob Mionis, President and Chief Executive and Mandeep Chawla, Chief Financial Officer. As a reminder, during this call, we will make forward looking statements within the meaning of the U. S. Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws, including those related to our future growth, trends in the EMS industry generally and in relation to our business, our anticipated financial and or operational results and our anticipated non IFRS adjusted annual effective tax rate our targets, priorities, guidance, plans and initiatives the sale of our Toronto headquarters our intention to launch an NCIB the timing, amounts and benefits anticipated from our cost efficiency initiative the anticipated impact of our comprehensive review of our CCS business, the expected timing of our anticipated acquisition of Impakt and anticipated restructuring actions and capital expenditures. Such forward looking statements are based on management's current expectations, forecasts and assumptions, which are subject to risks, uncertainties and other factors that could cause actual outcomes and results to differ materially from conclusions, forecasts or projections expressed in such statements. For identification and discussion of such factors and the material assumptions on which such forward looking statements are based, as well as further information concerning financial guidance, please refer to the company's various public filings. These include our most recent MD and A and Annual Report on Form 20 F filed with and in reports on Form 6 ks furnished to the U. S. Securities and Exchange Commission and as applicable to Canadian Securities Administrators, including the Risk Factors sections thereof. Please also refer to our cautionary statements regarding forward looking information in such filings and in today's press release. Our public filings can be accessed at sec.govandsedar.com. We assume no obligation to update any forward looking statement except as required by applicable law. In addition, during this call, we will refer to certain non IFRS measures, including operating margin, operating earnings, gross debt to non IFRS adjusted EBITDA leverage ratio, adjusted net earnings and earnings per share, free cash flow, adjusted ROIC, adjusted SG and A expense and adjusted effective tax rate. These non IFRS measures do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other public companies that use IFRS or who report under U. S. GAAP and use non GAAP measures to describe similar operating metrics. We refer you to today's press release and our Q3 2018 earnings presentation, which are available at celestica.com under the Investor Relations tab for more information about these and other non IFRS measures, including a reconciliation of historical non IFRS measures to the most directly comparable IFRS R measures from our financial statements. We do not provide reconciliations or forward looking non IFRS financial measures as we are unable to provide a meaningful or accurate calculation or estimation of reconciling items and the information is not available without unreasonable effort. Unless otherwise specified, all references to dollars on this call are to U. S. Dollars. Let me now turn the call over to Rob. Thanks, Paul, and good afternoon. Celestica delivered strong revenue growth and continued consolidated margin expansion in Q3. Mandeep will provide more details on the quarter, but let me highlight a few items. First, we were very encouraged by the improvements made in our CCS segment, which for the 2nd straight quarter has delivered solid revenue growth and has moved towards the higher end of our target CCS margin range. As we have highlighted throughout our transformational journey, we believe a strong and focused CCS segment is essential to delivering on our strategic initiatives and we continue to make progress in this regard. 2nd, we like how the diversification and strength within CCS helped offset some of the pressure we saw in our semiconductor capital equipment business. CCS revenue and segment margin have steadily recovered since the beginning of the year and we are encouraged by the results of our investments, including in JDM, which is having another year of double digit revenue growth. 3rd, the integration of Atren is substantially complete and meeting our objectives. With Atren, we were able to acquire and successfully integrate a business with a proven operational track record, and we are looking forward to the integration of Impakt later this year. And finally, I am pleased with continued consolidated non IFRS operating margin expansion this quarter and with our Q4 guidance where we are targeting to report additional improvement. The continued progression in our margin initiatives is key to supporting our recently increased and accelerated non IFRS target operating margin range at 3.75% to 4.5% over the next 12 to 18 months. As previously highlighted, there are 3 main components of these initiatives. 