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Shannon
Conference Host
Good day, and thank you for standing by. Welcome to the Honeywell First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Sean Mecham. Vice President of Investor Relations. Please go ahead.
Sean Mecham
Vice President of Investor Relations
Thank you, Shannon. Good morning and welcome to Honeywell's first quarter 2022 earnings. On the call with me today are Chairman and CEO Darius Adamczyk and Senior Vice President and Chief Financial Officer Greg Lewis. Also joining us are Senior Vice President and General Counsel Ann Madden and Senior Vice President and Chief Supply Chain Officer Torsten Pils. This call and webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com forward slash investor. Honeywell also uses our website as a means of disclosing information which may be of interest or material to our investors and for complying with disclosure obligations under Regulation FD. Accordingly, investors should monitor our investor relations website in addition to following our press releases, SEC filings, public conference calls, webcasts, and social media. 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 SEC filings. This morning, we will review our financial results for the first quarter of 2022, share our guidance for the second quarter, and provide an update on our full year 2022 outlook. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to our Chairman and CEO, Dariusz Adamczyk.
Darius Adamczyk
Chairman and CEO
Thank you, Sean, and good morning, everyone. Let's begin on slide two. First off, our collective thoughts are the millions of Ukrainian refugees, and we hope to see a peaceful resolution quickly. A number one priority continues to be the safety and security of our employees, and partners in the region and respond to their immediate needs. That said, we delivered a very strong first quarter despite a challenging backdrop that included ongoing supply chain constraints, inflation headwinds, and global unrest. I'm pleased with our disciplined execution as we navigate these dynamics and capitalize on the ongoing recovery in our end markets. We met or exceeded our first quarter commitments despite these challenges with adjusted earnings per share of $1.91, down 1% year-over-year, about 1 cent above the high end of our guidance range. Organic sales grew by 1% year-over-year, and our commercial aviation aftermarket, building products, productivity solutions and services, advanced materials, and recurring connected software businesses all delivered double-digit organic growth. This was partially offset by 2% percentage point impact from lower COVID-related masks, sales, as we lapped the height of the demand in 2021. Our strong price realization allowed us to stay ahead of the inflation curve. We expanded segment margin by 10 basis points year over year, 10 basis points above the high end of our guidance range. Excluding the impact of our investment in Quantinium, the margin expansion rate would have been 40 basis points year over year. Orders in backlog growth accelerated in the first quarter, indicating strong demand momentum despite macro headwinds, led by strength in Arrow, HVT, and PMT, our end markets continue to recover. We'll go into more details on orders and backlog trends on the next slide. The first quarter is seasonally our lowest from a cash perspective, and as we communicated, this year it is being exacerbated by the supply chain impacts and strong collections in Q4. We generated $50 million of free cash flow in the quarter. These results do not change our full-year free cash flow guidance range of $4.7 billion to $5.1 billion, which Greg will discuss later. We continue to leverage our strong balance sheet, deploying $2 billion of total capital in the first quarter, including $1 billion allocated to share repurchases as we began execution of our recently updated commitment to buy back $4 billion in shares in 2022. From an M&A perspective, we closed the acquisition of U.S. Digital Designs, a public safety communications hardware and software solutions provider. Looking forward, I continue to be encouraged by the strength we're seeing in many areas of our portfolio as we execute our rigorous and proven value creation framework. Our accelerator operating system is driving outstanding shareholder value. Now let me turn to slide three to discuss our orders and backlog trends. First quarter orders across Honeywell grew 13%, the strongest growth we have since the start of 2021, with the exception of second Q21 growth, which benefited from 2020 COVID-related lows. Despite ongoing macro challenges of the last few years, our book-to-bill ratio has been greater than one for the last several quarters, indicating the strength of our demand and commercial success. Long cycle orders grew over 20% in the first quarter, led by strength in the overall aerospace portfolio, P&P process solutions projects, and SPS warehouse automation, which will help facilitate sustained growth through the coming years. First quarter backlog increased 9% year over year to $28.5 billion, or up 10% excluding the impact of approximately $300 million of backlog removed due to the Russia conflict. Backlog growth has also been accelerating consistently over the last two years as our end markets recover, giving us confidence in increased sales growth as the supply chain environment eases. Now let's turn to slide four to discuss some exciting recent announcements. Last month, we announced a strategic collaboration of Automotors, a division of ClearPath Robotics that gives warehouse and distribution centers throughout North America an automated