Honeywell International Inc.

Good day, and welcome to the Honeywell's first quarter earnings release. At this time, all participants are in a listen-only mode, and the floor will be open for questions following the presentation. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mark Bensa, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Jake. Good morning, and welcome to Honeywell's first quarter 2021 earnings conference call. On the call with me today are Chairman and CEO Darius Adamczyk and Senior Vice President and Chief Financial Officer Greg Lewis. This call and webcast, including any non-GAAP reconciliations, are available on our website at www.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 based on many factors, including changing economic and business conditions, 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 10-K and other STC filings. This morning, we will review our financial results for the first quarter of 2021, share our guidance for the second quarter, and provide an update to our full-year 2021 outlook. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to Chairman and CEO, Dariusz Adamczyk.

Thank you, Mark, and good morning, everyone. Let's begin on slide two. We delivered a very strong start to 2021, exceeding the high end of our first quarter organic sales growth, segment margin, and adjusted earnings per share guidance range. In the first quarter, we delivered adjusted earnings per share of $1.92. down 13% year-over-year and 9 cents above the high end of our guidance range. Organic sales were down 2% year-over-year, a 5 percentage point sequential improvement from the 7% organic sales decline in the fourth quarter of 2020. We drove year-over-year organic sales growth in two out of our four segments, HVT and SPS, despite facing difficult comps since the first quarter of 2020. wasn't fully impacted by the pandemic. Honeywell Building Technologies' return to growth and safety and productivity solutions achieved an outstanding 47% organic growth in the quarter. We also drove double-digit year-over-year organic growth in connected software sales driven by strong demand for connected buildings and cyber solutions. We delivered a segment margin of 21% 10 basis points above our guidance, with margin expansion in aerospace, HVT, and SPS. We generated $757 million of free cash flow in the quarter, a strong performance despite increased investments in high-return capital expenditures, which were up approximately $80 million year-over-year as we positioned ourselves for the recovery. Adjusted free cash flow conversion was 56%, up 500 basis point year-over-year on the strength of working capital improvements. In terms of capital, we deployed $3 billion to dividends, growth capex, share repurchases, and M&A during the quarter. We opportunistically repurchased 4 million shares throughout the quarter, reducing our share count to 705 million. We're off to a strong start in 2021. and I'm very confident that continued improvement in markets coupled with accelerated innovation and strong execution will provide a long runway for continued business improvement and top-tier value creation for our shareholders. Next, let's turn to slide three to discuss a few of our recent business highlights. I'm excited to share a few recent recognitions and partnerships that highlight our commitment to upholding the highest ethical standards and our focus on creating breakthrough innovations. First, Honeywell is one of only eight companies in the industrial manufacturing category to be named one of the world's most ethical companies by Ethisphere. Ethisphere is an organization that evaluates and honors businesses around the globe and across industries for their strong cultural, environmental, social, governance, and diversity practices. We are proud to have earned this prestigious ranking. Second, Honeywell is named to Fast Company's annual list of the world's most innovative companies for 21. In addition to being recognized for a 100-year heritage of creating groundbreaking technologies like quantum computing that transformed the way the world works, Honeywell is also recognized for mobilizing quickly to help people and businesses cope with the pandemic, including our launch of new N95 mask manufacturing and our introduction of a UV treatment systems for airplanes, healthy building solutions, and innovative AcclarEdge bottles and vials. We also recently announced our partnership with musician and entrepreneur Will.i.am to launch the Super Mask, a one-of-a-kind innovative smart face mask for the mid- and post-pandemic world. The Super Mask is easily adjustable to fit a variety of face shapes and is enhanced with multiple functions for the modern lifestyle, including dual three-speed fans and HEPA filters for enhanced breathability, active noise-canceling audio and microphone capabilities, and Bluetooth connectivity. Finally, we're continuously evaluating our portfolio for M&A opportunities that can enhance our existing offerings. During the first quarter, we signed an agreement to acquire a majority stake in Phyplex Communications, a company that develops in-building communication systems, including bidirectional amplifiers that provide continuous and critical in-building radio coverage in challenging environments to improve the safety of first responders and building occupants. The addition of FiFlex products and software will enhance our offering in the fast-growing in-building communication market and complement our innovative, industry-leading portfolio, enabling us towards creating the next generation of fire and life safety solutions. Let me turn it over to Greg on slide four to discuss our first quarter results in more detail and to provide an update on our 2021 outlook.

