SPX Corporation. (NYSE:SPXC) Q2 2016 Results Earnings Conference Call August 4, 2016 4:45 PM ET
Paul Clegg - IR
Gene Lowe - CEO
Scott Sproule - CFO
Shannon O'Callaghan - UBS
Ronny Weiss - Credit Suisse
Brett Linzey - Vertical Research
Filippo Falorni - Susquehanna
Good day, ladies and gentlemen, and welcome to the SPX Corporation’s Second Quarter 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 call is being recorded.
I would like now to turn the call over to Paul Clegg, VP of Finance and Investor Relations. Sir, you may begin.
Thanks, Gracia [ph], 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.
A press release containing our second quarter 2016 results was issued just after market close. You can find the release in 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 follow along with the slide presentation during our prepared remarks. A replay of the webcast will be available on our website until August 11.
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.
On our call today, we will discuss core operating results, which exclude the results of the South African projects, and we will separately provide an update on those projects. Other adjustments to our GAAP results this quarter include an adjustment to the gain from the sale of our Dry Cooling business, a pension adjustment and the exclusion of an adjustment related to non-controlling interest in a South African subsidiary. You can find reconciliations of all adjusted figures to their respective GAAP measures in the appendix to today’s presentation.
Finally, we plan to be on the road this month meeting with investors. And on September 7th, we will participate in the Vertical Research Partners Industrial Conference in Westbrook, Connecticut.
And, with that, I will turn the call over to Gene.
Thanks, Paul. Good afternoon, everyone. Thanks for joining us. I’m pleased to report another strong quarter of results for SPX Corporation and that we remain on track to meet our full year guidance for 2016.
On the call today, we’ll give you a brief update of our overall results, segment performances and market conditions and guidance before going into Q&A. I’ll start with some highlights from the quarter.
I’m proud of our second quarter performance. In our HVAC and Detection & Measurement segments, we continue to see solid organic revenue growth and operating margin expansion. Operational initiatives in our Transformers business are continuing to drive improvements, and we finished the quarter ahead of plan putting us on track to exceed our full year margin targets for this business.
These accomplishments reflect the hard work of our employees to make our business better. As we have previously stated, the power generation market is going through a challenging. Our business is feeling the effect of this but we're taking the necessary steps to reduce our exposure to this end market.
Turning to the results for the quarter. I want to mention that our second quarter GAAP EPS is affected by an adjustment related to the value of a minority interest stake in a South African subsidiary, Scott will take you through the details, but we expect no material change to the total cash outflows of the South African entities and this item has been excluded from our adjusted core earnings per share calculations.
Now focusing on our adjusted results for the quarter. On a core basis, our HVAC and detection measurement segment both recorded healthy organic growth more than offset by lower power segment revenue. Adjusted operating income was $16.7 million, or similar percentage of revenue to the prior year.
Our adjusted EPS came in at $0.26, which is modestly ahead of our internal expectations. As we always do, I’d like to briefly touch on a value creation roadmap, which lays out our initiatives for driving double-digit earnings growth from operational efficiencies, expanding our growth platforms and repositioning the Company to increase our focus on a higher return markets.
As a result of the actions we have been taking, our strategic HVAC, detection measurement and transformer platforms having each improved margins by more than 200 basis points in the first half of 2016, compared with the year ago period.
In HVAC, we are seeing the benefits of operational efficiencies driven by product design productivity initiatives and sourcing, as well as more effective pricing strategies. We are also seeing some nice momentum on some of our new product initiatives.
In the HVAC heating market our new high-efficiency products continue to get good traction. In a commercial cooling we are excited about the launch last week of a new product called Everest, which delivers 50% more capacity than any other factory assembled cooling tower while offering up to 35% energy-savings and is much as 30% lower installation cost
We think this product could have broader applications that will help expand our market reach, both in large commercial HVAC facilities, as well as a package replacement for many field [ph] directed cooling applications and industrial markets.
In detection and measurement, we're seeing traction on our new product in introductions and growth initiatives as well. Our Genfare link intelligent fair management system continues to attract interest is a comprehensive solution for midmarket customers in our cable and pipe locators business. We continue to educate and convince customers of the positive cost-benefit of adopting our GPS enabled locators.
