Earnings Call Transcript - SPXC Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the SPX Corporation First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference to your speaker today Paul Clegg, Vice President of Investor Relations. Please go ahead sir.

Paul Clegg, Vice President of Investor Relations

Thank you and good afternoon everyone. Thanks for joining us. With me on the call today are Gene Lowe, our President and Chief Executive Officer; and Scott Sproule, our Chief Financial Officer. The press release containing our first quarter results was issued today after market close. You can find the release and our earnings slide presentation as well as a link to a live webcast of this call in the Investor Relations section of our website at spx.com. I encourage you to review our disclosure and discussion of GAAP results in the press release and to follow along with the slide presentation during our prepared remarks. A replay of the webcast will be available on our website until May 7th. As a reminder, portions of our presentation and comments are forward-looking and subject to Safe Harbor provisions. Please also note the risk factors in our most recent SEC filings including our disclosures related to the ongoing COVID-19 pandemic. Our comments today will largely focus on adjusted financial results. You can find detailed reconciliations of historical adjusted figures to their respective GAAP measures in the appendix to today's presentation. Our segment reporting structure combines the results of our Heat Transfer and South African operations into an all other category which is excluded from our adjusted results. Our adjusted earnings per share also excludes non-service pension items including our true-up of actuarial assumptions, amortization expense, and one-time costs associated with acquisitions. Finally, we will be conducting virtual meetings with investors during the second quarter including our participation in the Oppenheimer Industrials Growth Conference on May 5th. Additionally, we will be virtually hosting our Annual Stockholder Meeting on Thursday, May 14th at 8 A.M. Eastern Time. And with that, I'll turn the call over to Gene.

Gene Lowe, President and Chief Executive Officer

Thanks Paul. Good afternoon everyone. Thanks for joining us. Before we get started, I hope that all of you and your families are safe and well. These are certainly challenging times and we appreciate your support as we all navigate through the health crisis. I also wanted to take the opportunity to thank the entire SPX team for their strength and continued perseverance. I'm really impressed with how our people have adapted and succeeded in a rapidly changing environment. On the call today, we'll provide you with a brief update on our overall results and segment performances for the first quarter. We'll also get into a more detailed discussion regarding the impacts of the COVID-19 pandemic, the actions we have taken, and our process for dealing with continued uncertainty. Now, I'll touch on some highlights from the quarter. We had a strong first quarter with a solid increase in revenue and adjusted operating margin. The COVID-19 impact to the quarter was relatively small and concentrated in China. However, during March, the impact accelerated as containment measures implemented in Europe and the Americas quickly took effect, while China on the other hand began to reopen. Given the rapidly changing business environment and the economic uncertainty surrounding the pandemic, we are withdrawing our full year 2020 guidance. SPX ended the quarter with a strong balance sheet and liquidity position and we believe the company is well-positioned to manage through the current situation. Turning to our adjusted results for the quarter. Revenues increased 3.9% from the prior year to $365 million and EPS was $0.62, an increase of 21.6%. We experienced revenue growth in our detection and measurement and engineered solutions segments. This growth was partially offset by lower HVAC heating volumes associated with warmer winter weather compared with a much colder prior year period. We also experienced strong operating income growth driven primarily by a solid operational performance in our engineered solutions segment. Now, I'll provide you with an update on the current state of our operations and the actions we have taken to safeguard our employees. Our facilities have not seen any material interruption in operations. Our businesses and the products we manufacture are essential under the definition of critical infrastructure and current applicable government orders. These include products and services that enable the operation and maintenance of communications networks, the electric grid, water and wastewater systems, and other key elements of our infrastructure. Later in the call, I will review the end markets we serve in more detail. We have also implemented strict and clear procedures to prevent the spread of coronavirus and protect our team members and our communities. These include work-from-home practices wherever feasible, restricting facility access, social distancing, modified work schedules and widespread use of masks. We also modified our leave and other personnel policies to accommodate the unique needs of our employees during these challenging times. We have a COVID-19 task force that I am a part of. We meet daily to monitor and adapt our practices where needed and to provide guidance and tools for our businesses and corporate groups to meet the needs of our employees and their customers. I would like to extend a special thank you to this team for their tireless effort. In addition, across the enterprise, we have taken multiple actions to reduce near-term cost and cash usage such as reducing discretionary spending, travel and CapEx and strictly controlling hiring among other items. We have also taken further actions in those businesses most impacted in the near term. We'll continue to assess the situation and the need for further actions. All of our businesses and our corporate teams have developed plans to further address profitability and cash generation, should additional steps become necessary. At this point in the call, I usually discuss updates on our value creation roadmap such as new product initiatives, operational excellence programs, and employee development. Today, I want to make a comment about how our culture and values, our team and our processes have helped position the company to deal successfully with the current environment. Our business system has yielded significant benefits in implementing additional safety procedures as well as providing robust data gathering and analysis capabilities to help drive better decision-making and planning. Our teams have been able to adapt successfully to a rapidly changing environment by leveraging the company-wide processes and practices we have put in place to drive efficiencies. These include coordinating efforts through our manufacturing and supply chain councils, frequently assessing progress, and taking timely actions to resolve logistical and sourcing challenges. Currently, we anticipate that our supply chain will support our near-term demand expectations. I am very proud of the leadership and accountability our teams have shown and the resilience and flexibility they have demonstrated that have allowed us to continue operating effectively in this difficult situation. And now, I'll turn the call over to Scott to review our financial performance.