Thank you and good morning, everyone. As Darius highlighted, we're very pleased with our start to 2021. While the COVID pandemic continues to impact some of our end markets, our laser focus on demand generation, operational execution, and cost management enabled us to over deliver on our commitments. First quarter sales declined by 2% organically due to the effects of the COVID-19 pandemic, which represents a five percentage point sequential improvement from the fourth quarter. As Darius mentioned, that was driven by robust double-digit growth in our warehouse automation solutions and personal protective equipment businesses, as well as continued demand for our building products and services, advanced materials strength, and strength in our connected software. We expanded margins year over year in three out of four segments, aerospace, HBT, and SPS for the second consecutive quarter, limiting Honeywell's overall segment margin contraction to 80 basis points and ending the quarter with a segment margin of 21%. Our commercial excellence and strong cost management, as well as an approximately $30 million one-time benefit in aerospace, drove 10 basis points of outperformance in segment margin compared to the high end of our guidance range. despite the mixed headwind from much stronger sales in our lowest margin segment, SPS. We delivered adjusted earnings per share of $1.92, down 13% year over year. This was $0.09 above the high end of our guidance, driven by segment profit improvement from higher sales volumes and by a lower than expected effective tax rate. From a year over year perspective, below the line items were an $0.11 headwind, driven by lower interest income in FX, and higher repositioning and interest expense, partially offset by higher pension income. Our effective tax rate was higher than the first quarter of 2020, primarily due to benefits realized in the prior year period from tax law changes in India and the resolution of certain U.S. tax matters, driving a 13-cent headwind. This was partially offset by a 3-cent EPS benefit from lower share counts. A bridge of all this from 1Q20 to 1Q21 adjusted EPS can be found in the appendix of this presentation. We generated $978 million of cash from operations, up 4% year over year, despite lower net income. Free cash flow for the quarter was $757 million, down 5% year over year due to higher capital expenditures, particularly in SPS, as we continue to expand PPE capacity. Working capital improvements, including strong collections, offset these headwinds during the quarter, driving adjusted free cash flow conversion of 56%, up 500 basis points from the prior year. As you know, the first quarter is historically our lowest from a cash perspective, and we remain on track to our full-year cash guidance. I'll talk more about our full-year outlook in a few minutes. We strategically deployed $3 billion to M&A, share repurchases, dividends, and CapEx in the first quarter, which significantly exceeded our operating cash flow. We paid $640 million in dividends, deployed approximately $220 million in CapEx, up 60%. We purchased over $820 million of Honeywell shares, reducing our share count to $705 million, and also we completed the purchase of Sparta Systems, deploying a total of $1.3 billion to further bolster our software, controls, and analytics capabilities in the attractive life sciences space. The integration of Sparta is progressing well, and in fact, we exceeded our first quarter financial expectations with sales of Sparta up 25% year over year and bookings up approximately 75% year over year. In March, we also repaid $800 million in maturing senior notes as we began the process to repay debt taken on to provide incremental liquidity during the COVID-19 pandemic. We maintained a strong balance of cash, cash equivalents, and short-term investments, at the end of the first quarter of $12.7 billion. So all in all, we had a very strong start to 2021. We are investing for the future, continuing to execute commercially and operationally with the discipline and rigor you have come to expect from Honeywell, positioning ourselves well for the recovery ahead. Now let's turn to slide five and talk about the individual segment results. Starting with aerospace, first quarter sales were down 22% organically, driven by lower commercial aerospace demand due to the ongoing impact of reduced flight hours and lower original equipment volumes. Our air transport aftermarket sales were down 48% organically year over year and down 7% sequentially from 4Q20 as rising infection rates, the pace of vaccinations early in the quarter, and the lack of the peak holiday travel contributed to flight hour declines as we messaged was possible in 4Q. Our business aviation aftermarket sales were down only 6% organically year over year, as we see a faster recovery in this space. And original equipment, while still down year over year, our business aviation OE grew double digits sequentially from 4Q20, driving a 6% sequential growth in the total commercial original equipment from 4Q. Defense in space was down 2% organically, as demand for U.S. defense in space was offset by lower international defense volumes. Aerospace segment margin expanded 110 basis points to 29%, driven by strong cost management in the face of organic sales declines and an approximate $30 million one-time benefit. Building technologies returned to growth in 1Q despite facing the most difficult comps we'll see this year since 1Q20 was only partially impacted by the pandemic. Sales were up 2% organically, driven by demand for building management systems and security and commercial fire products, as well as continued growth and building solution services. Orders and backlogs for building solution services were both up double digits year over year, positioning the business for continued growth in 21. In addition, our portfolio of healthy building solutions maintained strong customer momentum, with exciting wins with the Jacksonville Jaguars, the Pittsburgh Airport, and Syracuse University. HPT segment margins expanded 200 basis points to 22.5%, driven by commercial excellence and productivity net of inflation. P&T sales were down 6% organically, a 6 percentage point sequential improvement from the 12% organic sales decline we saw in 4Q. Process solution sales were down 9% organically, driven by continued project delays and lower smart energy demand due to some softness in the end markets, partially offset by demand for field instruments. Orders for services, process measurement and control products, and thermal solutions grew in the quarter, positioning the HCS service and products businesses for acceleration in the second quarter and beyond. In UOP, sales were down 14% organically, driven by the ongoing weakness in the energy end markets. However, this was a 16-point sequential improvement from the 30% organic decline we saw in 4Q. UOP orders were up double digits, driven by gas process and catalyst orders, so we are seeing some signs of growth potential for the future. Finally, advanced materials sales increased 8% year-over-year organically, driven by growth broadly across the portfolio, including strong growth in fluorine products, specialty additives, chemicals, and electronics materials demand. PMT segment margins contracted 290 basis points in the first quarter, driven by the impact of sales mix, partially offset by commercial excellence and cost management. Finally, in safety and productivity solutions, Sales were up 47% organically, as Darius mentioned earlier, driven by strength across the portfolio, including double-digit organic growth in warehouse and workflow solutions, personal protective equipment, and productivity solutions and services, who drove market share gains due to strong demand in the US and Europe. SPS orders were up double digits year over year for the sixth straight quarter, driven by continued demand for personal protective equipment and productivity solutions and services. SPS backlog was up approximately 70% year over year, remaining above $4 billion for the third consecutive quarter, including $2.1 billion of backlog for warehouse and workflow solutions. SPS segment margins expanded 180 points in the first quarter due to 14.3% driven by the impact of those higher sales volumes. So overall, we finished the first quarter with a return to sales growth in HPT, and with continued growth in other areas of the portfolio, as well as backlog strength in HPT, warehouse and workflow solutions, productivity solutions and services, PPE, and UOP. We expanded margins in three of the four segments, while strategically investing in high return growth CapEx and R&D, giving us confidence that our businesses are well positioned as demand recovers. With that, let's turn to slide six and discuss our preview for the second quarter. As the timing and speed of the economic recovery continues to unfold, we entered the second quarter well positioned with strong momentum in some key areas of the portfolio continuing to make progress each quarter. For the second quarter, we expect organic growth in the range of 10 to 13% as we lap the first full quarter disrupted by the COVID-19 pandemic. We expect some of the areas of the portfolio that have been most significantly impacted, particularly the commercial aerospace aftermarket and HPS businesses to return to growth. We also expect ongoing strength in safety and productivity solutions, building products, and advanced materials. We would normally see a seasonal step up from 1Q to 2Q, which this year will be somewhat dampened by the calendar impact of having more days in the first quarter than we do in 2Q. We will be facing some supply chain constraints as the sourcing environment for direct materials and components such as semiconductors and resins continues to be challenging. We have taken swift actions to partner with our distributors to mitigate those impacts, but our second quarter sales will be somewhat constrained as these shortages create higher lead times, primarily in SPS and to a lesser extent in HPT. As a reminder, during 2020, we responded fast and early to the pandemic by identifying and delivering on a two-phase program