Curtiss-Wright Corp (CW) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Curtiss-Wright first quarter 2015 earnings conference 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. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference to our host, Mr. Jim Ryan, Director, Investor Relations. Sir, you may begin.

Thank you, Eric, and good morning, everyone. Welcome to Curtiss-Wright's first quarter 2015 earnings conference call. Joining me on the call today are Dave Adams, our Chairman and Chief Executive Officer, and Glenn Tynan, our Vice President and Chief Financial Officer.

Our call today is being webcast, and the press release as well as a copy of today's financial presentation are available for download through the investor relations section of our Company website at www.curtisswright.com. A replay of this call also can be found on the website.

Please note today's discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on Management's current expectations and are not guarantees of future performance. Forward-looking statements always involve risks and uncertainties, and we detail those risks and uncertainties in our public filings with the SEC.

In addition, certain non-GAAP financial measures will be discussed on the call today. A reconciliation is available in the earnings release and at the end of this presentation and will be available on the Company's website.

Finally, our discussions today of current and future results, except for cash flow, are on a continuing operations basis, which excludes all previously announced divestitures. In addition, any references to organic growth typically exclude the effects of foreign currency translation, acquisitions and divestitures. However, for the purposes of this presentation, organic excludes the impact of foreign currency translation, while the impact of acquisitions is immaterial.

Now I' like to turn the call over to Dave to get things started. Dave?

Thank you, Jim, and good morning, everyone. For our agenda today, I'll begin with a brief update on recent events, followed by Glenn, who will provide an in-depth review of our first quarter financial performance along with updates to our 2015 guidance. Then I'll return to provide some additional commentary on our margin expansion progress before we wrap up and open the call for questions.

We're off to a solid start in 2015. On an organic basis, we produced a 16% increase in operating income on a 3% increase in sales. As Jim noted, the difference between our reported and organic results is the exclusion of foreign exchange.

Higher sales were primarily driven by improved demand in the defense markets, led by a strong start in ground defense. Our operating results also reflect solid performance in the power segment, which benefited from a one-time event, and stronger organic growth in the commercial industrial segment. We're also experiencing the ongoing benefits of our operational and productivity improvement initiatives across all three segments.

Together, these factors drove continued improvement in our overall operating margin, which increased 210 basis points to 13.3%, and organically, was up 150 basis points to 12.7%. As we have demonstrated, we are leveraging the critical mass of One Curtiss-Wright to drive efficiencies throughout the Company. As a result, our initiatives, as laid out in late 2013, continue to manifest themselves in steady operating margin expansion.

Overall, we reported diluted earnings per share of $0.89, which exceeded our expectations and topped our prior-year results, primarily based on the timing of the one-time event in our power segment. We also produced 8% growth in new orders, led by higher demand in our defense markets. This growth was based on our leadership positions in embedded computing and nuclear propulsion equipment, and bodes well for continued solid organic growth. Book-to-bill was 1.15 in the first quarter.

Next, I would like to provide some additional comments on our performance within the power segment. During the first quarter, we received a termination change order from our customer on the former Progress Energy AP1000 plant in Florida. This plant was never constructed due to state funding constraints. This was one of the three plants that were expected to be built as part of our original domestic AP1000 contract back in 2008. This change order was anticipated in 2015, though originally in the second quarter, but was received in the first quarter and does not change our full-year outlook.

As a result of this order, our first quarter diluted EPS included a one-time net benefit of $0.10. At this time, we are maintaining our current full-year 2015 diluted EPS guidance of $3.80 to $3.90. Further, we anticipate continued margin improvement during the second half of 2015 led by solid growth in all segments. We remain confident and on track for another exciting year.

Now I'd like to turn the call over to Glenn to provide a more thorough review of our quarterly performance.

Thank you, Dave, and good morning, everyone. I'll begin today with a review of our first quarter sales by end market, where higher overall sales in defense were partially offset by a slight decline in our overall commercial markets.

In the defense market, sales increased 4% overall and 6% organically. We were especially pleased with the solid performance in ground defense, as international demand for our Turret Drive stabilization systems continue to gain traction where we are currently supporting several new foreign ground defense programs. Although this improvement is from a fairly low base, sales increased 35% in this end market during the first quarter.