option to handle some of the most labor-intensive roles in an increasingly scarce job market. The collaboration enables Honeywell customers to increase efficiency, reduce errors, and improve safety by deploying Autos autonomous mobile robots in their facilities. These autonomous mobile robots handle repetitive and often time-consuming tasks and allow scarce labor resources to be shifted to higher-value jobs. This helps boost worker satisfaction while reducing injuries and turnover rates. The pandemic and its lasting effects on labor shortages is causing companies to reconsider the way they operate, and companies are more willing than ever to invest in automation. We also recently announced that we'll support supply Hekate Energy's energy storage system for a solar park located in northern New Mexico. When completed in mid-2022, the 50-megawatt solar farm will be capable of supplying enough electricity to power up to 16,000 average New Mexico homes, which will help meet the state's decarbonization goals. When combining with Honeywell's Experian energy control systems, the energy storage systems will enable customers to accurately forecast and optimize energy costs at the site and will support access to reliable and cost-effective clean energy. Honeywell remains on the forefront of innovation that is leading the energy transition. Energy storage will play a critical role in renewable power generation and will be vital to the decarbonization of global power systems. Lastly, We are teaming up with World Energy, our carbon net zero solution provider, and Air Products, the world's largest hydrogen producer, to build one of the most technologically advanced sustainable aviation fuel production and distribution sites ever constructed. The facility will produce fuels that will displace over 76 million metric tons of carbon dioxide by 2050, the equivalent of 3.8 million carbon net zero flights from LA to New York. World Energy and Honeywell collaborated over the past nine years, and this long-term engagement will continue to transform the industry, support the growth of zero carbon economy, and help accelerate the decarbonization of the aviation industry. These exciting announcements reinforce our message at Investor Day, that our innovative culture our commitment to providing efficient and sustainable solutions to meet the needs of our customers, and our new technologies will be integral to the next leg of growth. Now, let me turn it over to Greg on slide five to discuss our first quarter results in more detail and to provide an update on our 2022 outlook.
Greg Lewis
Senior Vice President and Chief Financial Officer
Thank you, Darius, and good morning, everyone. As Darius highlighted, we met or exceeded our financial commitments despite a very challenging backdrop. First quarter sales grew by 1% organically as supply chain constraints, predominantly in Aero, HPT, and SPS, continued to hold back volume growth and caused our past two backlogs to increase by approximately $500 million in the quarter. Our strong pricing was a highlight in the face of high inflation. Similar to the fourth quarter, 1Q also had difficult year-over-year comps with lower COVID-related mass demand impacting growth by two percentage points, and the timing of sales in warehouse automation dampening our growth rate. Turning to the segments, aerospace sales for the first quarter were up 5% organically compared to the first quarter of 2021, despite continued supply constraints. As the ongoing flight hour recovery led to more than 25% year-over-year sales growth in both air transport aftermarket and business in general aviation aftermarket. Commercial original equipment grew double digits in the first quarter as air transport original equipment returned to growth that was partially offset by lower business and general aviation original equipment volumes. Growth from commercial aerospace was partially offset by defense and space sales that were down 14% in the quarter. Aerospace segment margins contracted as expected in the first quarter to 27.4% due to higher sales of lower margin original equipment products, the impact of inflation, and the absence of a one-time gain in 2021, partially offset by our pricing actions. Turning to building technologies, where sales were up 8% organically, led by favorable pricing across the building product portfolio, partially offset by lower volume in building projects. Orders were up double digits in the first quarter as a result of strong demand for fire products and building management systems. Backlog growth continued in building solutions projects and services, giving us confidence for the remainder of 2022. In addition, our healthy buildings portfolio maintained its momentum with orders over $100 million in the first quarter. Segment margins expanded 100 basis points to 23.5% due to our pricing actions and our favorable sales mix partially offset by cost inflation. In performance materials and technology, sales grew 6% organically in the quarter, despite an approximately 1% headwind from Russia sales. Growth was led by advanced materials where the business experienced double-digit growth despite lower automotive refrigerant volume due to supply constraints affecting automotive OE production. Process solution sales growth was led by thermal solutions and lifecycle solutions and services. Sparta Systems grew approximately 20% and turned an operating profit in the quarter earlier than expected in our acquisition model. UOP sales were down in the quarter due to lower process technology equipment volumes although sustainable technology solutions continue to excel, growing over 75% organically year over year. Orders