Honeywell International Inc.

Good day ladies and gentlemen and welcome to Honeywell's first quarter 2019 earnings release conference call. At this time all participants have been placed in a listen only mode and the floor will be open for your questions following the presentation. You would like to ask a question at that time please press star 1 on your touchtone phone. If at any point your question has been answered you may need to remove yourself from the queue by pressing star 2. Lastly, if you should require any operator assistance please press star 0. As a reminder this call is being recorded. I would now like to introduce your host for today's conference Mark Macaluso, Vice President of Investor Relations. Please go ahead sir.

Thank you April. Good morning and welcome to Honeywell's first quarter 2019 earnings conference call. With me here today are Chairman and CEO Darius Adomchick and Senior Vice President and Chief Financial Officer Greg Lewis. This call and webcast including any non-GAP reconciliations are available on our website at .honeywell.com forward slash investor. Note that elements of this presentation contain forward looking statements that are based on our best view of the world and of our businesses as we see them today. Those elements can change and we ask that you interpret them in that light. We identify the principal risks and uncertainties that may affect our performance in our annual report on form 10K and other SEC filings. For this call references to adjusted earnings per share, adjusted free cash flow and free cash flow conversion and effective tax rate exclude the impacts from separation costs related to the two spinoffs of our homes and transportation systems businesses in 2018 as well as pension mark to market adjustment and U.S. tax legislation except for otherwise noted. References to 2019 adjusted free cash flow guidance and associated conversion exclude impacts from separation costs related to the 2018 spinoffs. This morning we'll review our financial results for the first quarter of 2019, share our guidance for the second quarter and provide an update to our full year 2019 outlook and as always we'll leave time for your questions at the end. With that I'd like to turn the call over to Chairman and CEO Darius Adamczyk.

Thank you Mark and good morning everyone. Let's begin on slide two. Honeywell had a tremendous first quarter delivering earnings per share of $1.92 or 7 cents above the high end of our guidance range and a 13% excluding the impact of the spins in 2018. The strong earnings performance was driven by organic sales growth of 8% and 120 basis points of segment margin expansion. Our outstanding top line results were driven by continued strength in our long cycle commercial aerospace, defense and warehouse and process automation businesses. In addition we achieved a significant improvement in Honeywell building technologies which delivered 9% organic sales growth in this quarter. The first full quarter following our 2018 spin-offs after 1% in the fourth quarter of 2018, for all of Honeywell our long cycle backlog increased more than 10% year over year and continues to position us well for the remainder of 2019. The investments we made in our sales organization, new product development and M&A in the warehouse automation business, a couple of our winning positions on the right platforms in aerospace continue to drive outstanding top line results. Segment margin exceeded 20% in the first quarter driven by smart portfolio enhancements made in 2018, continued investments in sales excellence, increased sales volumes and the benefits of previously funded repositioning projects. I'm also encouraged by the improvement in gross margin which increased 300 basis points in the first quarter. Our concerted efforts to improve working capital generated adjusted free cash flow of 55% growth of 55% excluding separation costs and the impact of the spins in 2018. Conversion in the first quarter was 82%, the highest start to the year since 2010. We represented a 14 point year over year improvement. I'm extremely pleased the progress we've made in this area while continuing to invest in our business. As a result of our first quarter results and continued confidence our ability to deliver, today we're raising our full year organic sales guidance to a new range of 3% to 6% and earnings for shared guidance to a new range of $7.90 to $8.15. We continue to expect to generate nearly $6 billion in free cash flow with conversion in the range of 95% to 100%. As I said in January, Honeywell is a simpler, more focused company that continues to over deliver on its commitments. We are encouraged by our results, particularly organic sales growth and free cash flow, which were two of my top priorities when I took over as CEO. Notwithstanding the strong start to the year, we continue to take steps to ensure we can deliver on our commitments in a potentially uncertain macro environment should things slow down the second half of 2019. We took significant actions in 2018 to transform the business. The results of which you've seen our performance today, a combination of strong sales growth, favorable end market exposure and significant balance sheet positions as well for the remainder of 2019. I'll stop there and turn the call over to Greg who will discuss our first quarter results and updated 2019 guidance in more detail. Thank you, Darius and good