In aerospace defense, we experienced a mixed performance, as higher sales on the joint strike fighter program were offset by lower helicopter sales. We expect this trend to continue for most of 2015 based on current production forecasts.

Within our naval defense market, we continue to benefit from the steady funding of key US Navy shipbuilding programs, with higher first quarter sales primarily driven by the Block IV build of Virginia-class submarines.

In the commercial markets, sales decreased 1% overall, but increased 1% organically. In the commercial aerospace market, higher hardware sales of actuation systems, sensors and controls were essentially offset by lower sales of (inaudible) services, which was primarily due to the negative impact of FX. Overall, organic sales were flat in this end market.

In the power generation market, sales increased 4% overall. Excluding the aforementioned one-time benefit related to the AP1000 termination order, we continue to experience lower revenues on the China AP1000 program as it continues to wind down. Further, relative to the aftermarket business, we continue to experience lower sales to existing domestic operating reactors based on ongoing deferred spending on plant maintenance and upgrades.

And finally, sales in the general industrial market declined 4% overall in the first quarter, predominantly due to the unfavorable foreign currency translation.

In our industrial valves business, despite higher MRO sales, we experienced lower sales related to timing on international oil-and-gas project orders as well as unfavorable foreign currency translation. However, this is primarily a timing issue, as we continue to have a positive outlook for the energy markets for the full year 2015 led by continued solid growth in MRO sales.

Elsewhere in the general industrial market, we benefited from higher domestic sales of industrial vehicle products, primarily for medium- and heavy-duty commercial vehicles.

Moving on, I will discuss the key drivers of our first quarter operating income and margin performance. Please note, for purposes of this presentation, organic excludes the impact of foreign currency translation.

The commercial industrial segment produced solid operating income and margin performance. Operating income was up 12% on 2% organic sales growth, driving a 170-basis point improvement in operating margin to 14.5%. And while FX negatively impacted segment sales, it had a negligible impact on operating income.

Key drivers of this improved performance included higher sales in our industrial vehicles business as well as improved profitability in both our surface treatment services and industrial valve business, despite lower sales volumes due to the ongoing operational and margin improvement initiatives.

In the defense segment, operating income was up 14% and operating margin was up 190 basis points to 15.9%, though there were some pluses and minuses. In our embedded computing business, we experienced continued strong growth in sales and profitability as we continue to elevate Curtiss-Wright as a market leader in this industry. However, that improvement was principally offset by higher estimated costs on certain long-term development contracts.

In addition, segment operating income included a $2 million favorable impact of FX. Excluding this FX impact, organic operating income was flat while organic operating margin declined 50 basis points to 13.5%.

Next, in the power segment, operating income increased 37% and operating margin was up 350 basis points to 14.5%, principally driven by the benefit of the aforementioned termination change order.

However, absent this order, lower sales in the nuclear aftermarket business and lower production revenues on the China AP1000 program reduced first quarter operating income, resulting in an 80-basis point decline in operating margin to 10.2% for the quarter.

Overall, our combined segment performance was solid, producing 15% organic operating income growth, while overall Curtiss-Wright organic operating income increased 16%, driving a 150-basis point margin improvement to 12.7%.

Moving on to our financial outlook, beginning with our end market sales, overall 2015 sales growth of 2% to 4% remains unchanged from our previous guidance, as sales are expected to growth between 2% and 4% in both our overall defense and overall commercial end markets.

And nearly all of the end market guidance remains unchanged, with the exception of ground defense. On the heels of the strong first quarter performance and improved optimism tied to contracts for Turret Drive stabilization systems, we have increased the ground defense guidance range to 26% to 30%. We offset that improvement with a few minor changes that left overall defense market guidance unchanged.

Continuing with our financial outlook, and as Dave noted earlier, we are maintaining our current guidance at this time.