that reduced our fixed cost base by $1.5 billion, and approximately 70% of these savings, or about $1 billion, were permanent reductions. As such, we'll see approximately $500 million of headwind in 2021 for the year from the temporary savings measures we implemented, and as we resume some areas of spending, including business travel, merit increases, and investments in growth, particularly in R&D. These impacts will begin to accelerate into Q, though we are confident our streamlined cost base gives us ample capacity to invest and positions as well to drive margin expansion across all four segments of sales recovery. We expect sales, excuse me, we expect segment margin in the range of 19.8 to 20.3% for the second quarter, which represents 130 to 180 basis points of margin expansion year over year. From a sequential perspective, our second quarter segment margin expectations do result in contraction from the first quarter due to the mixed impact of higher sales from lower margin businesses, higher research and development expenses as we invest back into the business, particularly aerospace, and the cost impacts that I mentioned earlier. as well as the first quarter benefit in aerospace, which won't repeat. The net below the line impact, which is the difference between segment profit and income before tax, is expected to be flat to a $55 million benefit, with a range of repositioning between $50 and $100 million for the quarter, as we continue to fund ongoing restructuring projects. We expect the effective tax rate to be in the range of 23% to 24% for the quarter, and our average share count, should be flat to 1Q at approximately 705 million shares. As a result, we expect second quarter earnings per share between $1.86 and $1.96, up 48% to 56% year-on-year. Now let's take a moment just to talk through the segments. In aerospace, we expect flight hours to improve in the second quarter, driving sequential and year-over-year improvement in commercial aftermarket sales as domestic travel improves. That will be tempered by ongoing softness in international travel as flight hours remain far below pre-COVID levels there. We still expect a slow ramp in commercial original equipment build rates. Moderate U.S. defense spending should continue in the second quarter, though this will be pressured by lower international defense volumes. In building technologies, as business conditions improve and as the world prepares to safely return to offices, schools, and to travel, We expect continued demand for building products and management systems, as well as sequential and year-over-year building solutions growth as we execute our projects and services backlog. In addition, we expect continued customer demand for our portfolio of healthy building solutions, which we began converting into sales in the first quarter. In PMT, we expect continued recovery in the process solutions products businesses, as well as sequential improvement in automation projects. While UOP orders were up double digits year over year in the first quarter, as I mentioned earlier, we expect customer CapEx and OpEx budgets to remain tight in 2Q, limiting the delivery and execution of those opportunities in the near term. We expect continued strength in advanced materials in the second quarter driven by growth across the portfolio, particularly by strong demand for flooring products. Finally, we anticipate continued strength in SPS with another quarter of robust double-digit organic growth in warehouse and workflow solutions, personal protective equipment, and productivity solutions and services. Our warehouse and workflow solutions backlog remains strong, over $2 billion as I mentioned previously, as customers make investments in advance of the busy holiday season, giving us confidence and continued growth. Our PPE and productivity solutions and services backlogs are bulked up triple digits, which will drive growth in the second quarter, though as I mentioned, we will be managing some supply constraints here. Overall, we expect another strong quarter for SPS. So with that foundation for 2Q, let's turn to slide 7 and talk about the key changes to our 2021 outlook since the guidance we provided in January. Over the past few months, we've seen tremendous progress in the distribution and administration of the COVID-19 vaccine, particularly in the U.S., the U.K., and the Middle East, coupled with improvements in infection rates in many of those geographic areas. We're also encouraged by talks of fiscal stimulus that will further support economic growth. including funding for infrastructure, clean energy, and manufacturing investments. While the pace of recovery varies regionally with slower vaccine rollouts in India, Europe, and Latin America, and with the emergence of new COVID-19 variants, we will continue to navigate the recovery with a balanced approach of investment and cost management in order to drive value longer term. So let's take a moment to walk through what's changed since our prior guidance. Starting in aerospace, we continue to expect gradual improvement and our commercial aerospace business as the pandemic subsides. The business aviation aftermarket is on track to recover as expected, and perhaps at a somewhat faster pace than we thought. In air transport, the aftermarket business had a slow start to the year, as I mentioned earlier, being down sequentially compared to the fourth quarter as virus outbreaks and challenges with vaccine rollouts tempered improvements in first quarter flight hours. The pace of this acceleration will vary regionally, with domestic travel clearly recovering faster than international travel, and country-by-country dynamics will make this difficult to predict. We remain cautious in our ramp expectations here as this unfolds. We continue to see moderate demand for U.S. defense in space offset by lower-than-expected international defense volumes. As a result of these dynamics, we expect organic growth for the year in aerospace to trend towards the low end of our flat-to-low single-digits guidance, which we provided in January. An overall aerospace segment margin expansion to be somewhat impacted by the slower ramp and high margin commercial aftermarket sales. In HPT, we still expect organic sales growth to be up low single digits for the year. The business is seeing robust activity and is trending towards the upper end of the low single digit range with continued demand for building products and management systems and continued momentum and healthy building solutions fueling that growth. We continue to expect segment margin expansion driven by higher sales and a streamlined cost base. In PMT, our expectations have not changed materially from our initial guidance. We still expect organic sales growth to be down slightly to up low single digits for the year. The recovery is progressing with strength in advanced materials and improvement in process solutions products and a slower recovery in HPS projects and UOP catalysts, as customer spending has not materially changed, delaying projects and reloads, which contributes to our view that we are trending towards the low end at this time. We continue to expect sequential segment margin expansion throughout the year in PMT, driven by cost management and some improved mix from UOP in the second half, though the specific timing of that remains uncertain. The recovery in oil and gas looks to be building momentum for a stronger 2022. Finally, in SPS, warehouse and workflow solutions, PPE, and productivity solutions and services are all trending better than expected in January. We now expect higher double-digit organic sales growth than in our previous guidance, as short-cycle sales accelerated in productivity solutions and services, and it will be accelerating in our sensor businesses, though that will be somewhat tempered by the supply tightness I mentioned earlier. The increase in warehouse automation sales, which are lower margin, as you know, will impact our overall SPS segment margins, though this will be partially offset by increased sales and the higher margin PPE and productivity solution businesses. Now let's turn to slide eight and talk about our updated guidance for the year. Given the macro and segment backdrop we just talked about, our strong outperformance in the first quarter, and our confidence in our ability to deliver through the economic recovery, we are raising our full year sales, earnings per share, and free cash flow guidance. We now expect sales of 34.0 to $34.8 billion, which represents overall organic sales growth in the range of 3% to 5%, an increase of two points in the low end and one point in the high end compared to our previous guidance. Given that our strengthening sales outlook is heavily driven by our lower margin SPS segment, we are maintaining our segment profit guidance in the range of 20.7 to 21.1%, an expansion of 30 to 70 basis points for the year. We still expect margin expansion in all of our segments as we carefully invest back into the business while managing the multi-speed recovery across the portfolio. We do not expect material changes to our net below the line impact at this time, which we estimate to be in the range of negative 130 million to a positive $20 million for the year. including capacity for $400 to $525 million of repositioning. We continue to expect a full-year effective tax rate of approximately 21% to 22% and a weighted average share count of approximately $705 million for the year, representing our minimum 1% reduction in shares. As a result, we're raising the low end of our adjusted earnings per share guidance and now expect a range of $7.75 to $8, up 9% to 13%. This represents an increase of $0.15 in the low end, effectively increasing the midpoint of our guidance by approximately $0.08. We expect free cash flow in the range of $5.2 billion to $5.5 billion, which is higher than the low end of our previous guide by $100 million. So overall, a great start to the year and a meaningful upgrade to our full year view in sales, segment profit, cash, and ultimately adjusted EPS as we manage the initial stages of this recovery. So with that, I'll turn the call back over to Xeris.