morning everyone. I'd like to begin on slide three. As Darius mentioned, we delivered another strong quarter across all of our businesses. 8% organic sales growth was the highest we've seen since 2011 and an acceleration from 6% in the fourth quarter of 2018. All of the markets we serve remain strong. A few highlights to mention, commercial aviation, OE, grew 10% organically driven by demand for new business jet platforms. Defense and space grew 13%, continuing the trend of strong double digit sales growth. Building technologies grew 9% organically with strength in commercial fire and security as well as in building solutions, particularly in India and China. And our warehouse automation and sensing and IoT businesses delivered another quarter of double digit organic sales growth, just as they did throughout 2018, leading to 10% organic sales growth in safety and productivity solutions. The impact of the spinoffs of our homes and transportation systems businesses, both lower margins than the portfolio, contributed 80 basis points of segment margin expansion this quarter. The remaining 40 basis points was the result of our strong operational performance, continued investments in commercial excellence initiatives, and increased sales volumes. We continue to effectively manage the impact of tariffs and material and labor inflation through our ongoing mitigation efforts, and we've made further progress on the elimination of all spin-related stranded costs by the end of 2019. However, we did see some volume declines in our productivity products business, which contributed to lower margins and SPS in the quarter. I'll discuss that in more detail shortly. The majority of our earnings growth, 15 cents this quarter, came from segment profit improvement. We realized a six-cent benefit from our share repurchase program, which resulted in a weighted average share count of 739 million shares in the quarter. Consistent with our first quarter guidance, our effective tax rate was approximately 22%, which generated a four-cent benefit year over year. You'll find a bridge of our first quarter earnings per share in the appendix of this presentation. And finally, adjusted free cash flow in the first quarter was $1.2 billion, up 55%, excluding separation costs and the impact of the spins. As Darius mentioned, we continue to see strong cash generation, particularly in performance materials and technologies and aerospace in the quarter. We're very pleased with our results across the board. Now let's turn to slide four and discuss our segment performance. Beginning with aerospace, which sales up 10% on an organic basis, we continue to perform extremely well in today's robust demand environment, driven by our strong positions on the right platforms. Notably, this marked the third consecutive quarter of double-digit organic growth for aerospace. Defense and space grew 13% organically, led by continued global demand for sensors and guidance systems, increased spares volumes on the U.S. DOD defense programs, and robust shipment volumes on key OE programs, including the F-35. Commercial OE sales were up 10% organically, with increased ship set volumes across all Gulfstream platforms, increased avionics deliveries on the Dassault F-900 and F-2000 aircraft, and increased engine shipments for the Textron Longitude. We expect this momentum to continue in the coming quarters. In the commercial aftermarket, sales were up 8% organically, driven by strong global airlines demand and tailwinds from ADSB safety mandates. In addition, we saw robust connected aircraft growth, driven by demand for jet wave and business jet software offerings. Aerospace segment margins expanded by 260 basis points, driven by commercial excellence and margin accretion from the spin of transportation systems. The spin contributed about 80 basis points of Aero's total margin expansion. Before we move on, I just want to take a moment to address questions we received regarding the unfortunate events surrounding Boeing's 737 MAX aircraft. At this time, based on our customers' current production schedules, we do not anticipate a significant impact to our 2019 results. We will continue to monitor the situation as we move throughout the year. Now moving to Honeywell Building Technologies, organic sales growth was 9%, driven by strength in commercial fire products and improved demand for our security offerings. We saw robust demand for our Niagara software platform, as well as further improvement in supply chain execution, which had been impacted in the back half of 2018 by the spins. Projects growth in building solutions was also strong, particularly for international airport installations in the Middle East and Asia Pacific. The project's backlog in building solutions was up over 15% at the end of the first quarter. Stepping back for a minute, this quarter's performance is a result of specific actions taken by the new HBT leadership team, which is moving the business in the right direction. The team is building out its sales force and capacity, investing in innovation, and they are executing the commercial excellence playbook to deploy and train a high-quality sales team. They're also focused on improving delivery and execution, and are making steady progress to eliminate the remaining stranded costs related to the home spin. HBT's segment margin expanded 240 basis points in the first quarter, driven by the favorable impact from the spin-off of the home's business. Overall, we are very pleased with their first quarter and are encouraged for the future. In performance materials and technologies, sales were up 5% on an organic basis. Process solutions, sales were up 7% organically, driven by broad-based demand and automation, including for our maintenance and migration services and field instrumentation devices. Orders in HBS grew at a double-digit rate for the third straight quarter. And advanced materials, sales were up 4% organically from ongoing demand for flooring products, including for our solstice line of low global warming refrigerants and blowing agents. UOP sales were up 1% organically for the quarter, driven by demand in gas processing and hydrogen, particularly partially offset by a tough -over-year sales comparable and licensing and timing-related decline in catalyst shipments. We again draw strong orders in backlog growth in UOP, up 6% and 8% organically across engineering, equipment, and catalysts, which is a positive sign for future sales growth. PMT's segment margins expanded 140 basis points in the first quarter, driven by commercial excellence, higher sales volumes, and productivity, including the benefits of previously funded restructuring. This largely offset the impact of material and labor inflation. Finally, in safety and productivity solutions, sales were up 10% on an organic basis. IntelliGRADE continued to outperform with another strong quarter of double-digit sales growth, driven by the conversion of our major systems backlog, aftermarket services, and increased demand for vote collect voice solutions. We also saw double-digit sales growth in our Sensing and IoT business, which was a continuation of the double-digit growth they achieved in 2018. Our China business also generated double-digit sales growth. Productivity solutions sales growth was partially offset by decreased volumes of scanning mobility products due to slower project ramp-ups and planned distributory stocking, mostly in North America. We highlighted this potential weakness in the business in early March. We anticipate that the productivity projects business will improve in the second half of the year, but are planning conservatively in the second quarter, given the decline we experienced in Q1. Moving to the safety business, sales were approximately flat on an organic basis. Growth for gas detection products and retail footwear was offset by softer demand for general safety products and personal protective equipment. SPS segment margins contracted 260 basis points, driven by decreased productivity products, short cycle volumes, the impact of inflation, an unfavorable mix stemming from significantly higher sales in our warehouse and automation business, which offset benefits from commercial excellence and productivity. Overall the trends in our end markets are largely consistent with what we discussed in February. We remain confident in our businesses and our view is supported by strong long cycle orders and backlog growth. Our focus on smart growth investments, breakthrough initiatives, and new product development, coupled with continued productivity rigor, has positioned us well for the remainder of 2019. With that, let's move to slide five and we can discuss our second quarter outlook. Looking ahead to the second quarter, we anticipate that the business environment will be largely similar to Q1, which strength primarily coming from our long cycle portfolio in commercial aerospace, defense, and warehouse automation. In aerospace, we continue to see robust demand in both commercial aerospace and defense, with growth in narrow body production rates and increased business set deliveries, as several new models have recently entered into service. We expect the commercial aftermarket to continue to be strong, driven by flight hours, airlines demand, and further tailwinds from the adoption of safety and compliance mandates. The industry dynamics and defense should continue to be positive, both in the US and abroad. In building technologies, we anticipate continued momentum in commercial fire and security. The second quarter typically encompasses the peak season for demand in these markets. We expect continued conversion of our long cycle backlog in building solutions and growth in services. In PMC, orders and backlog growth in UOP and in the automation businesses and process solutions should drive another quarter of strong sales growth in Q2. In HPS, we expect continued short cycle demand in maintenance and migration services and field instrumentation devices. In UOP, growth will be driven by licensing, engineering, and gas processing demand, while in advanced materials, we expect to see continued adoption of SOSIS products in refrigerants and foam applications. Finally, in safety and productivity solutions, we expect the strong e-commerce and warehouse distribution macro trends to continue, as well as growth in maintenance, services, and voice solutions. We're expecting additional destocking in our distributor channel will drive a decline in mobility, scanning, and print in the quarter. On the safety side, growth should improve sequentially in both gas detection and personal protective equipment, and we anticipate continued demand in the retail footwear business. For Total Honeywell, the net below the line impact, which is the difference between segment profit and income before tax, will be approximately a positive $30 to $40 million next quarter, driven by increased interest income and benefit from the spend indemnification payments related to asbestos and environmental expenses, partially offset by lower pension income due to the 2018 pension de-risking actions we took, all as previously guided. Our guidance assumes a weighted average share count of 734 million shares, an effective tax rate of about 22%, and earnings dilution from the 2018 SPIN of approximately $0.19 in the quarter. Now let's turn to slide six, and we can discuss our revised full-year guidance. We have revised our full-year sales and earnings per share guidance to reflect our strong-out performance in the first quarter. We continue to be encouraged by our business performance and outlook, however, we are remaining cautious with regards to the short-cycle portion of our portfolio, given the macro uncertainties that remain in the second half of the year. We are raising our full-year organic sales guidance by one point on both the low and the high end to a new range of 3 to 6%. Our segment margin expansion and free cash flow guides are unchanged. We remain on track to deliver 95 to 100% free cash flow conversion while investing in the business through high-return capex and research and development. The revised earnings per share guidance represents earnings growth of 7 to 10%, excluding the impact in the SPINs in 2018. We continue to expect no significant impact in 2019 related to tariffs. We have mitigation actions in place, including to address the impact of potential tariffs on all remaining items imported from China. We are also closely monitoring the potential effects of Brexit on our operations and are communicating regularly with our customers, partners, and suppliers around these plans. We are planning for various potential Brexit outcomes, including a no-deal Brexit scenario, to ensure that as the terms of the UK's departure from the EU are finalized, we are best positioned to continue meeting our customers' needs. Our guidance continues to reflect a weighted average share count of approximately 731 million shares and an effective tax rate of approximately 22%. Our net -the-line expenses are now expected to be in the range of $60 to $70 million of net expense in 2019, slightly down from our original estimate of $80 million in net expense. The minor change is due to slightly higher, full-year estimates for both pension and interest income. With that, I'd like to turn the call back over to Darius, who will wrap up on slide 7.