Within base power, our transformer business team led by business unit president Brian Mason is doing a solid job of taking the operational performance of this business to a higher level, while operating in a steady market environment.
The team continues to make progress on his value engineering product initiatives and remained focused on driving further operational improvements in strategic sourcing and productivity.
In our power generation business, we remain firmly committed to eliminating losses, which suppress the true earnings power of our strategic platforms and we believe way out our valuation multiple.
The marketing phase of our sale process for the European-based portion of the power generation business is underway, but it's still early in the timeline to have any material updates.
In addition, we are also continuing with our stated restructuring efforts in the power generation business. Taking a look at our end markets, while the macroeconomic environment remains mixed, our diverse set of businesses remain well positioned to achieve our full-year guidance targets for 2016.
In HVAC cooling, continued strength in North American commercial construction activity has resulted in a solid order pipeline. In HVAC heating we saw the effect of a mild 2015 2016 winter on first-half bookings. However, our operational initiatives have more than offset the impact of lower volumes.
In detection and measurement, two thirds of our revenue is short cycle in nature, and in those product lines we are seeing steady order rates. The remaining one third which is more project oriented is seeing an elongated sales cycle in certain markets that within the expectations our guidance was built on. We continue to expect solid results from this segment for the year.
The market for transformers has displayed consistent year-over-year demand in medium power. Lead times for medium power transformers remain 30 weeks to 40 weeks and we can we expect the pricing environment to remain stable.
In our power generation business overall, markets have experienced further challenges, particularly in the demand for heat exchange products and we continue to focus on repositioning the business to improve performance.
Now, I'll turn the call over to Scott to go to the results in more detail.
Thanks, Gene. I'll start with our net results for the quarter. Our GAAP loss per share was $0.33. On an adjusted basis, earnings per share for the second quarter was $0.26. In addition to adjusting for the results of the South African projects, we’ve excluded non-service pension costs and adjustment recorded to the gain on the sale of our dry cooling business in connection with the settlement of certain liabilities we retained.
Our second quarter GAAP EPS also includes an accounting adjustment associated with a minority stake in our South African operating company. This item has been excluded from our adjusted EPS calculation.
In South Africa, we are required to have local minority ownership in the South African operating company. This minority shareholder exercise a put option on its equity stake. But we believe the value of the underlying shares of the operating company is nominal. An arbitration panel recently declared the value of this put to be approximately $18 million. As a result, we recognize the accounting impact of this in the quarter.
We firmly disagree with the arbitration panel’s decision our South African entities pursuing legal options. It is important to separate the shareholder matter in South Africa from the execution of the projects. Overall, we see no material change in the operational performance or risk profile of the South African projects, or our expectations around total, future cash flows associated with South Africa.
Moving on to core segment results for the quarter. Overall, we feel good about where we stand in our performance for the year. As Gene noted, we achieved solid performances in our strategic platforms.
However, this is being offset by headwinds in power generation, resulting in a year-over-year decline in revenue and segment income. Core segment income margin was similar to the year ago period, but I’ll provide more color on the various drivers as I walk you through our results by segment, starting with HVAC.
Revenues increased 4.5% organically or 3% after the effect of currency due to higher sales of cooling products, which continued to see steady demand associated with commercial construction in North America.
As expected, shipments of heating products are down versus 2015, although we did experience some earlier than expected deliveries during the quarter. In addition to the positive effect of higher sales volumes, we had another outstanding quarter of operational execution in both our heating and cooling product businesses.
The operational initiatives implemented across the segment are the primary contributor to the 300 basis points of year-over-year margin expansion. Year-to-date we are executing at the upper end of our original expectation and we now expect to exceed our margin guidance for the full year
In detection and measurement, midway through the year the segment is executing in line with our guidance expectations. Revenues increased 5% organically or 3.3% after the effect of currency, organic increase reflects contributions from multiple product lines within the segment.
Segment income margin increased 260 basis points to 20.1%, driven by operating leverage on the revenue growth and favorable product mix. As a reminder, most of our detection and measurement product lines have high incremental margins.
In our power segment, excluding the results of the South African projects, year-over-year comparability of result is impacted by the sale of our dry cooling business and the large power project executed in 2015 for which we have no equivalent project in 2016.