1st, anticipated benefits from our $50,000,000 to $75,000,000 restructuring program, which is scheduled to run until May 2019. 2nd, the ongoing expansion of our ATS portfolio, which is growing organically as well as through strategically aligned acquisitions, such as Atren and recently announced Impact. And third, the continuation of our CCS portfolio review, where we are targeting to better align our program investments in order to achieve our strategic and financial priorities. While the first two items are clear in terms of what we expect, let me provide more transparency on our CCS review. As part of our CCS review, we are making thoughtful and strategically aligned decisions regarding the capital and resources being deployed in this $4,000,000,000 plus business. The investments in our CCS segment for our customers are meaningful as we provide significant manufacturing, supply chain and JDM solutions throughout our global manufacturing network, invest 100 of 1,000,000 of dollars in working capital to support our customers' revenue and enable tens of thousands of talented employees who are deeply committed to executing on our customers' requirements. Clearly, with this level of investment, it is important for us to continually adapt our approach to this market in order to best serve our customers, shareholders and our employees. Across all of our business and within CCS, we have strong long standing relationships with many industry leaders. We have earned their trust. We have delivered cost effective manufacturing and supply chain solutions for decades. And we believe we have helped them deliver on their promises to their customers. However, as the hardware industry has changed over time, some of the economics of this business. As we execute on this review, we anticipate our CCS revenue will be down in 2019 compared to 2018, yet we anticipate this to be a value creating exercise intended to improve CCS segment margins and release working capital. While we are not providing 2019 guidance, we intend to action approximately $500,000,000 of current CCS annual revenue over the next 12 to 18 months, with the intended benefit of expanding CCS margins. While executing on this program, overall CCS revenue is likely to be lower depending on market demand, new programs and other factors affecting our base CCS business. Hopefully, by providing the size of our review, you will have a better context in terms of what we are trying to accomplish. Importantly, with annual CCS revenues in excess of $4,000,000,000 the directional guidepost provided also highlights the fact that we are not exiting the CCS business. To the contrary, we continue to bid on and win new programs in CCS that are better aligned to our strategy. Our JDM business is a great example of this, where we have a healthy pipeline of new opportunities and revenue from this business continues to grow at double digits. Are also new program wins in our traditional EMS business, where we are partners to some of the world's leading OEMs and cloud providers. Additionally, as part of our review of the CCS portfolio, we are pleased that some customers are choosing to work with us on improved commercial terms that reflect the major investments we are committing to their programs. As we execute our CCS review over the next 12 to 18 months, We do not intend to update specific customer revenue or programs, but we will provide general context on our progress when appropriate. Additionally, you should assume that any anticipated impact from these programs will be factored into the quarterly guidance we provide. By reducing less strategically aligned revenue, we are targeting to expand non IFRS operating margins and grow overall EPS, while redeploying working capital. These improvements are examples of what we have been working towards as we progress through our transformational journey, which we started 3 years ago. And I believe our progress today is encouraging. I want to congratulate our employees for their successful execution of our strategy and for their ongoing commitment to provide the best solutions to our customers. We are also looking forward to welcoming the Impak team later this year when our transaction closes. Let me now turn the call over to Mandeep to provide some additional details on the quarter. Thank you, Rob, and good afternoon, everyone. Celestica reported strong revenue of $1,710,000,000 an increase of 12% year over year and exceeded the midpoint of our revenue guidance range. Our non IFRS operating margin was 3.3 percent, up 20 basis points from the 2nd quarter and in line with the midpoint of our revenue and non IFRS adjusted EPS guidance ranges for the quarter. Adjusted earnings per share were $0.26 at the low end of our guidance range. We had a $0.03 per share negative tax impact arising from taxable