Thanks, Greg. The first quarter is an outstanding start to 2019 for Honeywell. We continue to execute our commitments to share owners and accelerate organic growth from last quarter. We have winning positions in attractive end markets with multiple levers to deliver continued margin expansion. Our operational performance is driving adjusted free cash flow growth and conversion. All of this combined with innovative new product offerings and a strong backlog positions us well for the second quarter. We're continuing the business transformation initiatives I outlined during our outlook call, including in Honeywell Digital, a unified software business in Honeywell Connected Enterprise, and the increased focus on improving our supply chain execution. You will hear more about this and other exciting things happening in Honeywell at our 2019 Annual Investor Conference, which will take place on May 14th. With that, Mark, let's move to Q&A.

Thanks, Darius. Both Darius and Greg are now available to answer any questions. April, if you could, please open the line for Q&A.

Thank you. The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your touchtone phone. At any point your question has been answered, you may remove yourself from the queue by pressing star 2. We ask when you pose your question, please pick up your handset. Our first question is coming from Steve Tusa with JPMorgan. Please go ahead.

Hey guys, good morning. Good morning. So just kind of doing the, you know, a lot of companies betting on kind of a back half acceleration. You guys are just mechanically kind of the opposite and just doing the normal seasonality analysis around the businesses. Is there anything specifically that worries you in the second half? Because I'm getting to obviously something that's, you know, a lot higher based on just, you know, basic normal seasonal analysis on, you know, both organic as well as the EPS numbers. And obviously this wasn't a perfect quarter given, you know, PMT and UOP, which, you know, seemingly with the backlog should bounce back nicely and maybe have a bit of a slowing in other business. I don't know. I'm just curious if there's anything that kind of stands out that you're concerned about in the second half of the year?

Yeah, I guess I'll start. I mean, I don't know that there's anything that really concerns me in the second half of the year. You know, I think what's an unknown in the second half of the year is short cycle business. I mean, that's sort of the big unknown. And, you know, I think the signals are mixed. I mean, I think overall we're pleased with our outcome in Q1, but the short cycle business is very much that short cycle and all the things look good in Q1. They can look very, very different in the second half. You know what, on PMT, I don't know, Steve, I'm pretty happy with the PMT outcome for Q1. Whether you look at bookings, revenues, margin expansion, I'm not sure I'm really disappointed with those results at all. I'm actually very, very pleased. And when you think about things like HPS projects up strong double digits, backlog up, are booked to bill up 1.2 in the long cycle business, I don't know that I can, that there's much to be disappointed about there.

Yeah, I guess my only point was on UOP. It was kind of flattish this quarter and it should, you know, accelerate. There are reasons for it to accelerate. So I'm saying that's not a reason for it to be, for revenues to be, you know, weaker in the second half of the year. Okay, that makes some sense. Just lastly on, you know, to nitpick here on SPF, what is going on with the productivity business? I mean, you know, the tone at ProMat sounded, you know, reasonably positive. Is there anything, you know, going on with the launch of Mobility Edge, you know, that's kind of moving around a little bit? Just curious, a little more color on the SPS business because that was a little weaker than we were expecting.

Yeah, I think that's fair. Yeah, I think, you know, a couple of things. The first one being, you know, we had some de-stocking in our distributors. We anticipated some of that. Frankly, it was a little bit greater than we had anticipated. And we think that that's actually going to continue in Q2. When you look at the product subsegments, it's actually the Mobility did okay. As we look at the sell-through figures for productivity products, the Mobility did quite well. It was probably more of an issue on the de-stocking and the scanning, and that's where we saw a little bit of the pain points. But I will tell you that in the second half of the year, we are anticipating growth in that business. We anticipate filling some larger orders, and the de-stocking situation should normalize. So yeah, this, you know, Q1 wasn't exactly what we had hoped for, but I'm also bullish on the long term of the business. Okay, sorry, one more

quick one. Have your priorities on capital allocation changed at all? Are you guys, you know, given where multiples are today, or you know, thinking maybe a little more buyback than acquisitions? Are you still, you know, on the hunt with this pipeline?