Scott Sproule, Chief Financial Officer

Thanks, Gene. I'll start with our results for the first quarter. On a GAAP basis, we reported earnings per share of $0.50. On an adjusted basis, which excludes the impact of the items noted by Paul, EPS was $0.62, an increase of 21.6% from the prior year. Overall, our solid results for the first quarter were driven by our Detection & Measurement and Engineered Solutions segments. Turning now to our adjusted results. Revenues increased 3.9% during the quarter. This included 3.7% growth from acquisitions as well as modest organic growth. The organic growth was driven by our Detection & Measurement and Engineered Solutions segments partially offset by organic declines in our HVAC segment. Segment income grew to $7.5 million or 16.2% and adjusted segment margins expanded 150 basis points. The increase in income and margin were due to higher volumes and margin expansion in Engineered Solutions. Now, I'll walk you through the detail of our results by segment starting with HVAC. For the quarter, revenues decreased 7.7%. An 8.5% increase from the acquisitions of SGS and Patterson-Kelley was more than offset by an organic decline of 15.7% and a modest negative currency effect. The decline in organic revenue was due primarily to lower market demand for heating products. In the first quarter of 2019, our heating business benefited from stronger-than-typical seasonal demand, while during the first quarter of 2020, heating degree days were notably weaker than average historical levels. While the China cooling business experienced lower volumes associated with the COVID-19 virus, this was largely offset by higher revenue in other regions. Segment income decreased by $2.6 million or 14.1% with margins decreased 100 basis points. The decline in income and margin were due to lower heating revenue, partially offset by improvements in our Americas cooling business. In Detection & Measurement, revenues increased 8% including a 2.5% increase from the Sabik acquisition and a negative currency effect of 90 basis points. Organically, revenues increased 6.4%, primarily due to favorable project timing in our transportation business. Adjusted segment income margin was 21.8% or a decrease of 150 basis points that was largely due to a less favorable business mix. At the end of Q1, we saw a minor impact from COVID-19 particularly in our Radiodetection or locators business which is our earliest cycle business. In Q2, we are now seeing a broader impact which we'll discuss later in the call. In Engineered Solutions revenues for the quarter increased 12.2%, reflecting higher sales in both our transformers and process cooling businesses. Segment income increased $9.9 million and margins increased 580 basis points to 11.6% due to higher throughput and improved execution in our transformers business and higher volumes in our process cooling business. During the quarter, our transformers business continued to benefit from the operational improvements achieved throughout 2019 and our process cooling business benefited from the timing of service projects, as well as continued traction on our component sales initiatives. Turning now to our financial position. We entered 2020 with a strong balance sheet that positions us well to navigate the current environment. At the end of the first quarter, our net leverage ratio was 1.6 times and we had cash and equivalents of $163 million. In late March, we drew $100 million on our revolving credit facility to preempt any potential concerns about cash availability in the bank markets. During the quarter, adjusted free cash flow was approximately $3 million. This excludes cash used in South Africa of about $3 million. Late last year, we refinanced our credit facility, extending the final maturity into December of 2024, significantly reducing near-term amortization requirements and expanding our primary financial covenant. The combination of remaining borrowing capacity under our revolver and our cash balance provides us with approximately $350 million of readily accessible liquidity. To give you a sense of the headroom we currently have under our leverage covenant, at our current net debt level our LTM EBITDA would have to decline by 