increased double digits year over year, headlined by over 20% growth in process solutions. Segment margins expanded 230 basis points in the quarter to 20.8%, driven by favorable pricing and sales mix, partially offset by cost inflation. In safety and productivity solutions, sales decreased 15% organically in the quarter, Remember that the first quarter of 2021 was near the height of our COVID-driven mass demand, creating a 9% year-over-year comparison headwind in the quarter. Productivity solutions and services, advanced sensing technologies, and our gas detection businesses all grew at double-digit rates in the quarter, despite the supply-constrained environment, highlighting the strength in much of the underlying SPS portfolio. As we expected, the timing of integrated sales is shaping up to be a mirror image of 2021, with sales down in the first quarter, and we expect growth in the back half of the year. Segment margins expanded 20 basis points to 14.5%, led by favorable pricing and sales mix, partially upset by lower volume leverage and cost inflation. Honeywell Connected Enterprise continues to underpin the growth we are seeing across the portfolio. In the first quarter, recurring revenue grew over 15%, with SaaS growth of over 50%, led by the Sparta business. We also saw double-digit growth in our connected buildings, cyber, and connected industrial solutions. So for overall Honeywell, our execution allowed us to deliver 10 basis points of segment margin improvement, 10 basis points above the high end of our guide, with margin expansion in PMT, HPT, and SPS, ending the quarter at 21.1%. And keep in mind, this expansion is net of a 30 basis point year-over-year headwind associated with our investment in Quantinua. On EPS, we delivered first quarter gap earnings per share of $1.64 and adjusted earnings per share of $1.91, which was down one cent year over year. A bridge for adjusted earnings per share from 1Q21 to 1Q22 can be found in the appendix of this presentation. Segment profit was a one-set headwind, driven primarily by lower volume and supply chain constraints, partially offset by strong price realizations. A lower effective tax rate, 22% this year versus 22.3 last year, drove a one-cent tailwind. Share count reduction drove a four-cent year-over-year tailwind to earnings per share. We saw a five-cent headwind from below-the-line items, primarily due to lower pension income and increased repositioning. In response to the Russian invasion of Ukraine, we suspended substantially all our sales, distribution, and service activities in Russia, and as a result, we recorded a charge of $183 million, or a 27 cent impact, to our GAAP EPS. Moving to cash, we generated $50 million of free cash flow in the quarter, which was closely aligned to our expectations. This decrease was driven by higher working capital, including lower payables and higher receivables from strong 4Q collections, in addition to higher inventory as we continued to work through the constrained supply chain environment. Higher cash taxes Due to the impact of tax legislation and R&D capitalization, we're also a free cash flow headwind in the quarter, consistent with our full-year guidance. Finally, as Darius mentioned earlier, we continue to leverage our strong balance sheet, deploying $2 billion towards high return opportunities for our shareholders. Notably, we repurchased 5.5 million shares for $1 billion in the first quarter as we executed on our updated commitment to buy back $4 billion in shares in 2022. We also paid approximately $670 million in dividends, spent approximately $180 million in capital expenditures, and invested approximately $180 million in M&A as we closed the acquisition of U.S. Digital Design. So overall, we executed better than expected, managing through a very difficult first quarter, and accelerated our capital deployment as promised. Now let's turn to slide six to talk about our second quarter and full-year guidance. Signs of the recovery continue to unfold in our key markets, underpinned by strong orders growth across many of our businesses, as Darius highlighted his opening. While uncertainties and persistent challenges remain in the macroeconomic backdrop, our rigorous operating principles have enabled us to demonstrate our agility and resiliency, positioning us well for the recovery ahead. Our end market setup continues to be strong, with ongoing improvement in global flight hours, return to public spaces, and elevated oil prices. Global energy production continues to transition to a low-carbon future, and Honeywell will lead that evolution with our strategically differentiated and sustainable technologies. We expect supply chain impacts to remain as challenging in the second quarter as they were in the first quarter, but to start to abate as capacity for electronic components comes online and through Q. We're confident in the eventual return to normalcy in the aerospace supply chain. However, the timing remains difficult to call. Inflation will continue to be a significant headwind. However, our strategic pricing actions will continue to dampen impacts to margin throughout the year. In response to the Russian invasion of Ukraine, we suspended substantially all our sales, distribution, and service activities in Russia, representing approximately 1% of total 2021 sales for Honeywell that we do not expect to return this year. In addition, we're actively monitoring and navigating the worsening COVID-19 lockdown situation in China that is creating sales and supply chain risks. With that as a backdrop, we expect second quarter sales to be in the range of $8.5 billion to $8.8 billion, down 2% to up 