Yeah, no, I, you know, I think it's just, unfortunately, the environment hasn't changed. I mean, we would like to steer more of our deployment towards M&A, but I'm also trying to stay, you know, disciplined, and the multiples continue to be high. So you know, something is going to have to give, but having said that, we have been deploying more towards buybacks, and you know, we deployed a lot last year. Average share purchase price was right around 150 bucks, and that includes, you know, that's prior to the spin-off of Garrett and Residio. So if you look at where we are today, I think that's proven to be a pretty good investment. And we continue with another $750 million in Q1, which, you know, also looks to be, you know, and I think when in doubt, bet on yourself, because there's, we feel great about the company, we feel great about our prospects, we're going to continue to perform, as indicated by our backlog positions, our bookings, and so on. We're very confident Honeywell is going to continue to perform, and thus a little bit more security towards buyback. But don't read into that, that we're not interested in M&A. We are, we're just trying to be disciplined and, you know, pay recent, you know, good valuations that are reasonable, which is extraordinarily challenging in this environment, and you see the multiples being paid.

Yeah, when you're beating and raising and growing 6 to 8%, you can be patient, so I get it. Thanks a

lot. Thank you.

And our next question comes from Jeffrey Spog with Vertical Research Partners. Please go ahead.

Thank you. Good morning, everyone. Hey, just two things from me. First just back on kind of channel inventories, maybe more broadly, you know, is there anything, you know, anything that stands out in your businesses, especially in the shorter cycle where there was some type of pre-buy or something that's created elevated inventory that you're planning for some kind of give back on beyond what we've seen in productivity solutions? Maybe just a general state of play there in your visibility to the extent that there is any on the short cycle.

No, there was a little bit in terms of an ERP pre-buy because we had done some ERP conversions and as you know, sometimes they don't go as smoothly as planned, so we generally had a little bit of a buy-in, but I don't think that was accelerated. I think, you know, there's a little bit of a mismatch between sell-out expectations and buy-in expectations, and that was particularly pronounced in productivity, especially in our scanning business. And, you know, those things just take a little bit of time to normalize, and we're very confident that portfolio got a new set of products coming out here again, particularly in the warehouse and distribution segment, which we think is very interesting. So I'm not particularly worried about it, and like I said, we are projecting growth for the second half, but there's sort of something systematic here that's concerning, and, you know, a lot of our HPT portfolio is also short cycle. You saw the kind of figures we posted there, and I was extremely pleased with the kind of organic growth that we saw in HPT, which is also primarily short cycle business as well, other than the HPT as a project component.

And then secondly, unrelated, just on the project-related work in general in process and where it may spill into, you know, gas processing and UOP, just kind of what is the nature of the activity you're seeing? You know, there's any particular subvertical jump out, meaning, you know, refining or LNG or the like, and just, you know, any color there on, you know, on kind of your forward pipeline would be interesting.

Yeah, I mean, I think, you know, the LNG segment is continuing to be active, and we're waiting with some final investment decisions to be upcoming, but whether it's UOP business, which participates there as well as HPS, it's continuing to be a very active segment. Our gas processing business, and although, you know, this kind of, this price of oil makes the unconventional segment appealing, there's also a greater level of discipline by a lot of the unconventional players in terms of cash generation, which there used to be a bit more, you know, build out the infrastructure, drill, and so on. Now they want to be self-sustaining in terms of their cash flow. So the environment is good, but it's also a little bit more disciplined. But you know, anytime you see this kind of depreciation, the price of oil, we feel pretty good about the entire PMT segment. You know, responding with the clean fuel segment, it also continues to be an opportunity, particularly in segments like Latin America, then of course, clean fuels for shipping as well. So sort of broad-based strength, and whenever you get to this kind of an oil price, we feel very confident in the outlook for PMT.

Great, thank you.

And our next question comes from Scott Davis with Mellis Research. Please go ahead.

Good morning,

guys. Morning, Scott. There's not much to pick on in this quarter, for sure. Are you guys surprised that it's kind of the pace of how strong things were? I mean, China was supposed to be a little slower, Europe was supposed to be a little bit slower. It doesn't seem like that happened at all to you guys, though. Can you give some color, maybe dare us around the world, what you saw?

Yeah, Scott, this is Greg. I mean, I think we were pretty pleased with what we saw across the globe, as you mentioned. You know, the U.S., obviously, you know, a large part of our growth was up double digits. You know, Europe continued to be good for us, you know, I'd say, you know, mid-single digits as well. Middle East, very strong, you know, up strong double digits in virtually every business. China, for us, was down slightly, but that was really not a structural nature. We've had some very large wins in UOP that were burning off some backlog on. So, you know, the remainder of the businesses were, you know, up double digits in both HBT and SPS, for example, in China, PMT down a bit. We expect that to turn positive, and I think we guided low single digits in China for the year in the last call, and I still think that's probably about right for us. India was a very strong story for us, again, across all businesses up double digits. So, I think on balance, you know, we had a very good performance. Obviously, the 8% total top line, you know, better than we had anticipated, with all of those cylinders firing in the same direction at once.

Yeah, just to add to that, maybe, is, you know, I just would highlight the HBT performance. I mean, I think we're starting to see the seeds of, you know, better performance in HBT, and when you post the 9% number, I think that makes us feel good. We've got some more NPD coming, particularly even more so in the second half of the year than the first. So, I'm very optimistic in terms of what we're seeing in that business, and, you know, overall, the environment is good. I mean, I think the market didn't quite get this right in December. I mean, I think that December was doom and gloom, and recession is here, and as you can see by our results in Q1, and as Greg pointed out, we see kind of strength across the globe. We didn't have a market that really stood out to us and said, okay, that's a train wreck. I mean, everything was either up or up a lot. So, overall, we're pleased with what we're seeing so far.

