Curtiss-Wright Corporation (NYSE:CW) Q2 2016 Earnings Conference Call July 28, 2016 9:00 AM ET
Jim Ryan - IR
David Adams - Chairman & CEO
Glenn Tynan - VP & CFO
Ryan Cassil - Seaport Global
Kristine Liwag - Bank of America Merrill Lynch
George Godfrey - CL King
Jim Foung - Gabelli & Company
Good day, ladies and gentlemen and welcome to the Curtiss-Wright Second Quarter 2016 Financial Results 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 introduce your host for today's conference, Jim Ryan, Senior Director of Investor Relations. Sir, you may begin.
Thank you, Tamera, and good morning, everyone. Welcome to Curtiss-Wright's second quarter 2016 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. You also will find some additional charts on sales by end market at the end of this presentation. But for the sake of a proper comparison when reviewing growth rates for 2016 we're comparing 2016 guidance to pro forma 2015 results. Particularly the one-time AP1000 fee from our sales and operating income that are power statement and persuade overall.
Now I'd like to turn the call over to Dave to get things started. Dave?
Thank you, Jim. Good morning, everyone. For our agenda today, I'll begin with the key highlights for the second quarter 2016 financial performance followed by Glenn, who will provide a more thorough along with updates with our 2016 guidance. Then I'll return to provide some additional commentary on the AP1000 and margin expansion program and our capital allocation strategy before we move on to Q&A.
Second quarter EPS was $0.88 topped our expectation, we continue to medicate the challenge in market. Despite a 2% decline in sales operating income improved 4% overall all operating margin improved 80 basis points year over year 12.8% and increased the 140 basis points sequentially. Our results were led by a strong performance on the AP1000 programs including the achievement of certain milestones earlier than -- originally anticipated and development of our ongoing margin improvement initiative.
In addition our second quarter results reflect yet another solid cash flow performance as we generated nearly $80 million in free cash flow, according to free cash flow from nearly 200%. Efficient working capital management and higher in mass payments of AP100 program grow from our quarterly performance. I'm pleased to say that we are increasing our full year free cash both guidance for another $10 million to a new range of $320 million. As you like we saw in our press release last night we reduce our full sales - four year sales guidance by $5 0million. However through cost containment actions and our ongoing margin improvement initiatives, we will continue to mitigate impacts operating income.
As a testament these numbers we're increasing our operating margins guidance which represents a 90 basis to 110 basis on improvement over pro forma 2016. Overall despite a drop in sales guidance we are maintaining our full years EPS guidance. Glenn will expand upon the [ph] and take us through our guidance in a few minutes. In summary we remain confident that the diversity of our end markets and our focus on controlling costs, we produce yet another solid year for Curtiss-Wright's.
Now I would like to turn the call over to Glenn to provide a more thorough review of our second quarter performance and updates to our 2016 financial outlook.
Thank you, Dave and good morning, everyone. I will begin with a review of our second quarter end market sales.
Overall we experienced a long increase in sales for our defense markets and a 4% decline in sales to our commercial markets. However sale in both end markets improving gradually. Earning and defense sales in the aerospace defense market were up slightly from the prior year, but much improved from the first quarter. We experience higher demand from embedded computing products from several C4ISR programs, including the Global Hawk UAV, Apache and SeaHawk helicopters. Although those sales were largely offset by lower foreign military sales.
In ground defense, our result primarily reflects lower sales, turret drive stabilization systems as expected, as prior year included a one-time benefit relating to a large production contract award. Excluding that benefits from ground defense sales were only down 2% year-over-year. In Naval defense we experienced solid growth of 4% due to the ramp up in development on the new Ohio fast replacement submarine program, partially offset by reduced CBN79 aircraft carrier revenues as production nears completion.
Well beyond the commercial markets, I will begin in commercial aerospace were sales were up 5% in the second quarter. This growth was led by higher sales of actuation systems and sensors in control products to Boeing that were partially offset by lower shot in sales to Airbus. As previously discussed Airbus elected shift wing forming on the April 20 program to a supplier in South Korea resulting in lower revenues in 2016. April 20 sales in the second quarter declined approximately $3 million from the prior year. Please note that this impact is now essentially behind us.