In the commercial industrial segment, we are closely monitoring numerous influences in the marketplace and the potential impacts on our business, including the unsettled European economics, fluctuations in FX rates, US economic data and uncertainty regarding the timing of US interest rate increases. As a result, we are maintaining our current sales growth rate of 3% to 5%.

In the defense segment, we are encouraged by the positive signs coming out of Washington, as the industry appears to be stabilizing and the outlook for the fiscal year 2016 defense budget looks promising. We expect most of our key programs to be funded, even if the budget is subject to some level of sequestration, and we are maintaining our current sales growth rate of 2% to 5%.

Sales in the power segment will primarily be influenced by the AP1000 program, and our expectations for nearly flat sales growth remains unchanged at this time.

Turning to our 2015 profitability outlook, as a reminder, one of the primary drivers of our quarterly operating income outlook for 2015 is we expect to incur costs relative to the completion of the engineering and endurance testing on the AP1000 program in the first half of the year and benefit from increased production in the new China order in the second half. The majority of these costs will occur in the second quarter, as testing is expected to be completed by mid-year.

As a result, the first half of the year is expected to show moderate operating income and margin growth. However, we expect a strong second half of the year, and this pattern follows a similar trajectory as we have done historically. Further, this growth is expected to come from not only the new China order, but more so from increased sales in the ground defense, industrial vehicles and industrial valves.

In ground defense, we continue to recognize increased international demand for our Turret Drive stabilization systems. We've had success with large orders in South Africa and Saudi Arabia, and many other countries are planning upgrades to ground combat platforms, especially in the Middle East, Europe and Asia, which should drive continued solid growth in this end market.

In industrial vehicles, we're expecting continued strong demand in North America, where positive economic growth is fueling expansion of truck industry fleet capacity. Meanwhile, conditions are improving in Europe and China, the latter of which will begin to drive increased demand for our key products based on newly expected and much needed emission requirements.

And within industrial valves, we expect to see continued strong global demand for our chemical and refinery related MRO product offerings supporting ongoing maintenance needs more than offsetting lower project sales.

As a result, we remain on track to achieve 7% to 10% growth in total operating income and 70 to 80 basis points in operating margin expansion to a range of 13.3% to 13.4%. As Dave noted, our 2015 guidance for diluted earnings per share is a range of $3.80 to $3.90, which represents double-digit EPS growth over 2014.

Next, to our cash flow. During the first quarter, and as noted on our previous conference call, we made a $145 million pension contribution that significantly impacted our first quarter reported results. We anticipate that this action will significantly lower our pension expense and eliminate the need for further cash contributions over the next five years.

If you remove this pension contribution from current and prior-year periods, our first quarter adjusted free cash flow was $10 million lower than the prior year, due primarily to higher tax payments in the current year partially offset by higher cash earnings.

Please note that our first quarter free cash flow results are consistent with our historical performance, which is typically much lower than the rest of the year, as it normally includes large annual cash outlays primarily tied to compensation. And despite the first quarter decline, I reiterate our solid free cash flow position for full-year 2015, as we continue to expect a free cash flow level similar to our very strong 2014 results.

And lastly, I wanted to provide an update on our discontinued operations. Our efforts to sell these businesses continue to progress. As a result of continued uncertainty within oil-and-gas markets, we recognized an additional net valuation loss of $27 million, or $0.57, during the quarter. While it is our practice not to discuss specific details of ongoing sale processes, for obvious reasons, we will update you when the processes are completed.

Now I'd like to turn the call back over to Dave to provide an update on our operating margin improvement initiatives and our future outlook. Dave?

Thank you, Glenn. I'd like to provide some additional color on the AP1000 program. I'll start with existing contracts for the initial plants in China and the US.

We continue to make progress in the production of our first-of-a-kind reactor coolant pumps, or RCPs, supporting the China AP1000 nuclear program. We are nearly two-thirds of the way through the 100-day engineering and endurance testing phase. If all continues to go as expected, this would keep us on track for deliveries of our RCPs starting in the third quarter.

Additionally, we continue to secure smaller contracts for support equipment on AP1000 as well as other global reactor designs, which are expected to nicely contribute to our overall content over time.