Yeah, the only thing I would mention, too, is back to the second half, you know, and our views there is, you know, some of the macro risks, let's say, you know, they're not gone, they just got pushed to the right. You know, Brexit is an example, the US-China, you know, trade situation. So, you know, things that we thought might have perhaps come to conclusion in Q1, you know, just haven't been pushed to the right, and I think that's also, you know, kind of helped from a market sentiment perspective.

Now, good color. Just switching gears a little bit, the Connected Enterprise Initiative, how much of a headwind is that on margins right now, or is that turned into more of a neutral?

No, that's actually a creative for what we do, you know, and by the way, that grew in the teens again, so that's off. I'm

sorry, I meant the ERP, your ERP rollout, not your growth initiative.

Oh, sorry, ERP rolls, we're in very good shape. Yeah, I mean, we continue to move down the path. You know, we talked about the fact that we, you know, we're at 148. I think we finished that in 2016. We finished at 71, and we're probably going to take out another 20 or so this year, you know, on our path to getting down to 10 core platforms by 2021, and, you know, we continue to make good progress there. Lots of, you know, as you can imagine, lots of integrated planning going on to make sure that there's business readiness. We've got obviously all the IT readiness there, but we've got to always manage the change that goes along with the combination of, you know, ERP moves and business requirements, but, you know, feel very good where we are. It's not been disruptive, you know, and I think we've got a good solid plan to make sure that we don't, you know, put too much in any one quarter or in any one business to add, you know, business risk.

Okay, but it still is a mathematically headwind though, is that correct, Greg? When you say mathematically a headwind, what do you mean? Just on the payback, I mean, are you at the point yet where the payback is greater than what your dollar output is? Oh,

yeah. Yeah, I mean, yeah, from a savings and a cost out perspective, you know, we're now at a place where our run rate cost savings is certainly ramped up, you know, you know, 93% of our revenues are on our Core 10 platforms, so, you know, we have hit the majority of the scale that I would say that we're going to get from a cost productivity perspective, and most of the things that were, you know, kind of remaining on the roadmap are, you know, cleaning up more of the smaller items. Yeah,

I think, you know, if you were to look at the run rate on a -over-year basis, the impact is, I would say, very, very slightly a creative, but negligibly so. Yeah,

I mean, the run rate of deployment costs that we've got in the P&L is roughly flat year on year, and, you know, each year we're obviously adding some run rate benefits to the P&L overall.

Perfect. Thank you guys. Good luck.

Thanks.

And our next question comes from Sheila Cuyoglu from Jeffries. Please go ahead.

Good morning and thank you. Hey, in terms of margin expansion guidance for the full year, Darrow and HBT are tracking well ahead of that. TMP is at the high end of the range. How do we think about continued runway from here in margin expansion? And maybe as my follow-up on TMP, I understand margin mixed pressure and maybe a little bit of inflation. How does that play out throughout the rest of 2019? Yeah,

so Sheila, our guidance for the year, you know, remains at 30 to 60 basis points, I believe, at this point. We've talked about that being our framework and, you know, what we continue to do is add, you know, initiatives and elements to be able to continue having that runway in front of us. And so with things like, you know, our connected enterprise growth, which is margin accretive from a software business perspective, with our digital transformation efforts, you know, Scott just mentioned things like the productivity around the ERP deployments, as well as just our HOS Gold playbook that's driving commercial excellence into each of the And then again, our continual repositioning pipeline. We see that 30 to 50 basis points framework that we've laid out as very much sustainable over the coming years. So on a portfolio basis, we feel very good about, you know, where we are in that regard. Now, you know, as we mentioned, with this year, we're always, you know, talking about the elimination of stranded costs. We continue to see some of that impact in the first, you know, part of this year, and that will dissipate. You know, we've talked about having those stranded costs eliminated by the time we get to the end of 2019, and that will be, you know, fully behind us. So, you know, broadly speaking, feel very good about the margin expansion potential. It is a portfolio in different quarters and years, some businesses will have more or less, you know, opportunity depending on where they are in particular. And then as it relates to SPS, you know, in the mixed component, you know, with very high growth in the integrator business, when we bought it, it started out, you know, below the line average for margins. And we continue to improve that as we've integrated that business, but it is still below the line average for the rest of the segment. And so as we get through the de-stocking and productivity products, and we normalize, let's say, to perhaps growth rates that you know, multiples of double digits, you know, per quarter and integrated, you know, we expect to see that SPS margin rate continue to improve throughout the year.

Yeah, you know, and I think maybe just to add a couple things. The framework has changed a little bit, you know, what you're seeing is you're seeing a much stronger organic growth rate and a margin rate increase still that's very much within what we committed long term to our investors, which is the 30 to 50, we're like at a growth rate that's substantially higher. But if you're concerned about sort of, you know, our continued focus on margin, there's no need to be concerned there, because we have plenty of levers, even just from purely a productivity perspective, whether we think about ERP comp discussions we had before, the simplification in our ISC performance and overall making that much more simple, direct material productivity, we think we have more room for improvement there as well. We're going to continue to find restructuring just like we did this quarter, and we anticipate doing more of that in the second half of the year as well as Q2. And then we still have some stranded costs to go to take out both in HBT as well as corporate. So we have a lot of room in terms of productivity, you know, we're hurt a little bit in Q1, because our integrated business is growing. When I say strong double visions, I mean really think really strong double visions. And, you know, that's not helping the mix. But overall, we're not going to step back from something just because it's lower margin, when you can run it with a negative cash flow as well as that kind of an expansion, which will ultimately turn to a higher margin business once we establish an installed base.

Great, no concerns.

Thank you.

Thank you.

We'll

take our next question from Dean Dre with RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone.