50% to 60%, while we generate zero free cash flow to reach the maximum net debt-to-EBITDA ratio of 3.75 times under our credit agreement. While this is a time of significant uncertainty, we believe that the positioning of our businesses points to a much less severe scenario. Already into Q2, we have taken actions to mitigate the anticipated impact of the COVID-19 pandemic, mostly around the elimination of nonessential costs. And as we think about how the second half of this year and 2021 may play out, we have modeled various scenarios. These include further cost actions aligned to how we see the severity of the downturn playing out beyond Q2 and the potential shape of the recovery. With our current cost structure, we anticipate we could implement tens of millions of dollars of temporary cost reduction measures relatively quickly, without sacrificing our ability to serve customer demand, and we could implement more permanent actions if necessary. With respect to capital deployment, our current priority is to ensure that we have ample liquidity in this uncertain environment. M&A activities have slowed considerably, given our current situation. As we begin to see greater end market stability and improved visibility into the shape of the recovery, we would anticipate returning to a more growth-oriented capital deployment strategy. Once we get to that point, we will deploy capital in a manner that we believe maximizes shareholder returns. Turning to our near-term outlook and some color on our segments. Due to the uncertain economic and business conditions created by COVID-19, we are withdrawing our full year guidance. It is difficult to assess the impact of the current environment on our results, yet we believe that the diversity of our businesses and end markets and our significant level of replacement-driven demand for critical applications, helped dampen our overall sensitivity to the macro economy. This is consistent with the historical performance of our current portfolio during recessions including the period around the 2008 financial crisis. In a few minutes Gene will provide some additional detail on our end market conditions. You will see that there are portions of our business that are experiencing notable reductions in volumes, while others are growing based on the strength of our backlog and confirmation of demand from key customers. Ultimately, the impact on our full year results will be determined by how quickly our customers can get back to normal work routines, as well as by the pace of economic recovery, which of course we cannot reasonably forecast. However, to give you a sense of near-term performance, for Q2, we believe it is reasonable to model an organic revenue decline of approximately 10%, partially offset by the benefit of the SGS and Patterson-Kelley acquisitions that we completed in the second half of 2019. We would also anticipate that this organic decline includes the benefit of year-over-year growth in our Engineered Solutions segment, driven by our transformers business. This scenario is subject to several assumptions, including that our facilities, our customers, and our supply chain remain largely functional and that we do not experience significant event-driven disruptions such as government actions. While we typically provide additional modeling details in the appendix of our earnings presentation, many of the figures are scenario-dependent and currently difficult to estimate. However, in today's appendix we have included estimated decremental and incremental margins by segment, as well as some additional color to help you with modeling. Specifically for our Engineered Solutions segment, we would anticipate Q2 margins to be similar to our most recent quarters, following significant operational improvements implemented during 2019. On a year-on-year basis, this would imply higher-than-typical incremental margins in Q2. Lastly, we've spent a significant amount of time assessing various scenarios. If conditions require further actions, we are ready to implement plans to moderate further negative impacts on our results and preserve liquidity. Now, I'll turn the call back over to Gene for some commentary on our end markets and his closing remarks.