In power generation our performance reflects higher revenue on the AP1000 program for the new nuclear power plants in the U.S. and China. Partially offset by reduced demand in the nuclear aftermarket business. The general industrial market our performance once again reflects lower sales of severe service industrial valve, principally the oil and gas market and anticipate. Second quarter valve sales improve slightly compared to the first quarter and are still expected to improve modestly in the second half the year.
Moving to industrial vehicle on highways sales were down partially 5% as lower class a truck revenues were partially offset by higher medium truck revenues. All Highway medical sales were essentially flat in the quarter. Elsewhere the balance of our more economically sensitive general industrial businesses were relatively flat. That's higher surface treatment revenues were offset by lower industrial automation sales. Next, I'll discuss the key drivers of our second quarter operating income and margin performance.
Overall, Curtiss-Wright second quarter operating income increased 4% which led to an 80 basis point improvement in margin 12.8%. We produce sequential operating margin improvement in all three segments, driven in part by the benefits of our ongoing margin improvement initiatives. Our Vehicles commercial industrial segment remote operating income and margin decline prepared for the prior year. Similar to the first quarter the primary driver with lower overhead absorption due to the lower sales in our and our industrial balance businesses.
Next to the defense segment which produce lower year-over-year operating income and margin including a $2 million favorable impact from FX. The organic decline was primarily driven by prior year benefit from the transition from development to production contract for our turret drive stabilization systems in the ground defense market. This resulted in a $4 million one-time benefit them both sales and operating income in 2015, which did not recurred in 2016. In addition, we also experience lower sales in associated lower overhead absorption primarily on the 747 and various commercial helicopter programs. Finally, the $2million in restructuring costs that we originally expected during the second order in this segment has shifted to the third quarter.
Next in the power segment operating income and margin were considerably compared to the prior year reflecting significantly improve profitability on the AP1000 program. And a reminder in the prior year we spent $11 million in engineering, testing and design cost for our AP1000 which did not recur this year. Excluding those costs are comparable second order segment results were solid driven by higher absorption on the domestic AP1000 production as well as initial revenues on the new China contract. Similar to last quarter the benefits vehicle impound program out-weight reduced profitability in our nuclear aftermarket business which continues to be impacted by lower outages and deferred spending in the industry.
Moving on to our 2016 guidance. Although we remain firm on our full year EPS guidance we made several updates for the remainder of our 2016 guidance, we reduced full year sales by $50 million, and now expect an over-all decline of one to three percent down from the prior range down 1% to up 1%. Approximately $10 million of that decline is related the weakening in foreign currencies resulting from the Brexit vote, the majority of which impacts the commercial industrial segment. The balance of the sales decrease continued across all three segments which we'll elaborate on in a moment.
We also reduced full year operating income by $3 million. We lowered segment operating income by $5 million reflecting the reduced sales outlook, partially offset by lower corporate and other cost due to $2 million lower pension expense. As Dave noted we expect to mitigate the impact to operating income from lower sales for additional cost containment actions within our segment to maintain or improve profitability. As a result we expect overall Curtiss-Wright operating income to grow 4% to 8% and we are increasing operating margin guidance to expand 90 to 100 basis points to a range of 14.2 and 14.4 in 20 basis points improvements comparing to our prior guidance.
Next we will walk you through the adjustments for each segment. Within the commercial industrial segment we framed our segment sales by $15 million to reflect lower slower growth rate within industrial vehicles and now expect a year-over-year decline of 3% to 5%. We also reduced the operating income associated with lower sales by $3 million. However we are holding our prior margin guidance range 14.6% to 14.8 % as we continue control our cost and mitigate the slowdown in industrial markets.
On a sequential basis we will also benefit as we move beyond overstepped restructuring charges related facility consolidations, which will benefit profitability in the second half of the year. Next to the defense segment where we framed our statement sales by $15 million growth rate to arrange a flat 2% the changes principal improvement by lower systems solutions ordered and various programs in aerospace as well as late contract U.S. modernization on the gravity program ground defense.
Overall, second half sales to the end markets will be up, just not as robust as initially expected. As a result of the new sales guidance, operating income was reduced by $1 million. Operating margin is now expected to range from 19.5% to 19.7% reflecting a 40 basis point improvement over our previous guidance. This improvement is driven by a better sales mix of higher margins COGS business. It is also inclusive of the $2 million restructuring cost anticipated in the second half the year.