foreign exchange, primarily from the weakening Chinese renminbi relative to the U. S. Dollar, as well as an increased proportion of profits earned in higher tax rate jurisdictions. In ATS, we saw year over year revenue growth of 17%, driven by new program revenue in Aerospace and Defense, including contributions from our recent acquisition of Atren and demand strength in industrial. Some of this growth was offset by demand weakness in capital equipment, reflecting the well documented cyclical moderation currently being experienced in the semiconductor capital equipment component of this business. For the Q3 of 2018, ATS segment income was $25,500,000 and ATS margin was 4.6 percent, down 50 basis points from Q2 and slightly below our target ATS segment margin range of 5% to 6%. This decline was primarily driven by lower utilization in our capital equipment business. Our CCS revenue was strong in the 3rd quarter led by better demand in both the communications and enterprise end markets, including JDM. Overall, CCS revenue was up 9% year over year and up 1% sequentially. CCS segment income was $30,900,000 translating to a margin of 2.7%, a solid 50 basis point increase from Q2, resulting from improved mix and operational performance. DCF segment margin in the 3rd quarter was also up 100 basis points from the Q1 of this year, operating within our targeted 2% to 3% margin range for this segment. The margin improvement has been driven by better mix and benefits from our restructuring and productivity efforts. Within our CCS business, the communications end market represented 43% of our consolidated revenue in the Q3. Communications revenue was up 7% year over year and 3% sequentially. This was driven by strong demand and new programs, including in JDM, offsetting some demand softness from legacy programs. Revenue from our enterprise end market represented 24% of consolidated revenue in the Q3. In our enterprise end market, revenue increased 13% on a year over year basis, driven by strong program demand in storage, including in JDM. Our top 10 customers represented 71% of revenue for the Q3, unchanged from the Q2 of 2018 and the Q3 of 2017. For the Q3, we had 2 customers individually contributing greater than 10% of total revenue. Moving to some of the other financial highlights for the quarter. IFRS net earnings for the quarter were $8,600,000 or $0.06 per share compared to $34,800,000 or $0.24 per share in the Q3 of 2017. Lower year over year IFRS net earnings were driven higher restructuring costs, Toronto transition costs and acquisition related costs as well as increased tax expense. Restructuring charges related to our cost efficiency initiatives were $13,300,000 this quarter. This brings the total program spend to date to $37,000,000 This enterprise wide cost efficiency program will run through mid-twenty 19 and we anticipate the total cost of this program to range between $50,000,000 to $75,000,000 Adjusted gross margin of 6.7% was up 30 basis points sequentially, primarily due to better CCS performance. Our adjusted SG and A of $50,000,000 was up approximately $5,000,000 from the same period last year, primarily driven by expenses related to Atren. As a percentage of revenue, adjusted SG and A was 2.9%, relatively unchanged from last year. Non IFRS operating earnings were $56,400,000 up $3,300,000 sequentially and up slightly from last year. Our adjusted tax rate effective tax rate for the 3rd quarter was 27%, driven by negative tax impacts from foreign currency and the increased proportion of profits in higher tax rate jurisdictions. Our 4th quarter tax rate is expected to be back in line with our annual guidance range of 17% to 19%. Adjusted net earnings for the 3rd quarter were $36,000,000 Adjusted earnings per share of $0.26 represents a decline of $0.05 year over year. Adjusted ROIC of 16.2% was up 20 basis points sequentially and down approximately 2.90 basis points year over year, primarily affected by higher working capital. Our inventory at the end of September was $1,100,000,000 an increase of $56,000,000 from the 2nd quarter. Inventory turns for the 3rd quarter were 6.2, down 0.4 turns from last quarter and down 1.1 turns from the Q3 of 2017. The higher inventory levels were driven in part to support 4th quarter revenue growth as well as ongoing material constraints. Capital expenditures for the Q3 were $21,000,000 or 1.2 percent of revenue. This lower level of spend was driven by timing of certain investments and we expect CapEx for the year to end up at the lower end of our range of 1.5% to 2%. Cash flow from operating activities for the quarter were $55,000,000 compared to cash used in operations of $8,000,000 in the prior year period. Free cash flow was $25,000,000 in Q3 compared to negative free cash flow of $44,000,000 for the same period last year, driven primarily by improved working capital performance compared