Gene Lowe, President and Chief Executive Officer

Thanks, Scott. As we move through the current uncertain period, it is useful to understand where the demand for SPX's products comes from and how demand has reacted to economic downturns in the past. Looking at a breakdown of last year's revenue, more than half is associated with regulated electric, water and other utilities or government spending. Our products keep critical infrastructure functioning safely and efficiently. The consequences of not having them are high. While nearly 30% of our exposure is to non-residential markets, it is a mix of more cyclical demand, such as office and other commercial construction, as well as more stable end markets, such as institutional and areas that are currently seeing increased demand, such as health care and data centers. Our residential exposure was approximately 11% last year, but is primarily break/fix and break/replace boiler demand, which has historically shown a low correlation with GDP, and a high correlation with winter weather. As we've noted, recent market demand for heating products is down significantly year-on-year, due primarily to the warmer second half of the 2019-2020 heating season. Finally, industrial demand made-up approximately 8% of our revenue and is among the areas that experienced more economic sensitivity. But again, there's a component of replacement and service revenue here, that typically remains resonant during downturns. With this background, I think it is helpful to review how we think about the cadence of our business cycles. In a typical economic downturn, recognizing of course that the current environment is unique, while our early cycle businesses, such as location and a portion of commercial HVAC are experiencing initial declines, the later cycle businesses most notably transformers exhibit stability and continue to perform with little impact on the results. This is due to customer spending profiles that are less sensitive to GDP and, in the case of transformers, extensive backlog, some of which extends out more than a year. While some of our early cycle businesses have high decremental margins, they also have quickly adaptable cost structures and can remain highly profitable in the face of lower sales. This is what we witnessed with our locators business during the financial crisis and what we are currently seeing. If a recession is deep and persistent, eventually we would expect to see an impact on the later cycle businesses as well. However, if history is a guide, by that point, we would be seeing a recovery in our early cycle businesses with high incremental margins, boosted by earlier cost adjustments. Obviously, we're in a very fluid and dynamic environment. And we will continue to assess the situation as we gather new information. We believe that this favorable composition of our business and end-markets positions SPX to manage through a difficult economic environment. Our diversified portfolio has a high percentage of replacement sales and diverse drivers that can help balance our results during the recession, like the period around the financial crisis of 2008. Looking at a breakdown of last year's segment EBITDA, a large percentage was generated by businesses that have historically shown and are currently showing less overall sensitivity to the macro environment. Generally, these businesses have drivers that are more durable through an economic cycle. And the businesses that are experiencing a greater impact from the current crisis generate a lower portion of segment EBITDA. Combined with our strong balance sheet and liquidity, we believe that this positioning provides a buffer against any extensive weakness in our more sensitive businesses. Before I turn the call back to Paul, I'd like to say that I'm pleased with our strong performance for the quarter. While the near-term outlook has been affected by the ongoing health crisis, we are well-positioned to manage through the impact with our strong balance sheet and liquidity position, as well as strong and diverse end-market positions for numerous essential products and services. This is not going to be an easy road, but we expect that we will continue to be in an overall solid position as we work our way through the crisis. As Scott noted, we still face several unknowns when planning for different scenarios. We continue to make employee safety our top priority, while taking actions to dampen the impact of the virus on our customers and our near-term profitability and cash generation. As the economy reopens more broadly and we're able to gradually resume normal activities, we expect that SPX will be poised to return to its growth and value creation journey. In the meantime, we hope you all remain safe and healthy. And we appreciate your interest and support as we navigate our way through these difficult times. And now, I'll turn the call back over to Paul.

Paul Clegg, Vice President of Investor Relations

Thanks Gene. We are now ready to go to questions.

Operator, Operator

Thank you. Our first question comes from Bryan Blair with Oppenheimer. Your line is now open.

Bryan Blair, Analyst

Good afternoon, guys. Solid start to the year.

Scott Sproule, Chief Financial Officer

Thanks, Bryan.

Bryan Blair, Analyst

I appreciate all the color regarding end market exposures and near-term demand sensitivities. Hoping we could focus there a little bit more. If we look at Slide 20, how should we think about run rate sales performance, April rate, second quarter expectations? Scott, I believe you said an organic decline of 10%, net of all these exposures. How should we think about the rates of growth or decline moving from less severe to more severe range of that spectrum?

Scott Sproule, Chief Financial Officer

Yes. I think the purpose wasn't necessarily to show different rates at those levels but more just where they are being more directly impacted. But specific to Q2, as I said, overall, 10% organic decline. You have to offset that with the acquisition growth which would be similar to what we saw in Q1, so around 3%. And then if you look within organic, as I said in my remarks, we expect growth in Engineered Solutions. So you're really feeling the effect of the decline in HVAC in Detection & Measurement, specifically within the commercial portions of HVAC but we're also seeing recovery in our Asia Pacific business, China specifically but that's a smaller piece of our portfolio and in our locator business. So those are – the organic growth in Engineered that's always a modest lower single-digit type of a number, so then you kind of back into the combined organic decline across the other two.

Bryan Blair, Analyst

Yes, that's helpful. Thank you. And any additional insight or directional guide you can offer on Detection & Measurement project timing, over the near term and how that factors into the incremental decremental range you put out there?