2% on an organic basis, or flat to up 4%, excluding the one-point impact of the mask sales decline and the one-point impact of lost Russian sales. This sales range assumes that COVID-19 lockdowns in China alleviate in May and that the Chinese operating environment remains relatively normal. Despite the ongoing macro uncertainties, we now expect full-year sales of $35.5 to $36.4 billion, which represents an increase of $100 million on the low end from our prior guidance, up 4% to 7% organically, with accelerating growth as the year progresses. That represents organic growth of 6% to 9%, excluding the one-point impact of the lower mass demand and one-point impact of lost Russian sales. We expect that our disciplined price actions will keep us ahead of the current inflationary environment, contributing approximately 5% to our sales growth, which is higher than we anticipated in our original guide and offsetting the majority of the approximately $400 million of lost Russia sales. Now let's take a moment to walk through the second quarter and full year expectations by segment. An update on our 2022 end market outlook can be found in the appendix of this presentation. Starting with aerospace, the overall industry supply chain complex continues to be a challenge that we do expect to see moderate improvement throughout the year. Sequential growth in flight hours will lead to another quarter of robust growth for our air transport and business and general aviation aftermarket businesses. This momentum will carry through to the end of 22 with growth led by the air transport aftermarket. With build rates improving as expected, business and general aviation original equipment will grow sequentially each quarter for the balance of 2022. As 22 progresses and our comps ease, defense and space will see sequential improvement from the first quarter and return to year over year growth in the second half. We still expect full year organic sales growth for aerospace to be up high single digits. Growth in the original equipment will lead to mix-related margin headwinds throughout the year, but we expect error margins to grow sequentially from the first half to the second half. In building technology, we expect momentum to continue with sales growth both sequentially and year-over-year throughout 2022 as supply chain constraints, particularly around semiconductors, begin to ease and we deliver on strong demand for fire and security products and building management systems. Our targeted pricing actions will also provide growth on top of that unlocked volume. We expect building solutions to return to growth in the second quarter and rebound well into the second half, finishing the year off strong. Underpinning the growth throughout the portfolio are healthy buildings offerings, which will benefit from increased demand for air quality and touchless technologies. Higher government spending on infrastructure will provide additional growth opportunities for us as well. Overall, we now expect four-year organic sales growth of high single digits to double digits, trending better than expected. We continue to work diligently to combat the current inflationary environment, and our cost controls and pricing actions will ensure that we maintain and build upon our margin expansion in both the second quarter and the back half of the year. In performance, materials, and technologies, the macro setup remains favorable for our portfolio, as we are uniquely positioned to both participate in the oil and gas reinvestment cycle as well as enable the energy transition. However, PMP has the largest exposure to Russia among our segments, and our decision to substantially suspend operations in the country represents a near-term sales growth headwind, particularly in UOP. Process Solutions project orders are expected to remain strong throughout the year, and volumes in the products businesses will increase as supply availability improves. In UOP, we see sequential improvement in the second quarter and throughout the year, as catalyst reloads increase in refining markets, and we are encouraged by the order pipeline for our sustainable technologies. UOP is also a significant contributor to the liquefied natural gas capacity globally, and recent government announcements suggest incremental LNG capacity may ramp beyond what has already been committed, representing a promising opportunity for the business. Advanced materials pricing will continue to be a tailwind throughout the year, and we are expanding capacity to position ourselves for further growth. In total, we still expect PMC sales to be up mid to high single digits for the year. PMC margins will benefit from our pricing and productivity actions, and we expect sequential and year-over-year margin expansion in 2Q and continued sequential improvement in the second half. Turning to safety and productivity solutions, we expect productivity solutions and services, advanced sensing technologies, and gas detection to build on their momentum from the first quarter and continue to grow throughout the year. These businesses saw year-over-year backlog growth of over 25% in 1Q and have demonstrated their ability to execute in difficult macro conditions, giving us confidence in the growth trajectory there, especially as the supply chain environment improves. Lower COVID-related mass demand will continue to be a year-over-year drag in 2Q, but as we enter the second half of the year, we'll lap the difficult pandemic comps and personal protective equipment sales will return to growth led by other product offerings in the portfolio. In Intelligrated, we're encouraged by the progress we have made in improving