Regarding our next AP1000 order, we anticipate contract negotiations will wrap up once we conclude the engineering and endurance testing, and as indicated, we remain hopeful to receive the next China order in the third quarter.

Longer term, there are an increasing number of countries that are planning to include nuclear power as part of their future energy mix. With our growing domestic and upcoming footprint in China, Curtiss-Wright is expected to play a key role in support of this industry expansion.

Next, I'd like to elaborate on the drivers of further operating margin expansion and our goal to reach and maintain upper-quartile performance versus our peer group.

In March, we completed our analysis of the peer group's 2014 performance. We then recalculated the new tiers to identify the upper quarter, or 75th percentile, based on a rolling three-year average. Top-quartile operating margin is now 14.2%, which, as previously noted, was expected to be significantly higher than the prior target of 12.5%.

Our Management team remains focused on operational excellence and achieving consistent, solid operating margin expansion. At our current guidance range of 13.3% to 13.4% for 2015, I'm pleased to say that we're within reach of upper-quartile status. First and foremost, we're aiming to reach and then maintain our position in the upper quartile of our peer group, with the ultimate goal of being at or near the top.

As noted on this slide, we're tracking these savings in the following areas -- operational excellence, including lean and supply chain; low-cost economies; segment focus; shared services; and consolidations.

We remain on track with our key initiatives in 2015, particularly within segment focus, where the team is dedicated to improving the returns of some of our core-but-underperforming businesses. Overall, our enterprise-wide focus on driving synergies and producing significant cost savings is expected to generate solid results.

Next, to capital allocation. We remain committed to our goal to keep a fair balance between operational needs, returns to shareholders in the form of share repurchases and dividends, and strategic bolt-on acquisitions.

In the first quarter, we repurchased approximately $50 million in stock under our share buyback program. For 2015, we expect to steadily repurchase at least $200 million in stock, tripling the amount spent on repurchases in 2014, as we continue to reward our shareholders. This planned repurchase activity falls under the $300 million share repurchase authorization granted by our Board of Directors this past September. We also continue to pay a steady dividend.

During the first quarter, we completed one small bolt-on acquisition in our surface treatment services business. While we have a solid pipeline of acquisition candidates, there are no acquisitions on the immediate horizon.

Further, we will continue to invest in our business with a strong focus on organic growth, which remains critical to our long-term success. As a reminder, operational needs includes our ongoing CapEx as well as the $145 million pension payment.

Finally, as we more efficiently manage working capital and improve cash flow, we'll create even more opportunities to deploy capital in the best interest of value creation. We are confident that these efforts will benefit our shareholders over the long run.

In summary, we're off to a great start and continue to expect another strong year in 2015. We remain confident in our guidance to produce 2% to 4% sales growth in both our defense and commercial businesses in 2015.

Further, we expect to meet or exceed the growth rates in most of the markets in which we participate. We're making great strides in our various initiatives supporting the One Curtiss-Wright vision, which have and will continue to positively impact our results.

Our continued focus on improving operating margin should drive strong double-digit increases in operating income and earnings per share, providing a high level of confidence in our free cash flow outlook.

We have a lot of runway left on this journey, and we'll continue our surge to reach upper quartile versus our peers for all of our financial metrics. Our team is confident and focused that our ongoing efforts to improve margin expansion and free cash flow generation will drive strong shareholder returns for years to come.

At this time, I'd like to open up today's conference call for questions.

(Operator Instructions). Michael Ciarmoli, KeyBanc Capital.

Hey, good morning, guys. Thanks for taking the question. Nice quarter.

Good morning, Mike. Thanks.

Maybe, Glenn, just on the one-time termination gain of $0.10 in the quarter, I guess that was contemplated in your guidance, but was that higher margin? I mean, stripping that out, it seems like if I looked at just the core margin expansion in power, it's not really showing much year over year. I mean, if you could just maybe give us more -- kind of a little bit more of the profile around that termination settlement. Again, it did seem pretty additive, I guess, to the margins in the quarter.