Morning,

Dean. Morning. Hey, I know Greg touched on this in the prepared remarks on the 737 MAX, and I also know you guys don't disclose any of the dollar on the chipsets. But just could you share with us what's on the platform, and maybe what your assumptions are and how this plays out where it does not impact your 2019 guidance?

Yeah, well, you know, I think our assumption is exactly what Bowen laid out, which is the reduction in the production rates. We've encompassed that we have numerous systems on the plane. You know, we do expect that the delivery of these planes and that production rate to resume at the second half of this year. But as Greg pointed out, the impact for us is negligible, certainly for Q2. And you know, I think given that most just about everybody expects a resolution, we do too. We think that that's a terrific aircraft that's going to be back up and flying in the second half of the year. So I think there's really nothing more to add than that.

Great. That's helpful. And then one of the soft spots in the fourth quarter was the whole China air and water dynamic for HBT. Didn't sound like that carried into this quarter, but if you could update us there, is that normalized? And what are you assuming for 2019?

No, actually air and water, to be honest, have a great quarter in Q1. But overall, HBT did. So, you know, that was even more impressive about their performance. Despite challenged performance in air and water, HBT still grew 9%. So I'm actually not discouraged by that. I'm very encouraged by that. But you know, overall, I would say the air and water segment is inconsequential in terms of overall annual performance. But it was a headwind to HBT in Q1, and they still grew 9%. So I view that as a very positive outcome.

Good to hear. Thank you. Thank you.

And our next question comes from Julian Mitchell with Barclays. Please go ahead.

Hi, good morning. Maybe a first question around the margin profile at HBT. I think you'd called out what the X-Spin's margin performance was year on year in aerospace. Maybe just give that number in HBT as well in Q1. And apologies if I'd missed that. And then also when you're looking forwards for HBT, given the fairly high building solutions waiting in the sales mix, how do you think about incremental margins for HBT overall and managing that solutions mix moving around?

Yeah, thanks, Julian. So yeah, in terms of HBT, margins actually were down X-Spin's in the quarter, about 100 basis points. And as we talked about, the stranded costs are still an impact to them. When you think about our stranded costs overall, it was about 60-40 between Corp and the businesses. So HBC is still digging out of a little bit of the stranded cost hole, particularly in some of the factory aspects that they have there. So that we again expect to remediate over the course of the remaining quarters. And then in terms of the mix of products versus projects, certainly just like we have in our other businesses, it's no different than in PMT and even as we were talking about with SPS, the projects business is a meaningful part of HBT and carry the lower profile than the product side as well. So we're always going to be managing through the mix of that overall. But we see where we landed for the quarter, I think we were around 20 points of margin for HBT overall and we do see that progressing throughout the year.

Thanks. And then just circling back on the overall top line, I was intrigued on the guidance you took up, the high end of the organic sales growth guide. So just wondered, understand why the low end... We took up both too,

we took up a point in the high end and a point in the low end.

Yeah, so understand that the low end would go up because you have a very good Q1 print now in the bag. But taking up the high end, that would imply no slowdown year on year for 2019 as a whole. Just wondered if there are any specific end markets or businesses that drove that increase at the high end?

Yeah, I would say it's our long cycle businesses. So whether we talk about PMT, we talk about the segments of aerospace, HBT, we had a very strong booking quarter and our booked bill was 1.2, which was also very helpful. So what gave us the confidence for the rest of the year in raising the guidance was long cycle bookings. Short cycle, I still will say is unpredictable. I mean, I think our visibility there is relatively unknown, especially for the second half. And I think there is a little bit of caution that we still have in terms of our second half outlook on short cycle. We'll see how that evolves. I think you'll see some of the other commentary by some of our competitors and so on. And we're not seeing it in terms of the challenges, but it doesn't mean that they can't and won't exist. But based on what we're seeing in the business, we remain relatively bullish. And that's what gave us the confidence in raising the bottom and the top.

Great. Thank you. Thank you.

Our next question comes from Nicole DeBlaize with

Deutsche Bank. Please go ahead.

Yeah, thanks. Good morning.

Good morning.

So I guess maybe starting with UOP, if we could kind of go through the outlook over the rest of the year, backlog up 8%. I know you guys have some tough catalyst comps that you're facing. That's what drove the 1Q, I guess, slight weakness versus backlog growth. If you could talk about when we should expect UOP organic growth to accelerate?

Well, we expect it in the second half of the year. I mean, I think what's important to point out is we had some very challenging year over year comps, especially with our China bookings and revenue conversion. That's what drove that. But UOP had a very good orders growth. I mean, mid single digit kind of orders growth. So there's nothing to me in UOP that's screaming a problem. Yeah, I mean, the year over year revenue growth was a little bit flattish, but again, driven more a little bit by tough comps and timing. But the number that I always look at for those long cycle businesses is orders. And that's single digit with a strong pipeline. And this is not an area of worry for me.

Got it. Thanks, Darius. And maybe a second question around SPS organic growth outlook. So I know the integrated comps are becoming pretty difficult. And I think they get difficult throughout the year, if I'm correct me if I'm wrong. How do we kind of balance that against potential improvement in productivity solutions as we get through this de-stocking? Like, should we think of the high single digit growth as potentially sustainable within SPS so long as the short cycle trends behave?

Yeah, I think you captured it exactly correctly. I think IntelliGraded is going to have tougher and tougher comps as we get deeper into the year in Q2, Q3, and Q4. I mean, I only dream that they have another quarter like Q1, but that's probably not completely realistic. So their growth on a year over year basis is going to be slower, but it's going to be there. But that should get offset by some of the other segments of the SPS portfolio, particularly in the second half, in the name of productivity products and industrial safety. So we think that that will balance out and we're going to continue to see a rate of growth in SPS, which is, you know, think mid to upper single digits for the year. So that's our expectation right now based on what we're seeing.

Thanks, I'll pass it on. Our

next question is coming from Andy Kaplowitz with Citi. Please go ahead.