Thank you, Greg. Before we wrap up, I'd like to take a minute on slide eight to discuss ESG. At Honeywell, we consistently say and firmly believe that a robust environmental, social, and government's framework enables us long-term success. In fact, responsible corporate citizenship is an essential part of our value creation framework. Importantly, we announced a commitment earlier this month to become carbon neutral in our operations and facilities by 2035. This represents a continuation of our ongoing sustainability efforts, which have already reduced the greenhouse gas intensity of our operations and facilities by more than 90% since 2004. In addition, We've worked extensively to increase energy efficiency, conserve water, minimize waste, and proactively champion responsible remediation projects that restore valuable community assets. We plan to achieve our commitment through a combination of further investments in energy savings projects, conversion to renewable energy sources, completion of capital improvement projects at our sites and in our fleet of company vehicles, and utilization of credible carbon credits. We have a decades-long history of innovating to help customers meet their environmental and social goals. In fact, about half of Honeywell's new product introduction research and development investment is directed towards products that improve environmental and social outcomes for customers. For example, the widespread adoption of Honeywell's Solstice line of low global warming potential refrigerants blowing agents, and aerosols has already reduced the equivalent of more than 200 million metric tons of carbon dioxide to date, equal to eliminating the emissions from more than 42 million cars. A few days ago, we announced that Whole Foods Market has adopted the Solstice N40 lower global warming potential refrigerant in more than one hundreds of US stores as it seeks to reduce refrigerant emissions under the U.S. Environmental Protection Agency's Green Chill Program. This is just one example of how our innovative products and services continue to improve customer sustainability profiles and how Honeywell is playing an active role in shaping a future that is safer and more sustainable for generations to come. Now let's wrap up on slide 10. In summary, we delivered a strong start to 2021 with first quarter results that exceeded expectations. We're seeing promising signs of rapid recovery in some of our markets, and we're executing on our rigorous and proven value creation framework, which consistently delivers shareholder outperformance in all economic cycles and will continue to enable us to return to our key long-term growth commitments in 2021 and beyond. With that, Mark, Let's move to Q&A.