our operational efficiency and profitability, and we're increasing our focus on project selectivity, finding the right balance between top and bottom line growth, as we discussed. We still expect SDS sales to be flattish year over year for the full year, with sequential improvement each quarter. However, we anticipate margins to expand sequentially throughout the year as business mix, pricing, and volume compounds Now, let me turn to our expectations for the other core guided metrics. For second quarter segment margins, we expect to be in the range of 20.5% to 20.9%, resulting in 10 to 50 basis points of year-over-year margin expansion. Excluding the 30 basis point headwind from Continuum, we expect margins to expand 40 to 80 basis points. Second quarter net below-the-line impact, which is the difference between segment profit and income before tax, is expected to be in the range of $0 to $45 million, with a range of repositioning between $40 million and $80 million as we continue to fund ongoing restructuring projects. We expect the second quarter effective tax rate to be approximately 24%, and the average share count to be approximately 687 million shares. As a result, we expect adjusted second quarter earnings per share between $1.98 and $2.08, down 2%, to up 3% year over year. Turning to the full year, we continue to expect segment margins to expand 10 to 50 basis points, supported by higher sales volumes, price cost management, and our continued rigor on fixed costs. Excluding the 30 basis point headwind from Quantinium, we expect margins to expand 40 to 80 basis points in the year. SPS will lead the margin expansion for the company as we continue to prioritize profitability in 2022 in that business. followed by HVT and P&T with arrow about flat year over year. We continue to expect our full year net below the line impact to be in the range of negative 100 million to positive $50 million, including capacity for 300 million to $425 million of repositioning in the year. We expect a full year effective tax rate of approximately 22%, and we now expect a weighted average share count to be in the range of 684 to 687 million shares for the year, reflecting our updated commitment to repurchase $4 billion of Honeywell shares in 2022. We have raised our full year earnings per share expectations to $8.50 to $8.80, up 5% to 9% adjusted, an increase of 10 cents on both ends versus our prior guidance due to our accelerated share repurchase commitment. We still expect to see free cash flow in the range of $4.7 billion to $5.1 billion in 2022, or $4.9 to $5.3 billion, excluding the impact of continuing. So in total, we're raising our full-year earnings per share guidance and increasing the midpoint of our sales range, absorbing the impact of external macroeconomic factors. Now, let me turn it back to Darius to discuss our enhanced environment commitment coming out of our recent investor day.
Darius Adamczyk
Chairman and CEO
Thank you, Greg. Let's turn to slide seven and talk about the more aspirational approach we're taking to our ESG commitments. ESG has been part of Honeywell's DNA for decades. There will be an established track record of success in this area. Since we stood up our sustainability program in 2004, we've achieved every one of the ambitious targets we have set for ourselves, reduced our greenhouse gas emissions intensity by approximately 90% while spending over $4 billion on remediation projects to restore thousands of acres of land for our communities. While we're thrilled in the successes we have had in the past, we believe we still have much to accomplish in the future. We're currently on track to deliver on our 10-10-10 target set in 2019, further reducing our greenhouse gas emissions while deploying renewable energy projects and improving energy efficiencies at our sites. In addition, last year we committed to achieving carbon neutral facilities and operations by 2035, a full 15 years earlier than the Paris Climate Accords. While these targets are successful in reducing our scope one and scope two emissions, we didn't stop there. Earlier this year, we submitted a commitment to the Science-Based Targets Initiative to address our scope three emissions across our value chain, lowering the environmental footprint of our products, continue to innovate with products and services that help our customers reduce their own emissions. In addition to our ambitious sustainability targets, we've also enhanced our ESG disclosures with additional metrics on our investor relations website. These include an ESG data sheet that has metrics for diversity, water, greenhouse gas, and more, a defense and space fact sheet that includes more detailed information on our sales makeup, and a document that breaks down Honeywell's many ESG-oriented offerings, which compromised more than 60% of our revenue today. Now, let's turn to slide eight for some closing thoughts before we move into Q&A. As always, our value creation framework helped us successfully navigate the quarter and over deliver on our commitments. Most of our end markets will continue to recover, and we are optimistic about our future. Despite the ongoing geopolitical challenges, including approximately $400 million of lost Russian sales, we raised the midpoint of our full-year sales range and increased our earnings per share expectations. Our value creation framework is working. With the ongoing recovery of our end markets, we remain optimistic about the future of our business. While there is a heightened level of macro uncertainty at present, we remain confident our ability to execute and the pieces within our control. With that, Sean, let's move to Q&A.