Good morning, guys. Good morning. There's 8% commercial aviation organic aftermarket growth. It's the fastest growth we've seen from Honeywell this cycle. We know aftermarket growth has been a particular focus of the Aero team, but where has that improvement versus global flood hours come from? You did mention safety mandates are helping, but is it the uptick in performance-based contracting and increasing growth from the connected Aero that is also helping in the cell? Would you agree that the trends toward continued improved aftermarket growth for Honeywell look sustainable moving forward?

Yeah, I mean, I think you've captured a couple of the big levers where the growth is coming from because we're moving away from just fixed break kind of aftermarket growth. You know, that's certainly a good part of it, but the other part of it is, you know, what I call the proactive aftermarket growth, which is much more around connected aircraft, around RMUs, which generate a lot of value for our customers. As you know, we made a substantial investment in the aftermarket, primarily in the aftermarket sales team, I think going back to two to two and a half years ago, where we added now almost 250 sales professionals focused on driving proactive aftermarket sales. And you're seeing the benefits of that coming through. So it's both an effort in terms of generating proactive and investing in RMD to generate these RMUs, which are sales professional sales, and then obviously accelerated growth in our connected aircraft platform. Those are the two big drivers, and I don't see any reason why that isn't sustainable.

And there's maybe just staying on Aero for a second, can you give some more color on your commentary regarding commercial excellence driving margin improvement? Where are you in terms of alleviating some target constraints within Aero? How much more room is there within Aero to take GNA and fixed costs in general out? And should we be thinking that margin for the year could be a stand on higher than I think you had died to 24% last quarter for the year?

Sure, maybe let me try that one on, when you think about our commercial excellence efforts, I would think about that less as a cost reduction effort, because what we're trying to do is enable our sales teams to be more effective, ensure that we're deploying and redeploying sales resources into the right spots. And actually, we're investing in things like training to be able to make these sales associates more effective in the markets that they're in with the products and solutions that they're selling. So we think about commercial excellence less as a I'm trying to take cost out, and more about I'm trying to drive seller productivity and growth. So I don't know, Darius, if you'd

add to that. I think I'd agree with that. But as always, we always balance everything with growth and commercial levers and productivity levers, and put some money to work for a restructuring pipeline in Aero last year, and we're going to continue to do that. But yeah, the commercial, when we say commercial excellence, we really mean driving productivity and outcomes growth on the front end of the business.

And Greg, it's fair to say that that 24% guide looks conservative now after a strong start.

I'm sorry, the what?

The 24% guide for the year looks conservative after a strong start to the Aero.

Listen, I think we feel good about the place aerospace is in terms of their margin expansion potential. And that's an area that gives us a lot of confidence for our overall guidance range for the company. Thanks, guys.

Our next question comes from Nigel Coe with Wolf Research. Please

go ahead. Hello. Please go.

Please go ahead, Nigel. Sorry.

Yeah, hi. I'm having a bit of a problem here with my phone. Specifically the mute button. So sorry about that. Good morning. So I've covered a lot of ground here already. HPT, the acceleration there is obviously a big break in the trends. And I'm just curious, given the separation of Residio, that was a carbot from the business do you think that the distraction around that was a factor why sales last year were a little bit weaker and now we've seen that strength? And then maybe just address China because China's obviously where we've seen a lot of stimulus, where we've seen some improvement in the product market over there. How important is China acceleration in the HPT performance?

Yeah, a couple of factors. You know, and the management distraction. There's no doubt that Residio was a heavy lift last year for the HPT team. I mean, you know, that the amount of separation work that had to be done to create Residio, particularly Giza V. Garrett, is incredible. So I think that that team did an outstanding job in enabling Residio to exist. And I think I continue to be very impressed with what they have done. Now I wouldn't say, was it a distraction? Yes. They take their eye off the ball on growth. I don't think so, but they certainly have more time to do that this year when they can be very focused on the markets, on what's happening, and that team has done a great job in to move that business forward. So I'm very pleased. Yeah, I mean, China is important for our entire business, not just HPT. We've been there a long time. We want to be a local player. We are local players. I talked about multiple times on this call, which is, you know, we very strongly believe in a local strategy where we innovate, where we come up with ideas, where we manufacture, market, and sell all in the markets that we participate in. And that's certainly true in China. And I think that team has, the China team and HPT has done a nice job in creating that kind of strategy. So with more upside for the future. So overall, you know, I'm not going to declare any victories after one quarter in HPT, but I certainly loved what I saw in Q1 and I'm bullish on the future.

Yeah. Thanks, Deris. And a quick follow up on safety, the flat performance and safety. Sounds like it's mainly channel inventories, but we have heard, you know, one or two other players talking about some weakness and safety. So I'm just curious what you're seeing there and how that results.

I would characterize a lot more as sort of a channel issue rather than anything else. You know, and as we point out, that's something we need to, that should alleviate in the first half of the year. And then we should be back at the right place by the second half of this year.

Okay, great. I'll leave it there. Thanks. Thank you.

Next question comes from Andrew Obin with Bank of America. Please go ahead.

Hey guys. Good morning. Thanks for taking my call. Morning Andrew. Hey, just curious if anybody is going to talk to your organic growth this quarter. Let's see what happens there. Question on software growth. Can you guys, I mean, you alluded to that, but can you just talk about the growth for embedded and standalone software and what would standalone software business be in 2019 versus 2018?

Yeah. Well, as usual, you know, we're expecting high teams to 20% growth in our software business. That target has not changed. You know, we grew in the teens in Q1, so I think we're very much on track. You know, we kind of call it connected enterprise is really transforming. You know, we're going to be doing some fun things at Investor Day. I don't want to give too much away. And the day after, in terms of a new launch, for those of you that went through handover, you probably saw a little bit of a hint of that in terms of Honeywell Forge. But I'm excited by what's going on with that team and what they're trying to do. And the embedded platform is growing nicely as well. I mean, you know, think mid to high single digits growth there as well in a lot of those platforms. So overall, it's been an area of emphasis for Honeywell. It's going to continue to be. And we're seeing the results in our P&L.

You want to talk a little bit about Honeywell Forge ahead of their notice day?