Well, yes, it was. Just the sales impact was $10 million, and the OI impact was $7 million, so I'd call that fairly good margin. But when you do strip it out, I mean, if you look at the power segment, it's still consistent with what we said originally -- they were going to have a lower first half due to the testing costs and a higher second half due to the order and also increased production in that segment. So we're still on -- so the first half will be a lower margin half and the second half will be a higher margin half, and we're still on target for our full-year guidance of, I believe, about 11.4% in that segment.

Okay. Okay, so we'll really just start to see the ramp in the second half. Okay, that's fair. And then maybe, Dave, just on the operational improvement plan, when should we expect -- I know one of the benchmarks there was working capital as a percent of sales. I mean, when should we expect to see some of the impacts of what you guys are doing on working capital? I mean, on a trailing basis, it's still running in that upper 30 level, and I know you guys have some pretty big aspirations to drive that down, so I'm just wondering when we might start to see some of the gains there.

I'll answer the first part, and then I'll let Glenn get into some specifics. We, as indicated before, are paying a considerable amount of attention to that, and as we entered this new first quarter of the year, we've put a lot of emphasis on curtailing some of those expenditures that would be related to that, and watching and measuring those very, very closely, so we're going to continue to see those things ramp up and improve. That is, as we've discussed before, one of our -- I'd say one of our biggest challenges, but we feel confident that we're going to arrive at the end point that we want to.

Glenn, how about talking about some of the specifics on those.

Yes, I mean, a couple things we did in working capital -- a couple things to note on working capital. One is we changed the weighting for working capital reduction in our compensation system to place more emphasis on it, so we're trying to continue to increase focus on the metrics we think are very important, of which this is one of them, return on invested capital being another.

But I will say we are projecting a decrease in our working capital throughout the year, but as we typically -- if you look at our pattern, unfortunately, as we -- we use it in the first half and we gain it in the second half, and we are again pretty much in the same ballpark, though I will say our -- if you look at our cash flow performance being, again, as strong as last year, a good piece of that is going to be coming from working capital reductions you will see as the year progresses.

Okay. Is there a lot of that tied to the AP1000? I mean, will we see an impact once you guys start shipping more of those RCPs? Will that have an impact?

Not really, because that's all on POC accounting, so, I mean, that's really -- this is really just your base primary working capital plus deferred revenue, which is our advanced payments. That's the other account that we include internally in our working capital, because it represents cash that we've gotten upfront, and it's important -- we want to keep our Management team incentivized on contracting -- negotiating and getting contractual terms that offer that. But, no, I wouldn't say working capital is tied to AP1000.

Okay. And then last one from me, and I'll jump in the queue. Commercial aerospace -- it's growing, obviously, well below peers. I know you had one customer loss in surface treatment. I mean, is there anything else we should be looking for there, I mean, or anything else you guys are doing? Is it just tougher comps, or maybe just explain -- I mean, we've seen pretty healthy OE growth through this quarter, and I think peer companies are still looking for pretty robust growth given activity on rate increases, H7, A350. I mean, any other explanations for the weakness in commercial aero for the year?

No, you already hit the top ones at the beginning of your question there, the surface technologies with some of that business, some that we're not bidding on as a result of our own interest to maintain the margins that we want to maintain in that business.

So I'd say that we're being quite selective in our approach to that particular market. There are ample opportunities for us to bid at much lower margins on work with the rates increasing and going where they are, but those are under a lot of pressure, margin pressure that -- I'm not necessarily interested in taking that for quantity's sake, and it just -- our plan is to get up to upper quartile, like we talked about, and we're going to do that.

Now, there are some that you take on for absorption reasons, but for us, from a general perspective, we see our commercial aero as being pretty steady in the elements that we're particularly interested in, and we're happy with that. So at the sake of taking on extra -- or taking up extra volume with lower margin, I'm just not interested in that kind of work.

Got it, so you're not interested in partnering for Boeing's success?

No, we are absolutely, and we have partnered for our mutual success. I think that in that regard, that particular program is doing quite well for us. We're very happy with what we've achieved so far, and I think our customer is very happy. And there are a lot of opportunities outside of Boeing direct that we won't bid to as a result of the margins that would be requisite to win it.