Thank you, Darius. Darius and Greg are now available to answer your questions. We ask that you please be mindful of others in the queue by asking only one question. Jake, please open the line for Q&A.

Yes, ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. Just keep in mind, if you are using your speakerphone, make sure the mute function is released to allow your signal to reach our equipment. Once again, star 1 for questions.

We will pause for just a moment to allow everyone an opportunity to signal. We will begin with Steve Tussa with J.P. Morgan.

Hey, guys. Good morning. Good morning. I'll ask my one question in five parts. On the second quarter, you guys had said in the last call that margins would kind of build from 1Q to 2Q. Even excluding the $30 million in Arrow, they're down. First of all, kind of what changed relative to what you were expecting back then? And then second of all, just in kind of the second half of the year, you know, normally things kind of level out from the second quarter. Is this year going to be a little bit different seasonally given – the later cycle nature of the company. And then last one would be on aerospace. How do you think your performance compared to what you gauge as flight hours this quarter on your aftermarket?

That was almost five, but I think you got to four. Let me start with the margins. On the margins, the biggest thing that changes is the mix makeup of our Q2. The fastest growing business for us is Intelligrated, which was going to be growing even faster than we anticipated. Think about a mid to high double-digit growth rate for that business. Our bookings, our success, our output is growing, and frankly, it's mixing in at even more as part of the overall portfolio. So that is the number one and primary reason that there's a little bit of that change. Some of the headwinds, merits, we anticipated that, so there's really no change in that. But the short answer is the Intelligrated business is growing even faster than we anticipated. and continues to be a growth engine for us. In terms of the second half, I think the one thing to interpret it wrongly for earnings releases is that we're somehow less bullish on our second half. We're not. We're actually very excited about the second half. But frankly, it's one quarter in, in a year where there are many, many unknowns, including COVID rates in terms of infection rates and current supply chain and so on. You know, we don't see anything in there that we're particularly worried about, but it is one quarter into a year, which probably has many more unknowns than most. I think your third question was around sort of, you know, what's up, what's down. I would characterize the following in terms of, you know, our BGA flight hours are actually up vis-a-vis our initial assumptions. So that's what's up. What's down is our air transport, which obviously is a bigger number vis-a-vis BGA. In total, we're about the same, but it's a little bit different. Lastly, I would tell you that defense in space was roughly where we expected. The U.S. markets were strong. The internationals were a little bit weaker. We're sort of looking at that for the rest of the year. We don't know if there was some sort of channel loading that kind of happened at the end of the year, not that we drove it, but the distributors themselves. So those are sort of the puts and takes. But the framework that everybody ought to just fully understand is we are very bullish on our markets. And what we're seeing is the short cycles coming back very strongly compared to You also add on that IntelliGrade. When was the last time, Steve, you've seen any segment in any of our peers grow 47% year over year? That's remarkable. Now, whether it's in the third or fourth quarter of this year, you're going to see some of our longer cycle businesses coming back, whether it's PMT and aerospace. I can't exactly call it whether it's Q3 or Q4. There's a lot of moving pieces, but they're going to come back. As you well know, those are higher margin businesses. I think we're on a really, really nice ramp here coming up for our future. Greg, I don't know if you have anything to add.

No, I think you hit it right on, and I think we've positioned ourselves well for what's to come. You mentioned some of the temporary costs that we talked about coming back, and they will be coming back starting in 2Q. Merits go in in April. So these are things, and we're going to increase our investment in R&D, as we said. So I think you hit the salient points.

Thanks. Just FYI, pool pumps grew 50% this quarter, so they beat you guys on that front. Pentair pool pumps. Just letting you know. Thanks.

Pool pumps, wow. It was pretty close there, Steve.

47, 50, you know.

We'll now take our next question, and that will come from Scott Davis with Mellius Research. Please go ahead.

Good morning, guys. Good morning. Good morning. Good morning. Do I read your answer to mean that you're going to enter the pool pump business?

Apparently it's an opportunity we need to go investigate. I think so. It's an opportunity. I'm going to keep it simple. Can you just talk about price broadly versus cost? Sure. Yeah.

That's definitely a watch out item for the year. And for us, inflation is taking hold. There's no doubt about it. We knew it. We see it. It's real. And if you don't stay on top of it, the two areas where, and this is not a surprise, steel, semiconductors, copper, ethylene. Those are the four elements that we saw substantial inflation in Q1. I can tell you that we stood up a pricing team, which is been in place since the beginning of the year. We're quickly taking actions and we are staying ahead of it. And we're going to continue to monitor what happens and stay ahead of it. But it's a watch out item. I don't think things are going to abate. The short cycle is definitely hot. We all read the same articles around semiconductors and what's going on there. And I think we're going to have to just stay ahead of it. But we do expect an inflationary environment this year. And

uh we're going to stay ahead of it that's our commitment okay i'll pass it on thank you guys thanks well now hear from julian mitchell with barclays hi morning um maybe just sticking to the one question rule um the sps margin outlook um maybe just give us some context short and long term um i think you said q to the margins um you know, probably worse. So maybe, you know, how large is that sequential step down in SPS? And also longer term, you know, you've got that close to 20% guide out there. What's the approximate sort of aspiration of when people should think about that? Or is it just sort of off the table for the medium term because of how good the growth is?

Yeah, so, Julian, I don't think we said that margins contract in SPS sequentially. I think what we were trying to highlight is simply it's at, you know, in the 14s, it's the lowest one in the portfolio, and it's driving the biggest part of the growth, so it gives, you know, some pressure to the overall margin expansion for Honeywell. I think we're going to see margins, you know, improve modestly for SPS during the course of the year. Because even for Intelligrated as an example, we're going to have our peak quarter most likely here in Q2 on the revenue side. And then that will start to abate a little bit as the year progresses as well. You know that that business can be very lumpy on the install. That's not new news. So the movement of that will influence the, you know, the margin progression. As it relates to your 20% target, we absolutely still have that in mind in the longer term. It's probably not, you know, 24 months from now. You know, we've talked quite a bit about the, you know, trying to capture the install base, particularly in the, you know, the warehouse segment. And, you know, the whole point of that is then to follow with a terrific service and aftermarket business with software attached. And so, you know, as and when that shift occurs, then we'll see, you know, those margins mixing up. And then, again, with the recovery that we've had in places like PSS, which I think Kevin Dayhoff and the team there have done a terrific job in that business. We start seeing margin accretion again in there. So we still have very much a line of sight to that 20%, but with roughly maybe even close to a $3 billion business in warehouse this year, at the lower margin, that's going to give it some short-term pressure.