Sean Mecham
Vice President of Investor Relations
Thank you, Darius. Darius, Greg, Anne, and Torsten are now available to answer your questions. We ask that you please be mindful of others in the queue by only asking one question. Shannon, please open the line for Q&A.
Shannon
Conference Host
Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question is from Julian Mitchell with Barclays. Your line is open.
Julian Mitchell
Analyst at Barclays
Hi, good morning. Good morning. Just wanted to understand maybe on the margins first. So you're guiding for sort of the second quarter sequentially for revenues to be up maybe 300 million, margins down those sequentially. So just trying to understand sort of what are the main – segment drivers of that? And then within aerospace, was the Q1 margin performance in line with what you expected? And what's the conviction on that margin turning around through the year?
Greg Lewis
Senior Vice President and Chief Financial Officer
Yeah, well, let me start by saying the margins don't need to turn around. They're actually quite good at, you know, 27.4%. So we're pretty happy with where they are. And yes, they were in line with what we had expected. We do see them coming down a bit in Q2, though, because as we've talked about, the OE equipment margins are, you know, not favorable to us, and so we are facing some mixed headwinds, which those will, you know, continue to challenge us as the year goes on. And we also talked a lot about in our investor day our investment increases in R&D in particular, which, again, are very important for some of our longer-term programs. We feel good about where we are, but that is going to be, we do expect a little bit of a sequential tick down, you know, there in aerospace in particular. Probably get a little bit of a tick up in SPS, but those are really the, you know, those are probably the two main movers overall. We will also have a, you know, our corporate expense generally starts out a little slower in the early part of the year and, you know, ramps up again. That's not big dollars, but it As you know, every $10 million is about 10 basis points for the company. So those are really the three things I have in mind.
Julian Mitchell
Analyst at Barclays
Thanks. And then just one very quick follow-up would be on China sourcing. You said I think you're assuming in May the issues recede in terms of supply chain issues in China from lockdowns. Did you give any kind of dollar number for Q2 of the expected impact?
Darius Adamczyk
Chairman and CEO
I think, you know, Julian, that's really impossible to quantify. I mean, what we're assuming in our guidance range for Q2 is that essentially things come back to kind of normal state in May. That's the best data we currently have. If you think about our 20 manufacturing facilities that we have in China, about half of them are operating more or less normally, and the other half are kind of impaired to some extent by either supply chain challenges or inbound and or the operation itself. But we do expect that to improve in May and get back to normal with normal production, certainly in June, with a steady improvement in May. And to quantify that right now would be impossible. But that underpins our guidance for Q2.
Greg Lewis
Senior Vice President and Chief Financial Officer
Yeah, if I just would add to that, I mean, how this all continues to happen in China, obviously no one can say for sure. If things like what goes on in Shanghai happen early in the quarter like they are right now, it's going to impact our April. We're already seeing that. But assuming everything comes back, as Darius mentioned, and things open back up after the first week of May, then we've got plenty of time to sort of make up that volume and recover the shipping. But how will that present itself throughout the quarter and the rest of the year? really is kind of unpredictable.
Darius Adamczyk
Chairman and CEO
And as Greg pointed out, timing does matter. I mean, we expected a slightly softer April due to the outages. And, you know, when these outages kind of happen in month one, we have time to recover. If we get outages in month three, it's going to be a much bigger problem. And, you know, frankly, we're not anticipating that. We're anticipating a recovery.
Julian Mitchell
Analyst at Barclays
Understood. Thank you. Thank you.
Shannon
Conference Host
Our next question comes from Steve Tusa with J.P. Morgan. Your line is open.