Combined, these account for revenue decline of approximately 15% for the vast majority overall revenue decline in the quarter, and a 100 basis points of year-over-year margin decline, or roughly $3 million of operating income.
As Gene noted, operational improvement efforts in our transformer business are ahead of schedule. For Q2, transformers margin were up significantly compared with the prior-year period, and sequentially consistent with our Q1 performance.
However, the strength of the transformers performance was more than offset by overall declines from the meeting power generation business. Additionally, in Q2, 2015, we had a one-time contract settlement with power generation that provided over $2 million of market benefit. Regarding the South African projects, there were no material changes in our quarterly results and were in line with our expectation.
Turning out our financial position and guidance. Our balance sheet remains in a solid position. We ended the quarter with cash and equivalents of $102 million. Free cash flow from our core operations was $32 million, which is stronger than we anticipated, partly due to the timing customers. We use the start cash flow to repay approximately $16 million a short-term debt and to fund operations in South Africa. Cash used in South Africa $11 million was in line with our expectations. Even after these uses we still ended the quarter with slightly higher cash on hand than at the end of Q1. We continue to expect 100% free cash flow conversion of core net income for the full-year prior to the use of cash uses in South Africa, which we expect to be in a range of $30milion to $40 million here and then will decline starting in 2017.
As anticipated, our net leverage ratio improved sequentially was down to 2.3 times at the end of the quarter. Overall I’m feeling good about our ability to maintain a strong balance sheet while maintaining, meeting our obligations and operating within our stated target leverage range.
We remain on track to reach our year-end expectations of being around the midpoint of our target leverage range of 1 5 to 2.5 time s which will provide us with capacity to deploy capital for actions to drive incremental shareholder value as early as the second half of this year.
Turning now to our guidance. We are pleased with our second quarter results and think we are well positioned to deliver on our full year 2016 targets. Our year-to-date performance is slightly ahead of where we expect to be midyear. This is the combined effect of our HVAC segment and transformer business coming in at the higher end of our expected ranges, although results from the power generation business have been at the lower end of expectations. Looking at the second half the year, we expect to see these trends continue.
Therefore we are raising our segment income margin target for HVAC and now expect it to approach 16% for the year. Before transformer business, we now expect an increase of at least 150 basis points over the 7% margins realized for the full year 2050. However, the further challenges in the power generation operating environment, resulting in a higher level losses for the year than previously forecast.
We continue to see order intake delays, which are affecting revenues and negatively impacting the level of utilization in our factories. Taking this dynamic into account, maintaining our overall guidance for the full year, core revenues in the range of $1.5 billion to $1.7 billion and core segment income margin in the range of 9% to 10%.
We also continue to expect adjusted operating income between $80 million $100 million and adjusted EPS in a range of $0.95 to a $1.25 per share. We don't provide quarterly guidance, and give you some points to consider for modeling purposes.
First, it included our historical phasing of segment income by quarter in the appendix and we expect our first and second half waiting to be similar to the prior two years. Overall we are feeling good about our visibility in the second half, based on committed backlog and consistent order intake rates. This includes certain projects that have already been awarded in our scheduled execute to execute in the fourth quarter.
Other factors considered new models include the effect of the dry cooling sell and an absence of a large power project I noted earlier. Combined these create a headwind of roughly $25 million in revenues and 1 million of operating profit each quarter in the second half of 2016, compared to the prior year periods.
On a full year basis this will account for roughly 120 million of revenue decline in our power segment. As discussed in prior calls, HVAC cooling recorded revenue in Q3 of 2015 from high-value project that will not repeat, and HVAC heating saw some earlier than expected deliveries of products in Q2 this year that we anticipate will impact Q3.
Lastly, we now expect restructuring charges for the full year to be approximately $6 million, somewhat higher than we had previously indicated. All cost is less than anticipated to execute the restructuring actions we took in the front half of the year. We are now planning additional actions in the second half to further reduce cost in our power generation business
And with that, I’ll turn the call back to Gene
Thanks, Scott. Before we move to the Q&A portion of the call, I want to say that I am very pleased with the overall performance of our business and I want to highlight the transformational nature of the actions we are taking to boost the earnings of SPX.
I also want to reemphasize our commitment to reducing the impact of the power generation business performance on the Company’s overall earnings profile. Over the coming years we expect the margin mix of our revenues to improve significantly as we continue to build on the momentum we are seeing in our strategic platforms, while executing on our plan to eliminate the effect of the negative performance from the power generation business.