Scott Sproule, Chief Financial Officer

Yes. I think we feel good about the project timing, specifically when we talk about – you're talking about transportation and communication technologies most – where the biggest piece of that project is. The thing that we're watching is really customer access, their ability to take acceptance of shipments or come in and do final inspections. Those are the things that could probably impact it the most but we don't see that as certainly an issue for the near term. It's more of a – could something in Q – expected with Q2, expected with Q3 or even potentially things that we're looking to execute in Q3 come in earlier. So it's a little bit – with all the disruption that's going on right now, it's a little hard to really accurately pinpoint that.

Bryan Blair, Analyst

Got it. Okay. One more if I can. Any color you can offer on commercial boiler trends and COVID-19 impacts? I know that's not yet a major product line for you but it has been a nice growth initiative. Just wondering how that's trending.

Gene Lowe, President and Chief Executive Officer

Yes. I would say, if you look at our commercial business for – there is a portion of that that is typically linked to new buildings where there's typically a longer lead time. And we don't see much impact at this point in time. There's also a portion of a break/fix. We are upgrading older boilers. We would expect to see somewhat of a similar impact on our commercial boiler business as we do on our commercial cooling business. They have we think similar drivers. So we would expect some modest impact there but not a significant or severe impact there.

Bryan Blair, Analyst

Okay. Thanks, again.

Scott Sproule, Chief Financial Officer

Thanks, Bryan.

Operator, Operator

Thank you. Our next question comes from Brett Linzey with Vertical Research Partners. Your line is now open.

Brett Linzey, Analyst

Hey, good morning, guys. I appreciate all the extra color you gave.

Scott Sproule, Chief Financial Officer

Hi, Brett.

Brett Linzey, Analyst

Just a finer point on cost actions. What is the size of the savings that you currently have in hand from some of the discretionary actions you've taken? And then just thinking about some of the modularity or perhaps the variability of the market outlook, how large of a bucket of actions do you have kind of at your disposal as we go forward here?

Scott Sproule, Chief Financial Officer

Sure. I'll take that one. So what I'll say is when we're looking at this we've obviously taken the actions here in Q2 and have I'll say a playbook of actions we can take. One of the keys though is when you look at what actions we would take it's not necessarily every action would be taken across the enterprise evenly because as we said we have businesses like transformers that is growing and healthy and need support for expansion. And that's obviously a very sizable part of our earnings profile that we want to continue to support versus other sides and we talked about locators and partial – and portions of the HVAC commercial side of the business and the heating side, which is more weather-related really unrelated to COVID. It just happened to be same time frame. We're taking – I will say we're taking further actions than kind of the rest of the business. So it's a playbook of actions to take based on the severity that we see for the businesses, but it's not applied equally across all businesses. So that said, we've taken the actions here in Q2. We put it in place. We're really looking to see how we're going to be exiting. What's the evolution of treatments, identification, tracing? And kind of as the economy start opening up, how can they stay opened? I mean those are going to be a lot of the big indicators along with our order books of what the second half and beyond could look like. But if we were to keep the actions that we have in place and extend through the balance of the year, we feel like just in 2020 they would be in the neighborhood of $15 million to $20 million of cost reduction from kind of our LTM Q1 position.

Brett Linzey, Analyst

Okay. Yeah, perfect. And then just coming back to March-April trends, whether its orders or sales, are you able to provide some order of magnitude of what that range looks like? And I would assume that what you're seeing in April is informing that down 10% or are you expecting some improvement in May and June?

Scott Sproule, Chief Financial Officer

We are seeing that as we entered April, the trend aligns with our expectations of a 10% decline. In the Americas and EMEA HVAC businesses, this decline is visible, but we are experiencing a strong recovery in China, which seems more like a temporary pause rather than a prolonged downturn. The locator businesses are also showing positive signs. For other segments, the month-to-month project activity is more telling than the quarter-to-quarter performance. Year-over-year, results continue to meet our expectations. Engineered products are showing good activity, but for now, quarterly metrics are less significant due to our backlog, which has coverage extending through this year and into 2021. Therefore, current orders are more indicative of 2021 rather than 2020.

Gene Lowe, President and Chief Executive Officer

The way I see it, Engineered is performing well in terms of bookings and Detection & Measurement is showing steady activity. The notable exception is the location business, which has experienced the most significant impact since it has the shortest cycle. Additionally, we are observing some modest effects in HVAC.