to last year. Cash cycle days in the Q3 of 54 days increased one day compared to the Q2 of this year. While the inventory environment continues to limit free cash flow, we will be receiving proceeds at the closing from the sale of our Toronto headquarters, which is currently expected by the end of Q1 of 2019 or sooner. As mentioned earlier this month, we expect to receive the full payment of remaining proceeds of approximately CAD122 million upon closing. Moving on to our balance sheet. Celestica continues to maintain a strong balance sheet. Our cash balance at quarter end was 4 $58,000,000 up $56,000,000 sequentially and down $58,000,000 year over year. As previously highlighted, we expect to finance the $329,000,000 acquisition of Impakt through a combination of an expanded term loan, the use of cash on hand and the company's revolver. The acquisition is expected to close late this quarter. Our balance sheet remains strong even post the acquisition with an expected gross debt to non IFRS adjusted EBITDA leverage ratio of approximately 2 times, allowing us to continue a balanced approach to capital allocation. This quarter, we repurchased 1,900,000 shares for $23,000,000 as part of our NCIB program. Since commencing this program in November of 2017, we've repurchased 7,400,000 shares at a cost of 82 $1,000,000 and we remain committed to completing our current stock buyback program this quarter. In the Q4 of 2018, we expect to file with the Toronto Stock Exchange a notice of intention to commence a new NCIB. Subject to acceptance by the TSX, we expect to be permitted to repurchase for cancellation up to 10% of the public float of our subordinate voting shares over the 12 months following the acceptance. Now turning to our guidance for the Q4 of 2018. We are projecting 4th quarter revenue to be in the range of 1,701,000,000 dollars to $1,801,000,000 At the midpoint of this range, revenue would reflect an 11% increase over the Q4 of 2017. 4th quarter non IFRS adjusted net earnings are expected to range between $0.27 to $0.33 per share. At the midpoint of our revenue and EPS guidance ranges, non IFRS operating margin would be approximately 3.5% and would improve sequentially by 20 basis points from the Q3. We are continuing to execute on our margin expansion initiatives, including recently raising our consolidated non IFRS margin target range to reflect the progress we are making across the business and in executing on our strategic initiatives. Non IFRS adjusted SG and A expense for the Q4 is projected to be in the range of $49,000,000 to $51,000,000 Finally, as mentioned, we estimate our annual non IFRS adjusted effective tax rate for the 4th quarter to be in the range of 17% to 19%, excluding any impacts from taxable foreign exchange. Looking at our end market outlook for the 4th quarter. In ATS, we are anticipating revenue to be up in the low double digit percentage range year over year. In our communications end market, we anticipate revenue to continue to be strong, an increase in the mid teens range year over year. In our enterprise end markets, we anticipate revenue to be up in the mid single digit range year over year. Overall, we're pleased with our progress to date and expect to end the year on solid footing as we accelerate our transformation in 2019. I'd now like to turn the call over to the operator to begin our Q and A. Your first question comes from Robert Young with Canaccord Genuity. Robert, your line is open. Hi, good evening. First question for me would be a clarification on the $500,000,000 of CCS segment revenue you're looking at reducing by. You didn't give a range there. So is that a maximum figure, a minimum or can you give maybe some context around that number? And I was also interested in the clarifying, you said that you expect single digits percent reduction in total revenue. I assume that's 2019. And does that include any contribution from the acquisition of Impakt? Hey, Rob. This is Rob. So starting with the portfolio review, at this stage, we've done an exhaustive review of our $4,400,000,000 CCS portfolio. And based on that as we said in the earlier, the $500,000,000 of revenue is something we're looking to take out over the next 12 to 18 months. Again, our focus is on really improving the overall economics of the business while continuing to provide great support to our customers. From an overall company perspective, we anticipate that our revenues will be down in the single digits year over year next year. And that is while we expand margins, while we expand earnings and while we generate cash. However, as I mentioned on the call, this is somewhat variable because our base business might grow or contract just based on broad market demand. But broadly speaking, we view this as a value creating activity. And I'll turn it over to Andy for the second part. Rob, I think the answer the question was answered. So