In the power segment, we now expect sales growth to range from down 2% to up 1%. The decline in sales guidance of $20 million is driven by order delays in the nuclear after-market business. As a result operating income was reduced by $1 million. Our operating margin is now expected to range from 13.2% to 13.4% reflecting in 30 basis points improvement over our previous guidance, and an increase of 272 --290 basis points compared to 2015 this improvement is driven by better absorption due to the higher production volumes in AP1000 program and cost containment actions.
Lastly, we've not made any adjustments to our 2016 end market sales guidance. And the updated waterfall chart can be found in the appendix. Continuing with our 2016 outlook we now expect an additional $2 million reduction of pension expense down to $20 million which will result in lower corporate another costly. Offsetting this improvement we have increased our forecast for interest expense by $2 million due to the unwinding of our interest rates of earlier this year. We also lower our forecasted diluted shares outstanding 45.2 million shares reflecting our ongoing share repurchase activity.
In summary, despite all of the upgrades and changes for guidance we continue to expect diluted earnings per share $4 to $.15 which represents growth of 7% to 11% over performance 2015 results. Looking ahead, we continue to expect a strong second half of the year with our operating results following a similar trajectory as we've done historically. For purposes of your quarterly EPS modeling we expect modesty sequential improvement in the third quarter, followed by very strong fourth quarter.
Next our cash flow will recover our performance to the end of the second quarter as well as our updated guidance for the year. Second quarter free cash flow was strong and approximately $80 million generating free cash flow conversion of nearly 200%. Year-to-date we've generated approximately $141 million of free cash flow. We're very pleased with this strong start of 2016. Our second quarter and year-to-date performance were primarily driven by higher advanced payments related to the new China AP1000 order received in late 2015 as well solid reduction in our work capital.
We remain on-track to meet our working capital percent sales reduction guidance of 180 basis to 23.6% in 2016 as we continue our March towards top dollar performance. Meanwhile second quarter capital expenditures of $7 million remain flat of 2015 however we anticipate that the basic capital expenditures will wrap up in the second half including planned facility consolidators. Finally, we are raising our full year free cash flow guidance to new range re $300 million to $320 million up 10% to 18% compared with 2015 and now expect for free cash flow conversion rates range from 166% to 170%.
Now I'd like to turn the call back over to Dave to conclude our prepared remarks, Dave.
Thank you, Glenn. I'll begin with a few updates on the AP1000 program. We're currently in full rate production number RCP and are satisfying both our Chinese and U.S. customers on the initial 2007 and 2008 orders respectable. So far we have shipped 10 of the 16 pumps to China for each the Sanmen 1 and Haiyang 1 as well as the first per of pumps to Sanmen 2. We expect to ship the remaining six RCPs to China by year end.
During the past few months both the Sanmen and Haiyang plans have completed their cold hydrostatic test. This is a critical milestone test for the primary reactor lose -- to test the pressurization and watertight integrity of the system as it started for the first time. Underscoring the significant detail involved in these tests over 1700 precision welds joints were successfully tested during Sanmen unit once primary loop hydro test. The next steps in the process include the hop functional test, followed by fuel load and eventual connection to the grid. These are exciting times in the process as the first date your 1000 reactor on the world approaches full startup.
In addition, we recently began shipments of RCP is toward domestic customers. Thus far we have delivered four RCPs and expect the ship the remaining 12 or by the middle of 2017. Regarding the new China order which we received at each end of 2015 we continue to receive advanced cash payments to support long material procurement. Most of the manufacturing activities to support to ramp up in production are expected to begin in the fourth quarter of 2016, and continuing through 2019.
At this time we do not have any additional color to share regarding potential new orders from China. But I would remind you that the opportunities for future AP1000 plans over the next 8 or 10 years grouping quite large from this country. With regard to India following the president's June meeting with India's prime minister there is a growing possibility of an initial agreement between Westinghouse and India with the potential for 6 AP1000 reactors which could equate that 24 Curtiss-Wright RCPs.
