FEI Company (NASDAQ:FEIC) Q4 2015 Earnings Conference Call - Final Transcript
Feb 02, 2016 • 05:00 pm ET
we are able to serve our customer bases because we've separated service for the Industrial group and the Science group they have very different needs and very different requirements and very different ability to pay and so in the past several years in particular.
We've focused on having offerings that are appropriate for the segment, which has allowed us to grow revenue, and at the same time improve the gross margins in the business. So we've got a good backlog. We feel that the team's executing and we see no disruption to that pattern.
Tycho Peterson, JPMorgan.
It's actually Patrick Bellamy in for Tycho. Maybe just looking at the 23% long-term operating margin in 2019. Can you maybe just talk through the key levers to get there, and maybe what gross margins will be that year and where on the P&L you're really going to drive that leverage?
It's Tony, Patrick. The last couple of quarters, if you look at kind of where we've executed, we've been able to get into the pretty high-teens with gross margins not quite at 50% on a continuous basis. To get to 23% we're going to have to see gross margin expansion to the point where it's consistently north of 50%, not a ton north of 50%, but in the low 50%. There's a couple of places that comes from. We have been successful over the last couple years in driving some meaningful millions of dollars out of our supply chain.
We have gotten, I think, more focused in terms of value-based pricing and making sure that where we have a competitive edge we are able to translate that into better margin for us and fundamentally the mix of the business should start to trend in a more favorable direction as well because not all of our businesses have the same margins, and those that are growing the fastest tend to have somewhat higher margins.
And then on the operating expenses, we're not going to see operating leverage out of R&D because that's the lifeblood of this Company. You might see a little bit in terms of sales overhead, but we're going to have growth in sales. But there is an opportunity, and I've seen this and been involved in companies that have done this for many years, if you can grow your organic revenue in the mid-to-high-single digits, you can grow your operating expenses somewhere between two-thirds and three-quarters that rate and getting to the 23% is going to require us to be able to grow inside that range to get that operating leverage, but it's really once you get below the gross margin improvement in those items I talked about, it's really operating efficiency.
And then just thinking long term, maybe you could just provide some perspective on how you're thinking about capital allocation during that time? At the analyst day I think you said 100% of free cash flow return to shareholders, and then on that same vein, maybe just priorities