No, I can't. You know, I can't see all the thunder. I got to have something to talk about in May. And we're going to have to wait a little bit.

Let me ask a follow up question. On 737 Max, do you think there will be any working capital impact? Just do you think Boeing will behave any differently in terms of managing payments to you during this production ramp down? Should we expect any change in seasonality in aerospace?

No, we're not really expecting that. I mean, I think, you know, we're trying to be as helpful to Boeing and to NTSB as we can to get this thing resolved. But no, I think from a financial or payment, I don't anticipate that would be the case. And I am confident that Boeing is going to get this issue resolved. And we're their biggest fans. And we're ready to help in any way we can.

Thanks. Great quarter,

guys.

Our next question comes from Josh Pokowinski with Morgan Stanley. Please go ahead.

Hi. Good morning, guys. Morning. Good morning. Just first question on UOP. I think a few folks have taken a stab at it here. But Darius, you mentioned some good momentum on the LNG side. I think one of your competitors has talked about maybe kind of a mid-year order surge. So I guess the question is, you know, despite the good order growth you've seen, are we still on the leading edge of some of those investments?

Yeah. Well, I don't think we need to wait till mid-year. I can tell you about getting precise on the numbers. The growth in our orders and our projects business and HPS specifically was, let's just call it a strong double-digit growth. So I don't think we need to wait till Q2 or Q3. You've already seen it. And the pipeline remains strong. And yeah, I mean, whether it's LNG, and it's more than LNG because it's broad-based, but we're very pleased with the kind of orders we already booked, much less what's maybe in the pipeline.

And does that start to hit in the second half? I guess it doesn't really look like there's much in Q2, just

examining guidance. You mean in terms of orders or?

You're talking about in terms of the back of those orders turning into revenue. Yeah. Again, as you know, those things always have a they'll probably play out over the back half of

the year. Yeah. I mean, when you think about HPS orders, most of those don't get executed for a course of 18 to 24 months and sometimes even longer. So there isn't a very vast conversion from orders to revenue in some cases that can take several quarters.

And then just shifting over to some of your short cycle comments, I think they line up with what you said last quarter, Darius, but thinking about some of the intersegment comments, it seems like SPS, there's good momentum, maybe more of a D stock so things can improve from there. HBT has a good amount of momentum. You mentioned some second half product launches that could augment that further. I guess where specifically do you see that lack of short cycle visibility or a particular apprehension? Because it looks like in a lot of the exposures, there's reasons to be a bit more optimistic, not more cautious.

Well, maybe. I mean, I don't know that I wouldn't necessarily argue with you. But you know, when actually on short cycle, when you get into beyond three months, which is really kind of what we're talking about for the second half, I think, you know, pretty confident in our Q2. I'm not that confident that I really can give you great visibility on short cycle beyond three months. I mean, there's nothing that I'm seeing that worries me. I mean, you shouldn't read into that, that there's some issue that we're trying to cover or protect ourselves. I think it's just a reflection of there's a lot of unknowns. And as I stated before on this call, you know, we're seeing some of the commentary by some of our competitors, some of them have even reported, and we're wondering, are we unique or is there something else that's going on in the market here that maybe hasn't hit us yet? But I don't see that. I think we're very bullish on what's happening. But again, it's just a reflection of a level of uncertainty, because I know from my past, the short cycle can turn extraordinarily quickly and one quarter can actually be a long time. Yeah, and

again, I just would say on the macros, I think we all would agree that a Brexit, a hard Brexit is going to have some impact. And yes, we had anticipated that that might happen at the end of March, you know, as did the rest of the world. And now that's moved to potentially October. So that's just now pushed that worry, you know, down six months into the year. And again, I just same I mentioned it earlier, but saber rattling between the EU and the US on tariffs and the lack of a done deal with the US and China just keeps the cloud hanging over to see what's going to happen. So to Darius's point, it's not that we see something very specific that we know is coming. But there hasn't been this many macro uncertainties in the environment, certainly that I can recall.

Understood. Appreciate the call. See you guys in May. Thanks. Thank you.

Our final question comes from John Walsh with Credit Suisse. Please go ahead.

Hi, good morning. Morning, guys. Hi, and thanks for squeezing me in here. You know, just one question around price, it looks like, you know, in the queue, and this could be some rounding, you know, you're still in that 2% zip code. I might have thought that would have ticked up a little bit, maybe it's rounding. But can you just talk about your ability to capture price? And, and obviously, I know within the context of, you know, tariffs and Brexit, there are other mitigating actions in there besides price, but maybe if we could just kind of isolate on price for a little bit.

Well, again, I would say we feel very good about our pricing program. And we've talked about it before that, particularly given the value our offerings generate, you know, we feel like we're in a good position from a price standpoint, as you mentioned, you know, tariff impacts, we've been able to mitigate and some of that is through passing through and pricing, which by the way, keep in mind, that's diluted to our margin expansion, you pass through a dollar of price and have a dollar of inflation that actually dilutes your margin rate. So, you know, I wouldn't say that there's anything concerning at all, as we sit here about our effectiveness and passing through price at this stage.

And I would just add that, you know, to us, pricing is a function of really NPD and bringing valuable things to customers. So we don't really like to talk about price as much, we like to talk about value. And I think what you should expect is as our NPD cycle shortens, which, you know, we're launched a whole new innovation process called Z21, which basically will reduce our innovation cycle time in half, and our, new products will increase, that has obviously greater opportunities for value capture. So that's, you know, that's really sort of related to your question and that innovation cycle is accelerating and it will do so not just this year, but for many years to come.

Great, appreciate the color. Thank you.

And that concludes the today's question and answer session. At this time, I would like to turn the conference back over to Mr. Darius Adamczyk for any additional closing remarks.

Honeywell started 2019 with significant momentum, including strong organic sales and superb earnings and cash flow growth. We continue to execute well and still have significant balance sheet capacity deployed. We're focused on continuing to outperform for our customers, our share owners, and our employees. I look forward to speaking with you in

May. Thank you.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.