At the conclusion of that meeting they issued in June 2017 target date to have a deal in place effectively giving them a year to decide from the ongoing liability and cost constraints. As with China the potential opportunity in India it is also quite large, and the AP1000 is likely to play a significant role here as well.
For our purposes we believe orders for RCP is supporting the AP1000 construction in India would come directly from Westinghouse. Finally on the topic of the AP1000 we will be hosting an investor day at our plant outside of Pittsburgh on October 6, the event will include an overview of our new build and aftermarket nuclear technology along with the facility to work -- showcase our reactor coolant pumps. Please be on the loo- out for the agenda and registration details in the next few weeks. We hope that you can attend and look forward to seeing many of you there.
Next, I'll review our strategic -- drivers were as a reminder, our goal is maintain top quartile status compared to our peer group. Thus far we remain on track with our operating margin improvement initiatives for 2016. For the sake of simplicity we are now classifying our margin improvement initiatives into three primary categories. The first category is operational excellence which includes supply chain and lean [ph] initiatives. I want to remind that these enterprise wise initiatives put into place in 2014, with new systems training programs and assessment which we knew will take some time to be reflected in our financials. It is not an overnight process but a journey and our teams are fully a line. We respect that the bulk of our future margin improvement is likely to come from this category over the next few years.
A second categories of global footprint which includes consolidations as well as the shifting of labor to low cost economy. As Glenn noted earlier the facility come validation efforts within the commercial industrial segment are under way and we expect to recognize incremental savings by year end. However since we elected and further consolidation activity in the propensity went from a second to the third quarter will begin to realize more that segment savings in 2017. In total we now expect to incur approximately $7 million in upfront costs in 2016, to support of all consolidation and restructuring initiatives. As a result we now expect these actions to generate approximately $12 million in annualized savings, a $2 million increase compared to our prior guidance. We will begin to realize these savings in the second half of this year, contributing to our anticipated second half margin expansion.
The third category is corporate deficiency, which includes shared services and asset and capital efficiency. Through all these initiatives we will continue to focus on long-term opportunities to reduce our costs and improve our margins. We remain committed to a total of $40 million of savings between 2016 and 2018 inclusive public consolidations mentioned on 2016. We have a good line of sight to achieve these expected savings, which will position us to maintain an operating margin in the top work out compared to our peers. In summary we remain on track for another strong year in 2016. In the near term we have plans in place to mitigate the impact of top-line headwinds on our profitability.
Through improved execution and cost control we expect produce solid operating margin expansion in 2016 up to a range of 14.2% up to 14.4% enabling us remain -- maintains solid growth as well. In addition, we are focused on continuing to generate strong free cash flow as evidenced by our year-to-date performance and improve full year outlook. We remain committed to a balanced capital allocation strategy. Between operational requirements, returning capital to shareholders and strategic acquisitions. Thus far we've committed $100 million to share repurchase activity in 2016. We also continue to review potential acquisition candidates and I'm a fairly full pipeline. As a result we are maintaining the current balanced approach which assumes the possibility of a potential acquisition by year end.
We will update your accordingly our progress during the next conference call, and reallocate our cash distribution just necessary so no acquisitions materialize. Finally we look forward to delivering on our strategy and generating solid financial results to drive long term value for our stockholders.
At this time I like to open up today's conference call for questions.
Thank you [Operator Instructions]. Our first question comes from the line of Myles Walton, Deutsche Bank. Please go ahead your line is open.
Good morning, this is Luo [ph] for Myles. We've seen that -- anything that prevents that going forward I guess as we look out into the future I mean again maybe not the 160% level but you are maintaining that 20 level.
Yes I think remember we're comfortable I think you know that in the next couple of years averaging out about 125, I mean would swing the year- to -year of the of the advance payments as you can stand which is what you're seeing here having influence this year but I think we're compliment 125.
Is that contingent on -- an indie order coming in or is that sort of one of those potential swing factors of.
That would be a potential swing factor.
Alright, and then just wonder what obviously the-- looking for pretty steep margin rate in the second half and you know appreciate that you guys are a lot of cost savings, but I wonder if it looks you know challenging more so the commercial industrial is going from a 12% the first pastor 17% number in the second half. Anything really driving that, I know you mention the restructuring $2 million dispense in the Third quarter anything else in the commercial world?