from a 2019 perspective, I would think about the revenue as being down in the single digits on a consolidated basis, including impact and growth from ATS. Okay. So it does include impact. Okay. And the second question, you said that you're bidding on and winning new business. And so I was wondering if you could talk about the dynamic between the rationalization of CCS, but at the same time winning new business? Is that are you leaving any new opportunities? Are you unable to win some new opportunities because of this? Is it changing the dynamic with some customers? If you could talk about the impact on the pipeline? Yes. Overall, we've had a very strong bookings here in both segments. Specifically in CCS, we're looking for work that plays to our strengths, specifically in JDM. We're having a great year in JDM. Our growth should be north of 20%. We're also continuing to win work in core EMS as well that plays to our strength of higher complexity, higher higher reliability. The portfolio reviews are really program specific and largely on the work that has kind of less calories, if you will. Robert, the only thing I'd add to that as well is that the $500,000,000 is the net number, if you will, of revenue that will come out. The portfolio review has now been underway for some time. We've been making a lot of good progress in our conversations with a number of customers. We have been successful in renegotiating commercial terms to our benefit. And along with that, collaborating with our customers and generating new wins. When we've identified the $500,000,000 those are programs where we just agree together that the investment that we're making and the return that's going to come just don't really match up together. Okay. If I can ask one last one, just an update on the semiconductor equipment business. I noticed you called it the capital equipment business. Are you changing the name of it to include impact? And you said that you expected a pause last quarter, are you expecting that to change past lines? Yes. So with impact coming online, we view the entire portfolio of the capital equipment business. So it has an industrial sector, has a power sector, has a semiconductor capital equipment business and has a display business and that overall is our capital equipment business. With respect to semi cap, it has been a good business for us even through the cycle. Bookings has been especially strong this year. We do view Q4 as flattish relative to Q3 from a revenue perspective. Okay. Thanks, Rob. Next question, Julie. Your next question comes from Thanos Moskopoulos with BMO. Thanos, your line is open. Hi, Rob. As you go through the portfolio review process in CCS, what do you think that would do for your targeted margin range there? Hey, Dan, it's Mandeep here. Going back to some of the remarks that were made as we have laid out the expansion of the margins to 3.75% to 4.5% over the next 12 to 18 months, It's being driven by a series of initiatives. One of them absolutely is the CCS portfolio review, but it's also being driven by the continuing growth in ATS as well as the expanding margins that we're seeing from the productivity program that's well underway right now. As mentioned, we spent $37,000,000 towards the $50,000,000 to $75,000,000 program. And as you saw in the results this quarter from CCS, we're starting to see the benefit really hit the bottom line. So it's a combination of those three initiatives together. I guess my question was more around what would the targeted range though be as we look out longer term. I mean, should we be thinking about the maybe 2% to 4% range, would that be achievable? Or I guess should we wait until you get through the process before we talk about targets? We think the target range of 2% to 3% continues to be the right target for the CCS business. It was stronger this quarter. The productivity actions have been helping, but there was also a benefit of mix. As we continue to execute the portfolio review, it will allow us to stay within this range more predictably. And so we think that the 2% to 3% range continues. When you look at it from a company mix perspective, as we continue to grow the ATS portfolio, as we ramp new programs and integrate the Atren and Impact acquisitions, we would be working to scale into the higher end of that range, which is 5% to 6% as you know. And then through the mix of the portfolio, that's how we believe we can get to the 3.75% plus. Okay. And then can you update us on the tariff situation in terms of how your thinking is evolving maybe in terms of potential impact on your business and whether and to what extent it's playing a role in your customer discussions? Yes, it's certainly a lot more active Thanos over the last couple of months. Customers who are actually buying hardware for their own use, they've been more active than classical OEMs and they have been very