As a reminder our HVAC business has solid revenue growth potential, it is benefitting from increased levels of operating efficiency, our detection and measurement segment has significant margin growth potential from high profit dropped through an incremental sales.
We also now expect our transformer business to beat the margin target we had previously set for the year while continuing along a path to double-digit margins without any benefit from improved market pricing.
So looking a few years down the road and before taking into the account the effect of any inorganic growth opportunity, which is a key part of our strategy, we would expect SPX to be a much more profitable company in absolute dollar terms and margins as we focus -- as we focus on growing our strategic platforms or reducing our exposure to the underperforming portion of our power generation business.
With successful execution, we expect the earnings upside to be substantial. In fact, eliminating the losses from the underperforming portions of our power generation business alone, would add north of $0.30 to our 2016 EPS guidance model.
So I’m feeling good about where we are year-to-date in the performance of our HVAC and detection measurement segments and our transformers business as well as our ability to meet our full year guidance commitments. While we have a lot more work to do, I do believe that SPX is well-positioned to continue executing and remains on track to meet our long-term goal.
I'm confident that we have the right plan and the right team in place to continue focusing and aggressively pursuing our roadmap to drive substantial value creation for our shareholders. As we continue through the rest of the year, I look forward to updating you on our progress.
And now, I'll turn the call back over to Paul.
Thanks, Gene. Gracia [ph] we are now ready to go to the Q&Q line.
Thank you. [Operator Instructions] And our first question comes from Shannon O'Callaghan from UBS. Your line is now open.
Good afternoon, guys.
And maybe start with the transformer margin. How much would you credit to the acceptance of the new design versus plant improvements doesn't sound like it was volume or price or some wrong on that, but maybe just a little more color on what, what is the better results there.
Yes, I think your instinct is accurate there. We don't see it as being volume or price. When we started out last year we had targeted 400 basis points of improvement in that business to really get to a from a 6% to 10% EBIT or a approximately a 9% or a 13% EBITDA. We had as have stated, we had line of sight to a number of initiatives to be able to achieve that without any price.
The biggest portion of that is the new value engineered design, that’s a product that we have talked about it actually takes cost out of the actual transformer and it actually delivers more value to the customer.
We have had nice success on that, that is a growing portion of our business and we think that is the most significant portion of the -- of the improvement in margins. But having said that, as I had mention the team there is really doing a nice job, and in particular some of the strategic sourcing and the OpEx initiatives have already started the pay dividends. So, where we are, we were ahead of where we thought we would be last year and we even more significantly had we thought we were this year. The team is doing a really nice job and we stand by our commitment of where we’re going to get to.
And Scott, I don’t know if you have any other thoughts on.
No, I’d say what you are seeing Shannon is the sources or say the improvement is coming from exactly where we expected as the pace of improvement is faster than we thought was going to record earlier in the year.
Okay. And then maybe within the restructuring actions of the power gen business. You had talked about the challenges in Europe, I mean can just put out a little bit what's going on. Also in the non-Europe part of the business and how should we expect that progress. I mean when do you expect that to progress, I mean when do you expect the savings from the actions you are currently taking to take hold.
So we did some restructuring in the second quarter and as we talked about that the last time and that was directed in the Americas portion of the business and we are currently contemplating other actions that we really don't think would have much benefit for this year than it will have more from a 2017.
Okay. All right, thanks guys.
And our next question comes from Ronny Weiss from Credit Suisse. Your line is now open.
Hey good afternoon, guys.
Just want to touch on the DMM [ph] margins seems like you guys are tracking above for the first half, but yet you kept the guidance same, just wondering, kind of what decelerates there in the back half a year. I believe the mix shift that you guys have talked about should continue throughout the back half, so I’m just wondering why the guide wasn’t really taken up there?
Yes, we still have the significant portion of the year to deliver in the second half. So really when we're looking at is not a deceleration of margin it is about the mix of the businesses in the product lines and some of the businesses. So there’s really nothing that we are communicating there to read into that. We are feeling good about where we are and we still feel good about being able to hit at least our margin targets that we have committed.