Yes, I mean there were several factors that there is a lot of things going on in commercials there is first you'll get extra $9 million from being increased sales and absorption. And from half-to-half you are going from under absorption from the first half to over absorptions in the second half. They're also leading - from half-to half view point in our margin improvement initiatives, so we about $7 million of incremental improvement in that segment in the second half. And they have benefit from more favorable mix in the second half with sales sensors and controls product versus actuation at about $35 million, from a restructuring standpoint it's a $6 million strength, they're going to go in the first half, $3 million benefit net benefit second half, that's also contributing half-to-half. And last there are couple of other different things they have some capitalize in our new contract they won a couple million dollars, again -- again number of things influencing them into second half.
All right, sounds great. Thank you very much, good quarter.
Thank you and our next question comes from the line Michael Ciarmoli of KeyBanc. Your line is now open.
Hi good morning, guys. This is actually Kevin on for Mike. Looking at the guidance by end market you know a pretty big up taking commercial aerospace going from down to the floor now expected to be flat. Any specific programs or drivers there.
No, it was actually conglomerates different things that we -- did reclassed home of our items from general industrial into commercial aerospace. That were not quite frankly just in the wrong -- I think that's last quarters so another than that we remain pretty much the same. No there's no particular program.
Okay, that's helpful. And then ground defense also saw a pretty big swing that the other direction. I know you mentioned a couple programs there I think that proudly and in Aerospace defense. What -- I mean same kind of question any specific programs are out in there broadly but on the aerospace side.
No. particular programs I would say is mostly in our systems solution side of the business. There is -- but there is no big individual -- only slower orders really comes down.
Okay. And then on naval defense, a couple questions arose kind of wrapped into one. It felt like things are progressing pretty well on the Ohio class, I think you know previously mentioned having approximately $90 million of content there. Is that generally still what we should be looking for in any potential development still out there.
No, no that's still in the content and -- and again we're -- the developed now starting to ramp up as we think of any of waterfalls more like 2019 I think or 2020 somewhere around there so I know nothing's really changed just a -- Ohio ramping up and you know the lobbying is on the other side of the beginning class me aircraft carrier which is typical for us.
Yes, turning this to my next question on the carriers so its sounds like you and CVN-79 ramping up. I know technically I think you guys like to look at that as kid of the bell curve over five or so years period, any gap that we should expect to see between CVN-79 -- I mean as they start construction on that over the next couple years. Or is it going to be a pretty smooth transition.
Yes, I think that the bell curve meet I think it's 2017. So we'll be down this year but next year will be the end of CVN-79 process and will begin CVN-80. So probably flat 2017 and then it'll ramp up in 2018 and 2019. So next year that we think is the cross over.
Okay, thanks. I will drop off, thank you.
Thank you and our next question comes from the line of Ryan Cassil from Seaport. Your line is open.
Good morning guys, congrats on the good quarter. Just looking at the industrial balance business, could you talk about pricing that you are seeing, is it getting any worse in the second quarter from the first, and what are you expectations in the second half.
We see pretty much they repeat of what's been going on for the last several months in terms of price competitiveness you know there are those that attempt to get in with several new product and production from legacy tends to prevail, we're able to mitigate the most of those then, with regards is our local economy reproach which allows us some flexibility there but, they say that it hasn't increased any more than -- more it has been so I will say that there is generally has been a slight we're going to call it internally very slight glamour of hope in the second quarter pick up in some orders versus first quarter, bearing in mind first quarter was pretty low to begin but does look somewhat promising that there is some light at the end of the tunnel, and I'm like where I'm calling retro patrol this point we're saying that it has picked up slightly, so little increase in their orders and request the calls so that's positive sign for us.
Okay. Are your volume expectations in the second half you pretty similar to what you saw the first half or is it slightly lower in the outlook.
Its again restarting the sequential improvement quarter to quarter for the year which is still essentially through, I mean but we only lowered our guidance space pipeline but not areas so it's not quite as robust really but we still expecting an improvement in the second half. I will say encouraging us to follow on which is that you know you look at the book of the boat builders in August about business it's been over one every month this year and you go back in the second half of last year it wasn't number one anymore the second half last year, so we feel pretty good about this year but the orders still have to come, they're coming but we used to lower the guidance in this market where we expect when at least we're moving in the right direction. That was good.