anxious in quoting new programs in other regions outside of China. The classical OEMs have been more measured in their actions and working towards a more balanced supply chain. So far customers have not opted to kind of move programs from where they are now. So the activity is largely on next generation programs moving forward. Based on our footprint and where our capacity is, we do think we might be in a net benefactor of the disruption in the supply chain. That being said, we're going to be very deliberate on the programs that we choose to go after relative to the portfolio review that we're currently undergoing. Okay. Thanks, Rob. I'll pass the line. Great. Thanks Thanos. Next question, Julie. Your next question comes from Daniel Chan with TD Securities. Daniel, your line is open. Hi, guys. Thanks for taking my question. I just wanted to expand on that question around the margin impact from the $500,000,000 On the programs that you're looking at within those $500,000,000 what is the financial what are the finances look like around those programs, talking about like margins and ROIC? Because in the past you've been able to get ROIC, high ROIC from low margin programs. Is that something that you're looking at too? Yes. Hi, Dan. Nice to talk to you. The primary focus of our review is ROIC, it's ROIC. And so with the current constrained inventory environment and with just growth in overall invested capital, what could have been a good ROIC program at the outset could unwind sometimes quite quickly. And when you have very thin margins, there's variability there as well. So our focus is on ROIC. Sometimes that's going to result in better pricing. Sometimes that's going to result in better commercial terms around investments that we're making within the business. And so we're looking at it from all angles. And for the programs where we've already been able to negotiate better terms, it's addressed both of those areas. And the margin profile on the $500,000,000 should we expect that to be kind of like in the low 2% range or below that? So the margin profile, Austin, is dilutive to the overall CCS portfolio. If you were to look at the programs, they are predominantly on the fulfillment side. And so again, as you stated upfront, the nature of those types of programs typically have lower margins, although often good ROIC when they're performing well. Okay, great. Thank you. Thanks, Dan. Next question, Julie. Your next question comes from Matt Sheerin with Stifel. Please go ahead. Yes. Thank you. Just a couple of questions from me. Relative to the $500,000,000 revenue number in terms of the portfolio review, Does that include the news recently that one of your customers is moving business away, which I think was a part deliberate on your part. Is that part of that $500,000,000 or is that incremental to that? Matt, it's Rob. That is part of it. I can't comment on specific customer activity, but what I can do is that action, the $500,000,000 that we just announced with regard to our portfolio review, that customer comment was part of that review. And it goes to say that sometimes we decide to with our customers decide to exit certain programs and in other cases we decide to grow different programs within that customer. So these are really program by program, location by location kind of decisions that we work out with our equipment in place. But I imagine that all that equipment is equipment in place. But I imagine that all that equipment is fungible where you can move it for other programs. So when there is opportunity to backfill with higher margin then that should help in terms of your CapEx? Absolutely Matt. We continue to optimize portfolio as programs come down to life and other programs that we're quoting on, we're looking at it holistically. Much of the CapEx that we do use is interchangeable between our sites. And we also believe, I'll make a note again, that the $500,000,000 review, there are any restructuring charges that would go along with it would be contained in our existing program of $50,000,000 to $75,000,000 Got it. Okay. And then just a follow-up on the tariff question. It sounds like you and other EMS companies are having a lot of conversations with customers about potentially moving capacity if indeed particularly if there's a 25% tariff on communications equipment in the U. S. But are you actually is there actually plans in place where you're actively quoting and looking at moving business now? And how close are you in terms of customers? And in terms of the cost, there's obviously going to be a cost relative to moving equipment, inventory build ahead of that. Is that something that you think that you'll be able to pass along to customers or will that be something that you'll have to share with? Yes. Most of the activity has been really on next generation programs. So it would be a lead time away from when these new