If I could just maybe add a little more color on the long-term. And this is, I think, very, very consistent of the framework we provided. The Intelligrated business is growing at a highly dynamic range. I mean, think mid to high double-digit kind of range. And it mixes down even within the SPS portfolio. That's not news. I think what is news is that we're continuing to take substantial market share in the marketplace. building installed base and as the build out of the warehouse infrastructure moderates, we're gonna get higher margin business because obviously then it's gonna mix much more to the LSS. So there's really no bad news here. This is actually fantastic news that we're taking share, growing extraordinarily quickly, and as I've said all along, Telegrader is the best acquisition we've ever done at Honeywell. Now it's more or less undeniable. And... It's a business that continues to do well, and I see it being primarily a projects business for the next short to midterm because the demand is still very, very high, whether it's North America and Europe, and we're going to capture that share. Ultimately, it's going to become our higher margin business as it becomes a bit more install-based centric.

That's great. Thank you.

Thank you. You bet.

Next up, we have Nicole Deblaise with Deutsche Bank.

Yeah, thanks. Good morning, guys. Good morning. Good morning, Nicole. So maybe I wanted to focus a little bit on HPT. I know that's part of the whole margin mixdown dynamic for the year, but HPT margins continue to move higher and were a lot better than we had expected this quarter. I guess, how do you think about the sustainability of the strong incrementals you saw there in the first quarter, if you could kind of talk about the 1Q dynamics? as well as how you see margins progressing throughout the rest of the year in that business.

We're very bullish on the HPT business. The Healthy Buildings offerings has kicked in. As you know, we booked roughly $100 million of that business in the year 2000. We expect it to be several hundred million in the year 2021. As we look at the Biden infrastructure plan, there's a substantial amount of money, something to the tune of $50 billion for particularly education and infrastructure. We think that we're going to be able to play in there. The team has done a great job managing the margin profile in the mix. So we're very bullish on what's going to happen to HBT, and we think we're very constructive on it for the rest of the year.

Yeah, and I would just say, as you mentioned, very strong margins in the first quarter, 22.5%. Our long-term target in this business was 23, so this is the beauty of a portfolio. You don't get everyone exactly at the same time, but this is one that's trending towards the high end. Some of that is going to be a little bit abated in the second half and perhaps even in the second quarter as the project's business becomes a bit bigger in the mix. But we feel very good about the progress that that team has made overall over the last 18, 24 months post the spin of the homes business. I think they've done a terrific job on productivity, on footprint, new product introductions. So I really think what Bemel and that team have been doing is quite good. And they're approaching their long-term target here

uh as we as we roll through 2021. got it thanks i'll pass it on thank you we will now hear from dean dray with rbc capital markets thank you good morning everyone good morning hey we'd love to get some color on sparta that those are pretty heady numbers sales up 25 bookings up 75 just Give us a sense of what's the normalized run rate. What are the applications? And it's kind of reminiscent of the way IntelliGrade had started, and it turned out to be pretty sustainable in terms of double digits. So just level set us here, if you could, please.

Yeah, no, good question. We're very, very happy with the start in Sparta. And, you know, sometimes when you acquire a business, you kind of hold your breath until you actually own it and say, okay, did we buy what we thought we bought? And I'm very, very happy to report that we're very excited about the business. We bought exactly what we thought we were going to buy. The first quarter numbers speak for themselves. Strong double-digit growth. Bookings that are sort of multiples of that. Being in the life sciences space and providing quality management solutions is, I think, going to have a very, very long runway for the future. We've got a great team in place there. We augmented the team with some professionals as well, and we're extraordinarily well positioned to make that a big winner. And then drive the synergies of our Honeywell Process Solutions business. I mean, we forget that that business is now really growing. The life sciences segment of the business at a disproportionate rate, this will be a further catalyst to enable even more growth. and uh and by the way it's substantially margin accretive too so uh we're you know it wasn't it wasn't uh kind of it wasn't maybe the typical honeywell acquisition that we make but we feel very very good about it now kind of being the proud owner for about a quarter and uh it all looks good for q2 and the rest of the year as well great thanks i'll pass it on thank you moving on to jeff sprog with vertical research

Good morning, everyone.

Good morning.

Good morning. We'll keep an eye on SPARTA, but for now, the second best acquisition Honeywell ever did was UOP. I wonder if we could talk about that a little bit more. And really, kind of the nature of my question is it's very interesting to see the backlog pick up, right? We're seeing this high level of activity in the chem space in particular that's probably pushing out turnarounds. Maybe you could just give us a little bit more color on how you see the year playing there, how the business, you know, might kind of mix. And, you know, if there's any kind of related commentary in HPS as part of that answer, that would certainly be interesting.

Yeah. Yeah, Jeff. Well, you know, I think there was certainly some encouraging signs in Q1. I mean, you know, we had double-digit bookings in the yellow. There are services. There are catalysts. Part of the business is coming back. Our sort of book-to-bill is in much better shape this year versus our assumptions this year versus where it was last year. So that's also promising signs. We're seeing some activity come back. And I also want to highlight maybe a very important part of that portfolio for our future, which is the sustainability technology solutions business. Its quote log is in the $100 million range now and growing very, very quickly. Its bookings were up 25%, and we're talking to literally tens of different energy producers today about our sustainability technology solutions portfolio, which is highly expansive. I mean, from plastics recyclability to ecofining to energy storage to hydrogen energy to carbon capture, we have all these solutions. I am very optimistic about that business, and it may look very different three to four years from now than it does today because we've overinvested into our sustainability technology solutions portfolio. Now, on the larger projects, and you know this, sort of the OPEX, CAPEX budgets, I sort of expect that, although I would view the price of oil and gas to be very friendly towards investment. You know, we think that that still could be a couple of quarters away just because of where the budgets were set for a lot of the majors. And, you know, as you know, they were depressed for this year. However, they are investing in the refurbishment, the catalyst, and so on. And if you look at – and lastly on your question, as it relates to HPS, if you look at the HPS UOP cycle – HPS typically trails UOP by two to four quarters. That's sort of mathematically how things work. We see some encouraging signs, and those signs are gonna get better, and the business is gonna get better for the next several quarters. We're gonna be patient, but we're very confident this environment is gonna keep improving because, as you know, you have to reinvest. Although we're moving to a more non-carbon energy infrastructure, we're certainly going to need carbon for a while. And so we've got two different growth factors. Number one is to sustain the current, but also to help those businesses transition to the future.