Okay, alright, thanks. And then lastly on M&A, excuse me -- touched on a little bit but could you just talk about the bigger deals you know the 100 million plus deals you know what the pipeline looks like there and perhaps where some of the more interesting opportunities you're seeing are out there in terms of the products you want to add to the portfolio.
We are in -- we are seen as I've indicated in the past more opportunities for the greater than 100 million that we've been living on the for last couple years, and it is because a little bit more focus has been applied there and we have looked up quite a few and heard away some we got a few pipeline that looks very interesting, their reference mine -- my syndication and that sort of in the end of my narrative this morning and a so things pan out for us and if everything looks good and continues to go we the way we might hope it would, then we could see some activity there you know and do the things you do take some time you're aware that in them is the sum with the nursing for considerable amount of time, but advertising wise it remains that if I stayed in the past and some of the industrial sectors even though they're down right now real opportunities out there for strategic implications occurs right.
And that's what we look at really as far as ten years outlook and what they can come and do for us, what can a company do on our hands better than someone else and then also in a more specifically I'm talking about valves that have been adventurers -- not talking about the huge valve companies but they're very leashed severe environment-related [ph] water that's sort of the middle all kind of activities that that are of interest. And symptoms are always of interest to us so well in those on and be smaller in size but in any case we are actively engaged in looking across the platforms that we participate in today and all across all segments. And, it is very opportunistic if they need the hurdle we step for which are high and then we might continue onward but I'm encouraged by what I'm saying so for.
Okay, great. Thanks, appreciate it.
Thank you and our next question line comes from Kristine Liwag from Bank of America Merrill Lynch. Your line is open.
Good morning. Dave, I know you provided your capital allocations -- proper allocation plans for 2016. But as I look out in the next few years and unless there is significant changes in end market. It looks like you generate conservatively around $200 million of free cash flow per year career. So for a company's your size. There's a point in which the sting share purchases would have an adverse effect on your float. So can you perhaps discuss how you think about capital deployment in the long term. In the next couple of years ensure your vision of what you think the company will look like then, it is it bigger and more profitable company or is it a company of similar size with just a significant capital return story perhaps in dividends. Increases and things like that.
I appreciated question Kristin, up loaded with a bunch of things then there also outright recoverable in general answer the all of the above I'm really interested in I have talked in the past on my desire, my strong desire to do more strategic acquisitions then share recall because you're right there will become a negative information or effect on some points which your report and I think industrial large needs to be concerned with that but specifically courage right from an enterprise perspective we have and there will maintain our -- basically our allocation strategy that we've set forth with. However, I'm really looking forward to some of the accusations that I just talked about in response to Ryan's question. What it is that we can do is to mark this company into its next year, next journey.
So we are not going to turn the ship around I mean it's already going in the direction we want to so we don't have a big fish or a bird this is a well-positioned well-machine that this point you can tell I'm margin expansion we're doing a phenomenal job there the team should be credited with all of that, and will continue that March. It's now a matter of feeding the animals in cages and that we love and we describe them amongst ourselves in the corporate offices and that is bringing in opportunity for them to do make better with companies there are perhaps not in our great positions strategically with president owners, and our entrepreneurs want to see that next step in growth with their privately held businesses.
I think they're going forward from the size perspective with the corporation I said two years ago three years ago I wouldn't mind being a smaller corporation with higher probability and we've taken it so well with the bottom of where we want to be in not what standing some of the issue and market wise we would've seen some great organic growth and we have some launch from our markets and I don't expect there does not turn around one of these days and when it does we will really see some healthy margin gained out of that plus the organic growth part, but I think from the inquisitor sight or just where we will position this corporation five to 10 years out.
I'm going to see a larger corporations that has gotten even further critical mass in our and our chosen markets and markets our products spaces. And then like I said I doesn't mean that we're going to have important just learn the company's going to be building on the floor, now and I'm not also talking about unspecific number doubling tripling the size I have indicated in the past that I'm willing to look at greater than 100 million on acquisitions. But you know my serve criteria it is very selective and those are hard to achieve will have a lot of trying harder to deal with somebody that given the statement obviously you made and we're looking forward to, and that's great immersion in the next several years because we believe that we will be able to maintain that.