No, we are quite happy with the success of that partnership program. We've been dealing with Boeing for over eight years now. And hopefully we can all be mutually successful, and we certainly worked it that way, and, like I said, I think everybody is happy.

Got it. Thanks.

Just to add to that, Michael, so that was what -- the commercial aerospace sales in the first quarter was also negatively impacted by FX. That's part of the reason we were down.

Got it. All right, perfect. Thanks, guys. I'll jump back in.

Thanks, Mike.

Kristine Liwag, Bank of America Merrill Lynch.

Hi, good morning, guys. Congratulations on the strong first quarter.

Hi, Kristine. Thank you.

Thank you.

First, my question is with the AP1000. Can you provide a little bit more color on the size of opportunities for the product after testing is complete, maybe over the next few years? And as a follow up to that, what is your dollar content if a new plant is opened?

Well, we haven't even provided -- we don't even have the details of the new order, per se, right now, so never mind the next three years. So we really couldn't and probably shouldn't while we're still in negotiations with China and Westinghouse. Just suffice it to say, it's large.

(Inaudible)

We'd like to give you a more direct answer, Kristine, but we are in current negotiations with our customer, and we can't really disclose that at this point. As time goes on, we'll be able to, but it is certainly a very strategic program for us, and we look forward to a lot of success there.

But as a first milestone that we should look for is the order from China?

I'd say that first milestone internally for us is successful completion of the E&E testing, which we indicated will be mid-year or, let's say, June, and then shortly thereafter, sometime in the third quarter, we're hopeful that we'll achieve the completed negotiations and successful acceptance of a contract, and, yes, after that, it starts to ramp up. It takes a little bit of time, some initial benefit, and then over the next subsequent several years, it starts to pick up pace.

Great. And you bought back the $47 million of shares in 1Q, out of the $200 million that you've guided to this year. Should we think about the cadence of share repurchases to be evenly split throughout the year?

Yes, we've gone on a, we call it, peanut butter spread throughout the year, lovingly referred to, and so we'll continue that cadence.

Sure. And then one last one from me. When we think about the FX activity, can you give us an idea of how that really -- how you're thinking about that for the rest of the year and then what kind of FX rates you have embedded in your outlook?

Yes, I mean, I don't have the exact rates, but I can tell you what we -- in 2015, the major three currencies that impact us are the Euro, British pound and the Canadian dollar, so I'll give you those three. So in our 2015 assumptions, we modeled in a 10% reduction in the rate, for the pound an 8% reduction, and for the CAD -- I'm sorry, the CAD was 10%. I said the wrong thing. The pound 8%, and the Euro 13%. Those were our assumptions. That is baked into our guidance for 2015.

So that means the rate -- those are the rate declines versus year-end 2014? Is that how to think about it?

I'm just trying to think if it's average or year-end. Probably average for the year. It would be the average.

Great. Thank you.

Thanks, Kristine.

Sam Pearlstein, Wells Fargo.

If I look at one of your slides where you talk about the outlook of the year in the different sub-segments, help me understand what's in that general industrial end market where you were negative 4% for the quarter but still expect 5% to 9% growth for the year. What's really going to drive that growth, and why do you have the confidence of getting there?

So in the industrial segment, the general industrial market as we talk to it, it's industrial valves, it's industrial vehicles, it's surface technology services, and sensors -- industrial sensors.

But what's driving the growth I guess is what I'm trying to think about it in the remaining three quarters to still get you that kind of growth rate after minus 4%? I know the minus 4% has foreign exchange in there.

Yes, I mean, it's a couple pieces. It's the industrial vehicles, and I think as I pointed out, we're expecting continued growth in the North America markets as well as in China and other pieces of the world based on these new emissions standards. It's our -- in the industrial valves, it's mostly our MRO valves for the energy markets, which has been continually one of our steadiest performers, and the same thing -- they will have a better increased second half versus the first half of the year. And what else in that bucket? Those are the two big drivers in that particular market.

Okay. And you mentioned the $0.10 of the, I guess, one-time item was expected in the second quarter. Are there any other kind of big, unusual items that you kind of included in the forecast for the remaining nine months of the year?