Maybe just as a brief follow-on, Darius, are you seeing any of those large kind of transportation fuel to petrochem projects kind of coming back on the board?

We're seeing some activity and some discussions because, as you know, that's exactly right, which is, you know, a greater switch from fuels to petrochemicals. That's very much a part of our discussions and quote logs that we're having. Frankly, some of the projects are not being released yet. They're being delayed, but we're highly, highly confident those will happen.

Great. Thank you.

Thank you.

Now we will hear from Peter Arment with Baird.

Hey, good morning, Darius, Greg. Hey, Darius. Question more on a kind of regional basis, just particularly focused on Europe. You know, we would look at first quarter flight activity in general and domestically. We were in the U.S., we were down 32%, but we were down 62% in Europe. I guess the question is really how are you looking at Europe today, just more broadly speaking, not just aerospace across your businesses, how you're seeing the recovery there? Thanks.

Yeah, no, I mean, Europe probably was a bit slower than we have just been in terms of flight hours. I mean, that's clear in Q1. And Europe, I mean, I think there's a direct correlation towards vaccinations, right? And we kind of, as we look at Europe, they're probably, you know, let's call it three to six months behind the U.S. in terms of vaccination rates. So we're going to kind of continue to see slow rate of recovery here as we move through the year. And we actually expect a fairly robust domestic flight market in the US. It probably won't be the case in Europe. We think that that's probably going to push back into the fall. But Europe, the leaders are UK, US, Israel, UAE. Those markets are recovering fairly quickly. I think Europe will be next. China is in a pretty good place. You know, India is a bit of a trouble spot, and Latin America is a bit of a trouble spot. So those will probably recover late this year. Then we see a very strong pickup next, even stronger pickup next year, particularly on the international routes. But some of those will recover in the second half of this year. I anticipate, especially the U.S., Middle East, Europe, U.K.

routes to be fairly active even in the second half of this year. Appreciate it. Thanks.

you and good time with hana with cowan has the next question yeah thanks good morning guys i was wondering if you could elaborate on yeah if you could elaborate on the after commercial aerospace aftermarket you mentioned you know sequentially it was down maybe if you could tease out how much aero a large commercial atr was down and then what are You mentioned it will be up in Q2. What are you seeing from a booking standpoint? What kind of indications are you getting for magnitude of the improvement in Q2? And maybe your thoughts beyond that.

Yeah. It seems like the flight hours from Q1 to Q2 want to be up in the call 20% range. You know, whether we have a little bit of a lag to that or not, you know, remains to be seen. But as you highlighted and we talked about the Q4 to Q1 decrement is the lack of Thanksgiving, Christmas, the December and January infection acceleration. So as those things start coming down, domestic travel we expect will be the main beneficiary. All the airlines who have reported, you know, Southwest, which is mostly domestic leisure travel, is doing fantastic. And, you know, those who are reliant on more on the business travel are going to suffer. So you're going to see that domestic and international and business travel bifurcation. exactly how that's going to you know play out is is really you know kind of remains to be seen and even as was mentioned earlier with places like Europe domestic travel in intra Europe is has been depressed a little bit given given the fact that they've had some additional lockdowns in in some of the in some of the countries with the outbreaks there so it really is it's really a country by country region by region you know impact and so I you know, putting a precise finger on that is going to be a little bit elusive.

Thank you. And with Citigroup, we have Andy Kapuletz for the next question.

Hey, good morning, guys. Hey, Andy. Darius, you talked about accelerating cash deployment in Q1 with the $3 billion that you allocated to high return opportunities, including SPARTA, but could you update us on the M&A pipeline you're seeing? Obviously, We've talked about valuations not being cheap out there, but do you think you can continue to ratchet up M&A over the next few quarters given what you see?

The pipeline continues to be good. You're right. The valuations are not exactly low, but we're going to be opportunistic and we're going to look for kind of I would call the needles in the haystack and finding things that work for us, that make sense for us, we think they exist. And sometimes you have to go in places where maybe everybody else isn't running to, because obviously those things have very, very expensive price tags. And we have some ideas that I think could be pretty interesting for our portfolio. So it's a very robust Pipeline. And we're always working on a couple of things that hopefully will land and anticipate, you know, we're going to be doing more deals in 2021. And we're also looking at other level levers of capital deployment as well.

Thanks, guys.

Thank you.

Now we will hear from Nigel Coe with Wolf Research.

Good morning, guys. So just getting back into those pool pumps. Just kidding. I want to go back to the comments about the supply chain constraints in 2Q. And I don't know if you want to try and quantify it, but if you look at normal seasonality, the 1Q to 2Q step-up that, Greg, you talked about, it seems like it might be in the range of maybe $2 or $3 million. Is that sort of the right range? And where are you seeing these constraints? Is it Is it mainly in SEMI, or is it broader than that? And do you think 2Q is sort of peak pain for this, and we're getting some semblance of normality in the second half of the year?

No, the constraints are significant, and they are in SEMI. And by the way, just to be very clear, the constraints are reflected in our guide. So I just want to be very clear about that. But the constraints are significant, and they are primarily in our – SPS and more specifically think about a million of a hundred million plus kind of a number because so so it's it's not it's not small it's actually significant we do think it will abate over the year but q2 is is challenged because you know frankly the guide could have been even higher And we are working, and we've really projected an outlook for the rest of the year. And we're looking for alternative sources. Actually, Torsten Pils is here as our supply chain officer.