products get introduced and ramp. Very limited action right now, more point solutions on moving existing product around. And if it would require additional CapEx or major investments that would all be taken into account in terms of our proposals with our customers and moving forward. Okay. All right. Thanks a lot. Thanks, Matt. Next question, Julie? Your next question comes from Gus Papageorgiou with Macquarie. Please go ahead. Thanks. First just a clarification, Mandeep, did you say that there are 3 customers that account for 10% of revenue each? 2 customers in the quarter. Okay. So just on the inventory, you mentioned in your press release that you had to take additional inventory provisions and the inventory days continue to remain stubbornly high. When do you so kind of around that, when do you think your inventory days will kind of normalize? And in terms of the additional inventory provisions, I think this might be the Q2 you mentioned that. I mean, how much risk is there in terms of your balance sheet and what could we expect from those write downs? Yes. So Gus, the inventory did grow slightly quarter to quarter. It was up about $50,000,000 or so. As you'll notice with the guidance that we have provided, we are continuing to see strong revenue growth and we're seeing growth Q4 from Q3. And so we do support that. The constrained material environment, it continues to be a challenge. We are seeing some areas improve, but we're seeing other areas continue to be quite stubborn. MLCCs continue to be an area with very long extended lead times. Our viewpoint right now is that the environment will improve closer to the back half of twenty nineteen, but it's a dynamic situation as you know and it does change quarter to quarter. I will make the point which I've made in the past, which is ultimately the inventory is the liability of our customers. And so while we have been building the inventory, it ultimately does go back to them. From a provisions perspective, our provision rates continue to be in line with the normal aging of our inventory. Our write off history is actually quite lower than our provisions. We have at times taken more conservative approaches towards the way we do our provisioning. And so again as that inventory unwinds, we would expect that there would be an opportunity there as well. Okay, great. Thank you very much. Thanks, guys. Thanks. Next question, Julie. Your next question comes from Todd Coupland with CIBC. Please go ahead. Good evening, everyone. Good morning. I just wanted to clarify on the EPS in the quarter. So the adjusted number of $0.26 that was at the higher tax rate. So your comment of a $0.03 hit from FX and the higher tax rate was not included in that $0.26 is that right? So sort of an adjusted, adjusted number would be $0.03 higher. Is that what you meant when you said that? That's right. So we did hit the midpoint of our guidance, as you know, Todd, with revenue relatively at the midpoint. So the 3.3% was in line with our guidance, but we were at the low end of the EPS range because of $0.03 of additional taxes. And so that was made up primarily of taxable FX, but also tax that landed in other jurisdictions. If we were to normalize for those, we would have expected our adjusted EPS to be at the midpoint of our target. Right. And the mix issue of semi drag and better mix in CCS sort of offset each other, which I guess ultimately got to that number as well. So, okay. And my second question is with respect to free cash flow goals, in the past, I think you've had a running target of $100,000,000 to $200,000,000 per year. How are you thinking about 2019 with all the moving parts that you've called out of inventory constraints and portfolio review, better margins, etcetera? Just give us your thoughts on what free cash flow might look like next year? Thanks. Sure, Todd. So we're pleased that we were able to generate positive free cash flow this quarter after you know, a number of quarters of negative free cash flow mainly due to the increasing levels of inventory. The thing I'll point out though is the revenue for this year is on track to be up almost $500,000,000 on a year over year basis. And so while the constrained inventory environment has definitely contributed to it, we've been also growing along the way our inventory to support the revenue. With the guidance that we've actually I'll correct that we're not giving guidance, but with the goalpost that we provided for 2019, which is that revenue would likely be down in the single digits, we would expect that that would not happen again. And so as you know, in our industry as inventory environment does start to unwind, we expect that there'll be some, And when this inventory environment does start to unwind, we expect that there'll be some additional benefits coming. Is so with that happening, are you saying you could see free cash flow above what your