No. I mean, again, the AP1000 program in and of itself has many moving pieces, although we tried to cull out what we thought was going to influence or half to half, which was the testing in the first half and orders and production in the second half, and so this doesn't really affect that half to half.

It does affect our quarter to quarter. For the second quarter, we have to move whatever we had from originally we thought was going to be in the second quarter to the first quarter, and we also have $2 million of higher incremental testing costs in the second quarter. But other than that, there's nothing else that we have -- no, nothing else large, Sam, or abnormal.

Okay. And just on those costs that you talked about in terms of the testing costs, is there a way to think about the segment profit or even the earnings impact? I know you don't want to get into a quarterly guidance, but just thinking about what the margins can look like in power in the second quarter when you include those kinds of additional costs.

They're going to be -- well, they're going to be fairly low. I mean, I don't want to go into it exactly, but, as you can imagine, they're going to average out to a rate for the half. But, again, we had determination in our orders for now, but they're going to be certainly much lower than the first quarter.

Okay. All right, thank you.

You're welcome.

Myles Walton, Deutsche Bank.

Good morning. This is actually (Inaudible) on for Myles. How are you guys doing?

Hey. Good.

Good.

How are you doing? Good morning.

Good. So just wanted clarification on the target margins, the 14.2%. Is that still for 2018?

We have steadily maintained that, and yes, we're going to leave it there for now. We hope that we can improve upon it by the time we get there. I see no reason why we could not, but that's been the journey that we set out upon, and at this point, we are making good progress towards that.

I would agree. And then, also, just I know you talked about margins ramping through the year. Is that from the 13.3% from the first quarter, or are you adjusting that for the one-time gain, I guess?

No, you'd have to move that into the second quarter if you really want to say a ramp. Yes.

All right, just wanted to make sure. Thank you very much.

Thanks.

You're welcome.

(Operator Instructions). Steve Levenson, Stifel.

Just curious how much of your capital expenditure is in overseas locations, and if it's a meaningful amount, would you accelerate the spending to take advantage of the strong dollar?

I have to say I don't have the breakdown of our CapEx by region at my fingertips, Steve, so I couldn't tell you at this point. I don't know. I don't -- I think it's probably larger in North America for sure, so it'd be something less than 50%, and I just couldn't tell you how much less. Probably a lot.

Okay. Regardless of that, would you accelerate or do you plan to accelerate the spending on the overseas stuff?

We have not explored that yet.

Okay, thanks. And one for Dave on the margin drivers. Among the five categories you discussed on slide 9, which do you think are going to be the easiest to get right now, and which will be the most difficult?

The margin drivers are -- some are longer than others, and some of them will be through our supply chain that we've talked about in the past. That has been a -- it's a slow, steady ramp-up of improvement over time, and we're seeing that continue as a slow, steady approach. Our low-cost economies are potentially a big driver, because you switch a program to a low-cost economy like Mexico, you immediately derive the benefit of that labor rate in arbitrage, and so we do make, let's say, in some of those cases, considerable improvements.

Now, there is a ramp-up of efficiency and learning curve that usually comes with some of those movements, but that tends to be one of the quicker ones. So out of those, I'd say those are -- the slow and steady up and then the low-cost economy, and then some of the -- obviously, the consolidations and that sort of work that we've done. That's a fast pick up.

And then, lastly, I'd say that some of the shared services side is an area that is more along the slow and steady line. We do see and monitor, track very closely all of our gains that we have planned, and some that come up on an opportunistic basis in the shared services side to achieve those earlier than maybe downstream -- let's say another six to 18 months. So I'd say, leading off with those first couple, those are the ones that come more quickly.

Got it. Thank you very much.

Thanks.

And I'm showing no further questions at this time. I'll now turn it back to Dave Adams for closing remarks.

Thanks, Eric. We appreciate it. Thank you, everyone, for joining us today. We look forward to speaking with you again during our second quarter 2015 earnings call. Have a great day. Bye-bye.

Ladies and gentlemen, this does conclude today's conference. Thank you for your attendance. You may now disconnect. Everyone have a great day.