Then lastly, I'll just toss in there you get your facts of the color one all but on strategic long term where some of these AP1000 contracts that you look at China, you look at India, look at the Rest of the World, there is going to huge opportunities out there that will do exactly what we want and that is to fuel the opportunity for more growth and or lovingly referred to as throwing meat in some occasions of our alliance -- we're doing very good job of but running those businesses. So I really appreciate that question it does give me opportunity to expand on what we view as a strategic versus a quarterly kind of outlook.
And that's very helpful. And a follow-up on that, I mean M&A seems to be your answer -- it will take a bigger part in your future strategy. So when you first set in your role, M&A was one of the things that you put ahead us to and you wanted to focus on improving margins. So with M&A back on the table, can you discuss maybe how that processes change and how you would maintain discipline or is it just pursuing the metric that you've already outlined in terms of your requirements for targets?
We'll continue the maintain the metrics that will continue to you remain in the top profile of our peer group, so that's a must. And I will say that you're going to have some speed bumps that are very positive speed bumps when we acquire company given the hurdle rates that we've established internally and the required performance metrics from the target companies, you're going to have a little bit of dilutive in that year as a first year of acquisition, some acquisition cost and so forth. But if you look at those, the ones that we look at do transpire and we are actually able to execute on them, might be a little bit more than what we normally would have paid in years past, the best because we're buying companies that are producers, they are high margin performers, they are niche oriented with IP in their chosen field and technology,, high-tech kind of companies, highly engineered.
So we will not return to a serial acquirer like we used to be -- I think we did a great job at that. However, you did indicate and rightly so that we had some negative effects of that as being in certain requirements but when you acquired companies that are accretive versus dilutive you won't experience that for protracted period of time. So the outlook is that there is going to be high quality companies and they will establish a significant benefit to us.
Great, thank you very much.
Thank you. And our next question comes to line of George Godfrey from CL King. Your line is open.
Great, good morning. Dave I just wanted to gain a little bit focusing more on that commercial industrial and you said you weren't ready to call it trough, but if I look at -- I mean what would I call for growth; if I look at the first half of this year versus the first half last year, it looks like -- and just commercial industrial revenue down 6%. But then even with the guidance and revenue reduction, the second half of this year versus second half last year, it's flattish for 0%. So as we go into 2017, is growth really on the table or more likely to have growth rather than declines on the table as we look at that segment heading into 2017?
Well, we're like everybody else. The glass half full to an extent that it's got to turn eventually. And we are seeing a little bit of pickup and not in heavy duty class days, that's been tough on us as with everybody else, and we've been talking about that. Medium journey has done a little bit better, so in Europe in particular its showing pretty good; the off highway, that's picked up a little bit, construction has been on the good side for us, domestically and global lag obviously has been down and so I'm not looking at that to be coming back any time soon but construction is a positive note there. And then just general industry GDP type activities, it's pretty flat and our whether band just tells us that looks to around that flattish note. So we're not looking for much there but GI is going to be tough, all the way around I think for everybody and we do have some little niche pockets of interest that looks like they will pick up and I did indicate with some fair interpretation about the balance item, I'm not going to be the first one to call that soccer, it's a difficult one, I listen to all my peers, those outside the box but closely related.
And there is somewhat -- giving some signs of life and as I indicated, we did see a sign of life in a pickup in the last quarter and it was indicated that sales have picked up over the last couple of months as compared to last year. And so I think that what we're going to look at is the pickup in industrial production, plus the GDP is going to help in 2017. So I think we're coming out of 2016 into a stronger 2017 with a pretty decent outlook. So we're optimistic and I believe that most of my peer group is trying to hang in that same category but based on some facts rather than smoke and mirrors with some hope.
Got it, thank you. That's very helpful. And then the capital allocation strategy which I know you'll fine tune as we head into the end of this year. But I believe coming into this year you've dedicate at least one-third of free cash flow for capital returns, is that on the table for 2017 or potentially could we see no share buybacks if the acquisition opportunity really presents itself for some level of dividends and share buybacks still on the table regardless of what you do on the acquisition front?