Brett Linzey, Analyst

And maybe just sneaking one more. Thinking about the front log in HVAC what is your visibility? I would imagine there's some delays and it's tough to get to work sites and whatnot but, if this does open back I mean are there projects that are just delayed and underway but continue? And then just thinking further into the second half in 2021 how the pipeline looks in HVAC?

Gene Lowe, President and Chief Executive Officer

Regarding HVAC, I'll break it down into two segments: cooling and heating. On the cooling side, it's important to remember that it's roughly an equal split between new installations and replacements. Replacement revenue tends to remain stable across various markets. New builds, on the other hand, are affected by the Dodge Index. For example, a significant recession could lead to a decrease in demand. Typically, we are positioned later in the cycle, receiving purchase orders around seven months after new building initiatives start. There will be a delay in seeing demand for projects that are funded and under construction, which we expect will carry on for a while. However, if we examine the HVAC cooling segment, historical data shows that during the 2008 recession, there was approximately a 15% decline in our cooling business from peak to trough. Therefore, if we face a severe recession, it would be reasonable to anticipate a similar demand pattern. The situation is different for the HVAC segment.

Scott Sproule, Chief Financial Officer

Heating, yes.

Gene Lowe, President and Chief Executive Officer

I'm sorry. On the heating side, it's different because it's really driven much more by break/fix and break/replace. We think that's north of 80% of the demand profile. And we are innovating new products. We are broadening at different portions of the market, but that is very, very steady. And I would say for Q2 and Q3, you have a little bit of what I would almost call artificial demand. That's where people are doing their stock-ups. The distributors get some discounts to stock up in Q2 and Q3. And if there are liquidity concerns within our customer base, you could see a little bit of suppressed demand there, but really the demand is driven by break/fix. And so, we wouldn't anticipate that to evaporate, but you could see some timing shifts there. So I don't know if that's helpful, but that's how we think about.

Scott Sproule, Chief Financial Officer

I want to add to that by discussing the heating aspect. Traditionally, after a weak Q1 heating season marked by low demand, it’s common for the channel to be more cautious in their purchasing during Q2 and Q3 until the natural demand picks up in Q4. We are currently seeing this trend unfold, and we anticipated it. However, it seems to be more pronounced in the current environment due to macroeconomic factors and liquidity concerns affecting everyone.

Brett Linzey, Analyst

Okay, great color. I appreciate it. And congrats on all the efforts to navigate the situation. That’s all. Thanks guys.

Scott Sproule, Chief Financial Officer

Thanks, Brett.

Operator, Operator

Thank you. Our next question comes from Joe Mondillo with Sidoti & Company. Your line is now open.

Joe Mondillo, Analyst

Hi, good afternoon, everyone.

Scott Sproule, Chief Financial Officer

Hi, Joe.

Gene Lowe, President and Chief Executive Officer

Good afternoon.

Joe Mondillo, Analyst

So the HVAC business just in terms of the quarter, how would you describe, how much the organic decline was related to the warm weather and the boiler business? And then how much would it be related to the COVID effects?

Scott Sproule, Chief Financial Officer

The majority of the decline was linked to the heating side of the business and the weather. There was about $4 million impact from COVID in China and…

Gene Lowe, President and Chief Executive Officer

In cooling.

Scott Sproule, Chief Financial Officer

In cooling, yes. But really, the main factor for both the revenue and margin performance in the overall HVAC sector was the heating demand. It's important to note that this came off a very high comparison for the first quarter of 2019.

Joe Mondillo, Analyst

Okay. I don't know if we can get this detailed, but in March and as we moved into April, could you describe what you observed regarding the decline in activity in the HVAC business?

Scott Sproule, Chief Financial Officer

I'll pick up from where we were discussing. We've begun to observe a recovery in China, particularly in our cooling business, which was significantly down in Q1 but has rebounded sharply in the early part of Q2 in terms of orders. Conversely, we're experiencing declines in the Americas, which is the largest segment of that group, and those declines are continuing as Gene mentioned. On the HVAC heating side, the performance is heavily influenced by the behavior of the weather that I referred to earlier.

Joe Mondillo, Analyst

Okay. What about bookings? Have bookings slowed down or had an impact here too, or are you still securing bookings for the remainder of the year?

Scott Sproule, Chief Financial Officer

My comments actually were around the bookings trends, the orders trends.