Okay, great. And then it is anyway to kind of quantify, it seems like it you guys has been pretty good price in both HVAC and DMM kind of quantify that, and what the split is between the growth and volume and pricing there?
We are looking at both those when you look at HVAC in different businesses whether it's the heating side or the cooling side, pricing are called relatively stable. We are not seeing much, may be a little bit of positive price there. But it's not a significant factor for the margin really what’s driving the margins for the businesses, overall is the operational initiatives and in the business, and just better execution in our plants.
And your next question comes from Brett Linzey from Vertical Research. Your line is now open.
Hi, good afternoon guys. It sounds like you're getting a fair share from new product rollouts in HVAC and this is something you really haven't talked a lot about. I guess as you look into the balance of this year and next year. I mean, are you able to share or quantify what you think these new products can contribute to revenues going for here?
Yes, I think what I would say and for HVAC in particular we feel like we have a robust product pipeline. A couple of ones who talked about in the past and in the heating side is the evergreen product of the product. One, the ACHR [ph] news contractor gold design award. That was the only boiler that that was awarded this year. We end another product that we just launched in cooling. We actually think is a little bit of a game changer. That would be our Everest, our NC Everest. This is the first package product that can really start to compete in some new markets and has a tremendous performance advantages over the existing incumbent can, can basically achieve about 50% higher tonnage than any product on the market today so very significant.
What I would say is, we've communicated at our investor day that we think the longer-term targets are in the in the range of 2% to 4% for HVAC, and 2% to 6% for detection and measurement, and that's before any inorganic actions we actually think there is some pretty attractive opportunities to continue to build out a platforms, but I'd say at this point time it would be premature to change those. What I would say is, we are very focused on that and we are very focused on driving those growth rates higher.
And I think we would probably have a better feel for that and would probably go in a lot more detail now when we roll out our guidance and will also refresh our margin targets and our growth rates for the -- couple of years.
Okay, great. And just want to shift back to DMM, you called out higher sales of fare collection in the quarter, I mean are you seeing better book and in shipper orders. I know those sales cycles tend to be of a little bit longer. I'm just curious if you're seeing some tail winds from the highway bill or is it providing, funding certainty to some of those customers and there's a little bit more comfort there are any color would be I would be helpful.
I’d say overall for the year. What we see is remember the bulk of that business is more of a run rate business let’s say north of two thirds of our business where we have in trench [ph] installed bases and we get a lot of follow on orders for customers or people that are using our products. And I'd say there's two products that are more of a project oriented nature one of those is the fare collection. The large fare collection that you highlight.
And again that’s a smaller portion of that overall business. There's a lot of run rate business site in that product line. I would say that we are seeing more activity on that side and we are seeing activity converts sooner than we thought. And we talk about our project businesses we are seeing I'd say a little bit better performance on that side and a little bit slower performance on our communications side.
So net it’s about where we thought we would be almost exactly. We did come in higher than where we thought would be in the first half, but we’re saying a mix there, but overall we are feeling good about the demand profile for detection measurement.
I would say the one area that's the you that we had talked about is being that they were keeping our eye is the communication of products that does sell globally and sometimes sell into markets that oil based economies I would say. Scott, you have anything more to add on terms of..
The only other thing I would add is you asked the question about the transportation bill and I would say it’s probably too early to say there is the definitive change there. But we are definitely seeing a robust front log morbid activity as relates to the deeper collection products that we do think is the early sign of the impact that could certainly funding requirements for customers is more clear positive for the next years.
Okay, Great. Thanks guys.
And our next question is from John [Indiscernible] from Deutsche Bank. Your line is now open.
Thanks, good afternoon everyone. Just a little bit more color Gene on this 18 million. You described as -- is it -- this is a cash cost to you and is it one time or other, you are there other sort of perspective event like this that could actually happen in the future.
Sure, John let me take that one. So let me start saying that the minority shareholder issues unrelated the execution of the project. We have a highly focused and effective leadership team they're making a lot of progress on improving the overall execution of the project themselves. We are feeling really good about where we are compared to where we were a year ago, even six months ago. As we said in the prepared remarks, South Africa is pursuing potential legal options so I’m sure you understand we don’t want to comment on our ongoing matters to – what is the outcome there.