normal goal is or it just gets you into your typical range? No. So our inventory is up almost $250,000,000 or close to $300,000,000 year over year. Eventually that unwinds. When we give our target of $100,000,000 to $200,000,000 it's on a normalized basis. And so eventually as that inventory unwinds, we would expect it to be in addition to the targets that we work. Great. Thanks very much. Thanks, Doug. Next question, Julie. Your next question comes from Paul Treiber with RBC Capital Markets. Please go ahead. Thanks very much and good afternoon. Just first on a clarification question, just for Q4, your outlook for Q4, does that include any expected contribution from Impakt? Hey, Paul, good to talk to you. So we are currently anticipating that Impakt will close in late Q4. We have included our guidance does include impact closing, but we expect that the contribution from a revenue and profit perspective from impact is going to be not material. And so it is included in our Q4 guidance. Okay. Thanks for that. Just a second question is a follow-up just on the tariffs. Do the comments you made on the tariff situation, does that apply to the existing tariffs or does it also take into account a possible increase to the next level of tariffs at the 270,000,000,000 Yes, it probably applies to the existing tariffs in anticipation of it being notched up a level here in the beginning of the year. I don't see, but it could be wrong, I don't see customers moving existing product around. They're really more focused in on next generation products and having a more balanced supply chain. Maybe in the past, some of our customers have over rotated with supply chains in China. And I think in this new world that we're in, they're looking to have more of a balanced portfolio in terms of where their capacity is. And I think their quoting activity looks like it's aligning to that for the next generation of products. Okay, that's helpful. Just lastly, on JDM, I mean, obviously, it's been very healthy. The could you just elaborate on the trends that you're seeing in the JDM business right now, just particularly in regards to end customers as well, traditional OEMs versus maybe non traditional customers? Yes. So we service both the traditional OEMs and non traditional customers. And our broad JDM business is benefiting from increased deployment of data centers. Our go to market approach with non classical customers is largely to the JDM portfolio. And with the growth in data centers, that's one of the main drivers for it. Our portfolio within JDM is fairly balanced between communications and enterprise. And it's been growing at a very nice clip. As I mentioned earlier, I think this year we're on target to go north of 20% year over year. And we have a strong pipeline of products and programs and customers and our products are performing very well in the marketplace. And it's really an alternative to ODMs. We don't again view us as competing with the OEMs, our customers. We really view it and the market views as an alternative to the ODMs. And it's being received very well in the marketplace. Thanks. I'll pass the line. Okay. Thanks, Paul. Next question, Julie. Your next question comes from Jim Suva with Citi. Please go ahead. Hi. This is Josh here on behalf of Jim Suva. What is the revenue level needed for achieving your target operating margins of 3.75% to 4.5% over the next 12 to 18 months? Yes. Hi, it's Mandeep here. So we believe that we're able to get to that levels knowing that 2019 is going to be down likely in the single digit range. And so if you were to dissect that a little bit, we expect to see continuing growth in our ATS business. Our organic growth rate, our long term target is 10 percent in addition to any acquisitions that we're able to add on to that business. So with the impact also contributing to the overall margin expansion opportunity in ATS. And then on CCS, it is not going to be a revenue story, it's going to be continuing productivity and portfolio optimization. And so but on an overall basis, we would expect that we would see continuing margin expansion in 2019 with EPS growth as well, while revenue would be there. Thank you. Thanks, Josh. Any additional questions, Julie? There are no further questions at this time. I will now turn it back over to you, Paul. Thanks, Julie. I'm excited that we're able to sign Impakt early this month. It's a great business that's well positioned in a large growing technically demanding market. I think we're continuing to make very good progress on executing our strategy. We have great momentum across all our major priorities, and we're working towards a more diversified and profitable enterprise. Andeep and I look forward to updating you on our progress next quarter. Thank you all and have a good evening. This concludes today's conference call. Thank you for your participation and you may now disconnect.