So, I don't know if Torsten, if you want to provide. Yeah, I think we have two areas. Semiconductors is one, and resins is the other one. We believe that the resin impact will subside by the end of Q2, but the semiconductor impact will continue throughout the year.

Nigel, you're breaking up. We couldn't hear your question. I think I don't know what you said, but I heard lost sales. We think it's a push because obviously a lot of these suppliers are not unique it's obviously being impacted so it's not as if the demand is going away so we think that this is probably a push to the second half of the year you know but but we'll see it's we've you know that business has been a really really nice success story for us and you know if we go back a couple of years maybe it wasn't such a success story had a terrific year last year and And it just further accelerated this year and absolutely growing very, very quickly. So, you know, it's still going to have a good quarter in Q2, but it could have been a phenomenal blowout quarter in Q2.

Great. Thank you very much. Thank you.

Andrew Obin with Bank of America. We'll have the next question.

Hi, guys. Good morning.

Morning. Hey, Andrew.

Yeah, I figured maybe Julian was messing with Nigel's line to keep him from asking too many questions, but who knows? It's a competitive business. Just a question on Arrow. You know, in a very sort of twisted way, we're getting a lot of questions, the fact that your margin in Arrow already is so high at the bottom of the cycle. And I was just wondering if we could take a longer-term view and if you could talk about sort of longer-term levers to keep margin expansion going in this business, both in terms of specific end market recovery, but also operating initiatives.

Yeah, well, I think Q1 was a bit telling, and although we were very transparent about a $30 million one-timer, even if you exclude that element, I mean, you know, the margins were still in the upper 20s. So I think we demonstrated the credibility of the say-do that we believe this business can be in the upper 20s. I mean, this is a case in point. And take out the 30, and we're still in the upper 20s. So I think that's really important. You know, yeah, I mean, this maybe isn't a high point in sort of the investment profile of Arrow, but I can tell you, and as Greg pointed out, we are investing in Arrow today. some of the major platforms and products so I wouldn't say it's an all-time low but and our R&D dollars are going up from 2020 to 21 and and we still expect extraordinarily attractive margins for that business so you know I I think that it's we're investing it's it's a great business and you know better things are yet to come which I think maybe gets misunderstood which is you know, a lot of the ATR aftermarket's not kicking in yet. You know, I think the BGA is going to get better. I mean, so we have some brighter things on the future, and even at this kind of business levels, you know, we can print something in the upper 20s. So I just think that Hopefully people start believing that this is a very good business, which is going to get even better for the future. Greg?

Yeah, I would just maybe just augment that. So as you said, we printed 29%. You take the $30 million out, it's still $28 million, high $27 million. Our long-term target that we highlighted was $27 million. So again, we're there on that. But we're going to continue to invest. And so I think this business has done a very good job, and it was obviously that and PMT were the most impacted by the pandemic. They did a terrific job on their cost management and realigned their cost structure to the size of the business, and that's coming through. But to Darius's point, we're going to make sure that we continue to invest and grow it. We're not going to over-earn and print margins that are, let's say, unhealthy. for the long-term viability of the business.

Jake, let's take one more question, please.

And that question will come from Sheila Kayaolu with Jefferies.

Hey, good morning, guys. Thank you. Hey, Sheila. Good morning. Good morning. I'll have to tell Andrew it was me messing with Nigel's line, so just to clear it up. I guess, sticking with Arrow, you mentioned commercial OE was up sequentially. BizJets was up double digits, I think you said. Was that a surprise? What platforms drove that? And related to that, what are you expecting on commercial OE build rates as we progress throughout the year?

Yeah, so it was definitely up sequentially as highlighted. Not really unexpected. You know, we're starting to see some of the build rates, you know, recover. It's going to be slow from here. You know, I would say the level we're at right now is going to be – kind of a slow ramp from from this point so it's not like we see anything changing dramatically to the upside here you know imminently so but but not really unexpected for for what we've seen you see what's happening with the you know with the mass coming back at the service and so on so we we feel like we're you know we're sized properly for for that ramp as as we head into the second quarter and the back half of the year. On BGA, certainly that aftermarket stream, it's just going to grow at a faster pace than ATR. People are shifting. This is actually a question for the ATR business. People are shifting from commercial travel to business jet travel. That's happening. And so there may be some element of commercial first-class travel that actually, from a business perspective, you know, doesn't fully come back. So we do feel bullish about what we're seeing in the BGA space particularly. But as I said earlier, there are so many variables, and you know as well as we do, there are so many variables that go on to this between passenger behavior, airline behavior. You know, that's a little bit as to why, you know, we're going to take this one quarter at a time.

Yeah, and just to maybe add to that is, Yeah, I think what we have looking forward is the OE rate slowly increasing. And I think that that's we have a fairly high degree of confidence in there throughout this year, particularly second half versus first half and then increasing even more in 2022. So that's sort of the math. I mean, I think we also forget that, you know, as recently as three months ago, I mean, some of the infection rates in the U.S. were very, very high and we're in a dramatically different place. So the overall January and then part of February were fairly difficult. But we see the world slowly coming out of this. And there's going to be a direct correlation to aviation. And we think this is going to be manifested in the second half this year, then 22 and 23. And we're set up for some very, very nice quarters and years ahead of us, which are going to be slowly ramping up. So I We continue to be very bullish on aviation. We're investing in the business, but at the same time, you know, 2020 was a good opportunity for us to really rationalize some cost structure, and I think we can lever up nicely as that business starts coming back. Okay, thank you. Okay, I'm proud of everyone at Honeywell. This consistent hard work and unwavering commitment enable us to outperform in this challenging environment. Thank you to our shareholders for your ongoing support. We are well positioned for the recovery, a strong start to the year, and I look forward to opportunities to come during the balance of 2021 and beyond. Thank you all for listening, and please stay safe and healthy.

Ladies and gentlemen, this does conclude your conference for today. We do thank you for your participation, and you may now disconnect.

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