We're going to try and maintain a balance there. And I think say no to share buyback for the similar state, north -- we're going to do some and I may have to go back and explain that. So we are -- we're really sticking with a balanced approach. I'd love to have that and it's working well so far for us, whatever we've done extremely well with buyback side so far, and then the dividends and so forth. On the acquisitions it's been a little bit slow, that's not because we didn't want to spend money there, it's because like I've been saying, our hurdles are pretty high and we're real stingy without money. And until and unless I find something that I'm really willing to spend the money on then it will be out of balance with regard to the M&A side but like I said, it's best looking better and I'm feeling pretty good about it right now. So long-term it's all about balance.
Got it. Well, that's a nice high class problem to have, what do we do with all the cash?
Yes, we like that. Thank you.
And our next question comes from the line of Jim Foung from Gabelli & Company. Your line is open.
Hi, good morning Dave and Glenn. Good quarter there. I just want to start off with your margin driver Dave. Have you consolidated into three initiatives now and maybe you could just kind of go over the first one here; global footprint. I guess you announced that you can spend $7 million and this should consolidate plans in a $12 million as savings you expect. Is that -- I guess that's the total savings that's going to begin in the second half of this year from the global footprint?
Yes, that really is what's going to happen in this year for under global footprint.
Okay. Is there anything else beyond the intention of beyond issuing just a global footprint consolidation saving 2017-2018?
We don't have the identified that farm out. It's been roughly put on -- we did as enterprises one we're doing this year and targeted it because that was lethal and things you don't want to -- and stars have to align themselves but that's not to say that we've given an acquisition that we don't have in mind, like we've said it's very opportunistic in most cases, something might sum up that that would offer that opportunity to reduce some footprint out there by consolidations but it's not there right now. So it is always on the lookout for us and is a good area of achieving a lot of efficiency improvements.
Very good. And then on the -- I guess the first one, the operation excellence, you didn't identify the amount of savings there but maybe you can help us giving an idea what the potentially savings could be this year or next year?
We haven't gone that level, we've stated that it's $40million across all three; 2016 through 2018. And I will say that the order provided on that slide and in my narrative, the OpEx once was numbers one in terms of being the highest payback ongoing over these next three years inclusive as in global footprint second and then corporate efficiency for third. So you can roughly spread that around there of those three years inclusive.
Okay. And then when you talked about you M&A, the number of opportunities in the pipeline; are these opportunities for $100 million? I wasn't sure because you were increasing the range of…
Some of them actually are over $100 million and that's -- we've been looking for these for a while and so let's hope we can execute them. They need our stringent requirements.
And would you consider back into the energy market expanding into that market you got out the right time with the steps similar which is one the biggest in the super period. Now after the properties have -- pricing in these properties have come down substantially, these things could be 14% margins in a year so as the energy market turns back.
Yes, I would agree with you that there are some real deals to be had out there since on the dollar kind of thing but it's just not in it for us. As stated in the past that one of our problems that we had was -- we don't have and did not have the bench strength and talent that was from that industry. I mean we've got wonderful talent but they are not oil and gas people and they never were oil and gas people, and that is one of the biggest impediments to a successful of a company is hiring wrong talent to put in place in companies that are at their bottom. It's just a little touch protocol and so we've avoided that. So the shorter answer is no, we're not interested in getting back into that sector although I really like the element -- we have 5% of our business in pipe and oil and gas; and that's downstream and unlike those that were in severe environments, and we do well, that's niche oriented, so I wouldn't mind getting into more of those but the rooms we already have.
Okay. So you established exposure there and you probably want to keep it at that level. And lastly, could just kind of give us an idea what pinching these things may look like in 2017 with rates initiatives at low levels? You think you might a higher expense in 2017 or contributions to your pension or you have to make contributions to pension fund?
We're not really ready to talk about the pension for 17 years but we don't think we're going to need to make contributions primarily because the big contribution we made last year. But we know there is going to be pressure on the discount rate probably knowing return but we won't know that later in the year, probably the fourth quarter.
Okay, great. Thanks.
[Operator Instructions] At this time I'm showing no further questions in the queue. I would like to turn the call over to Dave Adams for closing remarks.
Thanks everyone for joining us today. We look forward to seeing you in October at our Investor Day. And we hope you'll have a great rest of your day. Thank you. Bye.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.
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