Joe Mondillo, Analyst

Okay. In terms of commercial HVAC, do you have any insight into the impact of the shutdowns, particularly those that occurred in the second quarter? Are you able to share any predictions about a recovery in the latter half of the year compared to our current position in the second quarter?

Scott Sproule, Chief Financial Officer

I think it's too many uncertainties there, which is part of the reason why we pulled the guidance is just not sure to be able to see what that visibility is. So we just try to give some sense for Q2 and what we're seeing in the immediacy of what we see in front of us.

Joe Mondillo, Analyst

Okay. Can I ask this though? The month of April, do you think that will be the trough, or is the visibility still that unclear that you're not sure?

Scott Sproule, Chief Financial Officer

I mean our hope like everybody is that things get under control here over the next two months. And if we get better testing, we get better some levels of treatment, the opening up of the economy shows that that can be managed. And the economy can stay open. It doesn't have to shut back down. And then we can get back to some level of normalcy. But really, like everybody we have to see that play out here. And it's just such a fast-moving animal that we're dealing with that the next two weeks, two months, it's hard to predict. So I think we – well, obviously, when we're back together here talking about our Q2 results, we'll have a position on what we think for the second half.

Joe Mondillo, Analyst

Okay. You mentioned what the peak to trough was in the commercial HVAC business back in 2008. I was wondering if you know, or if you would like to share what the Radiodetection business did back then? I'm just curious how cyclical that business could be?

Gene Lowe, President and Chief Executive Officer

Sure. And just Joe to be clear with you the peak to trough that I did mention there was really on the cooling side, which is predominantly all commercial or B2B variety of customers there. Radio, I believe the peak to trough was in the neighborhood of 20%?

Scott Sproule, Chief Financial Officer

On a constant currency basis.

Gene Lowe, President and Chief Executive Officer

…on a constant currency basis. And the rest of the Detection & Measurement portfolio actually grew during the recession. So the one area that we do see real impact that's shorter cycle is our locator business or our Radiodetection brand. But as we've talked about many times over the years we do have a lot of asynchronous drivers of demand and a lot of those are really regulatory-driven in our Detection & Measurement business. And we think that those tend to hold up pretty well and are not directly correlated with GDP. So that's where we were with Radio in the last recession.

Scott Sproule, Chief Financial Officer

Yes, it's accurate to say we've consistently noted that Radio tends to follow global GDP, and that's what we're observing. In the fields of transportation and communication technologies, however, there are different, more local market drivers that don’t necessarily align with GDP trends. We've seen this pattern during the 2008 recession, and it's evident again now. While there are distinctions, they exhibit similar behaviors. Ultimately, the extent to which these trends diverge from GDP will become clearer over time.

Joe Mondillo, Analyst

Okay. I have one quick question about the cost restructuring you are implementing. When did this start? I don't think I saw that information, or maybe I missed it.

Scott Sproule, Chief Financial Officer

Yes, we haven’t made any restructuring changes. These measures are all temporary. We have curtailed all non-essential spending, including travel, project-related expenses, and capital expenditures that are discretionary. We have put a hold on these activities. We’ve also restricted hiring and have implemented furloughs in some instances, but those are exceptions. These activities are also temporary in nature. Additionally, our STI program is based on growth projections, which we are not currently anticipating, so that also contributes to the moderation we are seeing.

Joe Mondillo, Analyst

Okay. To follow up on that, it seems you would need to see a more consistent trend of declines in the economy to initiate a more aggressive restructuring. Many companies have already started their restructuring efforts, which may relate to your company's asynchronous situation. Additionally, even your cyclical aspects are linked to the later stages of commercial non-residential, which could potentially improve in the latter half of the year. Is that the reasoning behind not implementing a more significant structural change at this time?

Scott Sproule, Chief Financial Officer

Yes.

Gene Lowe, President and Chief Executive Officer

Yes Joe. I believe you are correct. The most significant impacts are felt in areas such as aerospace, automotive, and retail, where we have limited exposure. Our demand drivers differ from those sectors. However, if we were to face a severe and prolonged recession, we would be well-prepared to handle it.

Scott Sproule, Chief Financial Officer

Yes, we are currently assessing the situation to determine if it will be a prolonged issue or something more temporary. While we don’t expect a quick recovery, our main focus is on managing our workforce during this unprecedented period and exploring every option before considering permanent reductions.

Joe Mondillo, Analyst

Okay. All right. Thanks a lot. Good luck.