But if I take a step back previously stated that at the start of 2016, we have further cash commitments in South Africa, approximately $70 million. The ongoing cost of exiting our existing infrastructure, about 3 million per quarter or they are roughly $12 million this year we expect we'll do significant reduce that cash burn socially the infrastructure costs starting in 2017, there is likely some level of spend through the end of the contracts. But we had it all in aggregate is in everything we know today is including everything to Q2 we see no material change to these expectations run or cash flows associated with South Africa. So obviously we are talking to South Africa projects still long time to execute.
There's just an inherent uncertainty within operating in South Africa, but overall feeling good about where our cash flow expectations are.
Okay, so 3 million at – so this 18 is a onetime thing I get it, it’s in the court, so we won’t talk about 3 trillion quarter. This substantially drops after 17 but it is a long term liability, is there any other certificates, I guess the 18 million...
Don’t mix those two together. The shareholder matter and the 3 million per quarter is more the overall infrastructure of our operations there that are outpaced outsized if you will to when we complete the construction and manufacturing scopes of the work that we expect to be getting at towards the end of this year in the beginning next year.
No, I get it. Is there anything else within the confines of your position there that could present some sort of a future charge that outside beyond the run rate that you’ve talked about like and again it’s not the question of is there another 18 million, but no one was expecting it, so I was just wondering if there's something else that in theory based on your structure something else that could happen? I don't know.
Yes, the way I would say is that based on everything we know today. No material changes to our cash expectations in the business.
Okay and then Gene, you mentioned the $0.30. I think X power in Europe. What were your – can you give us what your power results were if you were to exclude Europe, top line and operating margin?
Yes, Gene let me jump in on that one. So we report the power segment and we are a little [Indiscernible] far by calling it base power, by pulling out South Africa. So we are not – fit in the details of the businesses within the power segment beyond that. We do give in the diverging performance within transformers in the power generation group. We try to give you some color to be able to get a sense for where the performance relative performance is for those businesses. I think if you kind of look at the prepared remarks it will give you a pretty good sense of that. But I’d say on the north of $0.30 that’s really our commitment to getting rid of the losses associated with underperforming portions of our power generation business.
So it’s not the entire power generation it’s certain discrete underperforming aspects of it. The first step of that was the cell of dry cooling business. And so that was completed in the first quarter but with changes in accounting rules, we weren’t able to discontinue, but discontinue operations treatment of that business, so we are still incurring losses and in Q1 associated with that business that won't will go away next year. That alone is going to generate $0.06 of EPS improvement.
And then the other piece, which is a most significant part of it is the pursuit of the sale of the European power gen business that we are actively under doing…
And we just want to -- that out John because I think at the end of the day, we feel like we have some really good platforms here and we think that it gets -- it gets lost in the shuffle here. And we do think with the portfolio reshaping that we are undertaking we really have the opportunity to show that and it's interesting as we've been out on the road talking to different people.
Some investors have really peeled back the onion and really understand this and they really see the earnings power and the cash flow power of our core platforms. We think we have some really good businesses, but we also have a business that's facing some pretty significant market headwinds, and as we've said, multiple times over the past year we're very committed to taking actions to mitigate that, and I think the other sale of the dry cooling business in the process we have going on now or steps that were taking that that have the opportunity to have a very significant impact on our earnings profile and our cash flow profile.
And Gene, I'm sorry, the sixth sense that you just called out with dry cooling with respect to disc ops, is that running through the 26, so if weren't there, you actually would have done 32?
It's in –no, it's in our 2016 core results. So it will go away for 2017.
Right. But here you didn't exclude it from the presentation of the…
Correct. That's right.
That's right. If you took it out would be -- our midpoint would be a $1.16, right.
Right. Okay. I got it. And then just lastly if you were to, I know you want to get financials around this, but if you were to sort of x [ph] out, can you talk about its objectively if you were x-out the European cooling business -- is the rest of the business. What happened to it? Is it sort of flat? Is it growing? Is it -- or you sort of trying to grow margins, I mean is there any other color you can provide around it, because it does -- it is obviously a down trajectory with it in, and I think I agree with you it would be better to look at it stripped out. Is there anything subjectively you could talk to?
I can talk a little bit about the power segment and the different product lines and so forth. So we've started 30,000 feet, there's really kind of the power transformer business and then there's the power gen businesses as we've said, power transformer business, really strong business, we're very excited about that business. We have talked about the 400 basis points of margin expansion there and I think the team is well ahead of plan there. And we feel like that's a really strong sustainable business for us.