Scott Sproule, Chief Financial Officer

Thank you.

Gene Lowe, President and Chief Executive Officer

Thank you.

Operator, Operator

Thank you. Our next question comes from Damian Karas with UBS. Your line is now open.

Damian Karas, Analyst

Hey. Good evening, guys.

Scott Sproule, Chief Financial Officer

Hi, Damian.

Gene Lowe, President and Chief Executive Officer

Hey, Damian.

Damian Karas, Analyst

I believe we have discussed many important points. Most of my questions have already been addressed, but I want to thank you for the thorough analysis of your portfolio across different businesses. Scott, just to clarify, you mentioned a potential cost reduction of around $15 million to $20 million if conditions worsen. It sounded like that figure encompasses the total potential. Regarding non-essential discretionary expenses, how much of it have you already implemented that we can expect to impact earnings this year?

Scott Sproule, Chief Financial Officer

I was trying to provide an estimate of the impact for this year based on the current actions we have in place. If we maintain this level of lockdown without seeing any near-term improvement, this would represent the effect we can expect this year. There are additional temporary measures we could implement to enhance the situation. Certainly, as we move into 2021, we would start to see an effect in Q1. If the situation extends longer, we would need to consider potential adjustments to our size and operations.

Damian Karas, Analyst

Okay, makes sense. Thanks for clarifying. And then I wanted to ask you guys about transformers. I get that it's a little bit longer lead time. You guys are typically operating kind of nine-plus months type of lead time in there, but you've kind of had this period where we're running, I mean, 18 months two years where you've seen very strong growth in transformers. I mean, double-digit, high single-digit double-digit. I'm just wondering is there something to that fundamentally going on? Are you guys gaining share? Is there something changing in the pricing environment? Because that seems a little bit like outsized growth relative to how you guys have characterized that business that would, I think typically be more of kind of a low single-digit GDP type grower.

Scott Sproule, Chief Financial Officer

Right.

Damian Karas, Analyst

I see that there's visibility for the rest of the year regarding your order backlog for transformers. Is that why you wouldn't be able to achieve the 8.5% ES margin this year, despite having pulled guidance across the business?

Scott Sproule, Chief Financial Officer

Let me start and then Gene will add his thoughts. It's useful to reflect on the transformers' performance over the past several years. Back in 2016 and 2017, the business was doing exceptionally well, achieving double-digit EBITDA and low double-digit EBIT. However, we faced challenges in 2018 that carried into the first quarter of 2019. Therefore, comparing Q1 to Q1 isn't ideal; it's better to look at the sequential improvement from Q4 to Q1 because we saw enhancements in our operations throughout 2019. Due to the lead time in this business, it takes a while for those improvements to be reflected in the financials, but we noticed positive changes starting in Q2 and continuing. When I mention operational improvements, it includes not only plant enhancements but also our pricing strategies. We've made significant strides in being price leaders in the market, and given our strong backlog, we can be selective about the types of projects we undertake. There are various factors contributing to these improvements, and we are pleased with the business's performance. We have good visibility and customer confirmations regarding future demand, so we feel confident about our position this year. Of course, unforeseen events could affect this outlook, but for now, we feel optimistic.

Gene Lowe, President and Chief Executive Officer

Yes, Damian. I would add that we believe the market is healthy. For instance, Southern Company reported today and confirmed their capital expenditures. Many of the rate cases they implement last three to five years. We have strong relationships with several large players, making us optimistic about demand prospects over the next few years. Regarding market share and other areas, I think the team is performing very well. As you know, we have a strong position in medium power but a lower market share in EHV and high voltage, which we are expanding. We are noticing some customer preference shifting towards more domestic manufacturing. Historically, much of this was sourced from Germany and Europe, but we are seeing potential changes that could create opportunities. The team has done well, and we feel positive about that business and its future prospects.

Damian Karas, Analyst

That's great. Thanks for all the color. And good luck.

Gene Lowe, President and Chief Executive Officer

Thank you, Damian.

Scott Sproule, Chief Financial Officer

Thanks, Damian.

Operator, Operator

Thank you. I am not showing any further questions at this time. I would now like to turn the call back over to Paul Clegg for closing remarks.

Paul Clegg, Vice President of Investor Relations

Okay. Well, thanks all of you for dialing in. Everybody be safe. And we look forward to talking to you again next quarter. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.