If you look at the other half of the businesses within power gen, broadly speaking you have a cooling business. And this is a business that does achieve double-digit ROICs, and then you have the heat exchange business, and that's a business that I would say where we're facing the most significant headwinds. Big portion of that is in Europe and that is where we have announced that we are taking a strategic action right now.
And then there's the smaller business that it is based in the U.S. that was a part of some of the actions that we had discussed in Q2 and in prior last call, and in some of the prior calls.
Yes. So that's where we've direct some of our recent restructuring actions than what we did in Q2 is directed at that business.
But in I think what you see is with the dry action and the other action underway. What you see the much stronger power segment that we see is cannot provide a lot of a positive impact on SPX.
The focus going forward on that and that will be the remaining part of the power generation businesses will be around execution and margin performance and we're going to be selectively participating in the market where we feel like the terms and conditions and margin profiles are appropriate.
Yes. Got it. Great. Thank so much. Appreciate it.
And our next question is from Robert Barry from Susquehanna. Your line is now open.
Good afternoon, guys. This is Filippo Falorni. I am on the call for Rob.
Hey, guys. First question, I mean, you mentioned that you were slightly ahead of plan in 2Q, but you kept the outlook unchanged. I just want to clarify whether the incremental pressure in the second half, it's all within power gen in Europe or is across the board in power gen?
Really, the leaving our guidance where it is has more reflective of the fact that really two thirds of our earnings commitments sits in the second half based on the natural seasonality of our business. And depending on how the seasonality plays out will depend on where we fall in that range.
We set ourselves around the midpoint of that range. The expectation, if you take our heating businesses as an example, last year it was very warm winter. Year before that was a very cold winter kind of put ourselves guidance perspective in the midpoint you of those two seasons. So we'll see how this year actually plays out.
And then the other part is the timing of when some of the larger projects within the detection and measurement segment actually come to fruition about if a smaller part of the segment again as higher margin leverage on, so we are depending on where that comes out will kind of put us in that range.
Okay. Got it. And then sort of going to the detection and measurement, you mentioned strong growth in Genfare, I was wondering if you can comment on the performance on Radio detection and communication technology piece in particular part of the business that is tied to oil and gas. I believe in Radio detection mainly.
So Radio detection is more of a run rate business and in the markets there we have see that that’s much more of a global business. We have positioned it in every market. We believe we are the global leader in that business, and we've seen overtime that a very nice growth over the past five or six years there that is been largely in line with our global GDP of that time period.
So we do -- we never really see any impact in that. That's more used for construction or utilities or finding things undergrad to various different applications but, but oil is -- we haven't seen any material impact on that business. Yes communication technologies business on the other hand, is a very global business and has a good business in U.S. China, Canada, Europe and Africa.
Some of the African countries that we do sell into have economies that that are very based on their revenue base of government revenues are based on oil revenues and will prices where there are, we have seen some slowdown and the extension of procurements that were underway in some of those markets so, so when we look at it there's nothing outside of our planning horizon.
What we’ve put up for our targets for 2016, but that has impacted some areas in and in some geographies of that product line. But as a reminder, a small portion of the detection and measurement business overall.
Okay, great. And then finally, maybe if you can comment on the commodities and whether your guidance assumes some headwinds particularly [Indiscernible] in the back half and 4Q in particular?
So as far as commodities go, most of our businesses reminder are engineered to order. So really we are in a competitive bid situation. And so we are aligning our pricing and our cost structure in those situations as well as most of those business we have longer term supply contracts. So as an example, in our cooling businesses we have still contracts for a year.
So we really don't have the exposure there for short-term changes in the commodities and nor do we really see a significant exposure to our margins variability to our margins overall from commodities giving given the bidding dynamic there the entry door dynamic of the business.
Operator: Okay, great access. Thanks,) there might think you open during the call in. We look forward to updating you next quarter. Thank you very much and have a great day
Okay. Great. Thanks guys.
I would now like to turn the call back to Paul Clegg for any further remarks.
Thank you all for joining the call and we look forward to updating you next quarter. Thanks very much.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today’s program. You may all disconnect. Have a wonderful day.
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