Steve Tusa
Analyst at J.P. Morgan
Hi, good morning. Good morning. Two negatives and two positives. The first, can you just clarify maybe with a little more precision where you expect the arrow margin to come in in the second quarter just to kind of like you know, kind of clear the decks on that. And then also on SPS, the warehouse business, how does that trend kind of sequentially as we go through the year? And then on the positive side, anything that you're seeing or embedding on a pickup in defense or oil and gas in the second half of the year, or maybe is that stuff still out kind of in front of us? Thanks.
Darius Adamczyk
Chairman and CEO
Yeah, I mean, let me maybe start on the second of your two questions. So, In terms of defense and space, our orders in Q1 were actually quite good. They were double-digit orders growth in defense and space. But I wouldn't tell you that we're seeing a big uptick yet due to some of the geopolitical situation. But we do think it could happen, but we're not going to call it that it's going to happen until we see it. So the orders growth in Q1, although good, is not really tied to any of the geopolitical situations. You know, particularly in HPS, we saw good orders growth in Q1. We actually anticipate some strong orders in UOP, particularly tied to some of our gas portfolios. So that looks good. So that's sort of your second question, Greg.
Greg Lewis
Senior Vice President and Chief Financial Officer
Yeah, I don't know, Steve. We don't guide individual segments any longer. As you know, we've not done that for a while. So, you know, we do expect to see margins, you know, tick down in aerospace, less than 100 basis points, but you know, more than zero. And there's a range around, you know, those things as well, which is why we don't guide it any longer. And as it relates to, you know, IGS, you know, that is a low single-digit margin business. We expect that to, you know, go up each and every quarter by, you know, think about it as, you know, maybe 100-ish basis points per quarter as we work our way through the 2021 jobs that we took the charge on for last year, which the completion of those you know, we'll be at zero margin. And, you know, we continue to get the benefit of the new projects and our execution improvements throughout the course of the year, which is why, again, we see both between that as well as the volume leverage that we ought to get from our products businesses and the rest of the portfolio. That's why we see, you know, a pretty consistent margin expansion sequentially quarter after quarter after quarter in SPS, which is why our best It's going to be our goal of the year.
Darius Adamczyk
Chairman and CEO
Just to add to that, I mean, you know, if you take a look at our backlog, which you've just provided, commercial activity is not our issue. I think commercial activity is about as strong as we've ever seen it. You see the improving backlog positions, orders positions, and I think this is all about supply chain. And, you know, there's still unknowns around supply chain. I think on the semiconductor side, we probably have seen the bottom. but I will tell you the aerospace supply chain is still challenged, and our decommit rate from our suppliers is high. And, you know, that's why it's so hard to call this thing, because when you get a pretty high decommit rate, it's difficult to call exactly what that's going to look like in Q2, Q3, and Q4. So we remain optimistic that it's going to continue to improve, but we've got to kind of see it in the numbers. Okay, great. Thanks a lot, guys. Thank you.
Shannon
Conference Host
Our next question comes from Jeff Sprague with Vertical Research. Your line is open.
Jeff Sprague
Analyst at Vertical Research
Thank you. Good morning, everyone. Good morning, Jeff. Morning. Hey, I was wondering if you could share a little more color on the SAF project with APD Air Products, right? I mean, kind of maybe the first really big benchmark deal that I've seen, a billion-dollar project. Is there any way you can give us – an idea of just, you know, the Honeywell scope in terms of kind of the front-end capital opportunity and then kind of what the ongoing recurring revenue on catalysts and other things might be on a project of that size and scope?
Darius Adamczyk
Chairman and CEO
Yeah, I mean, I think it's a couple of things. So I would characterize it the following. And, you know, we don't release specific numbers to that project, but think about it as two dimensions. The first one is licensing and the technology itself, which can be recognized in one or two different ways, either an upfront paid-up license or a license that's recognized as a royalty rate as SAF is produced. And then the second stream being the use of the catalyst itself to actually drive that SAF conversion. So this is not the only project that we're going to be involved with when we look at SAF and Green Fuels, we've won something like a double-digit number of projects in the last, call it six to nine months. We've been on an incredible run. It's just one example of what we do. You know, at some point, we're going to give you a bit of a framework. We're not ready to share that yet in terms of exactly what it looks like, but it's going to be definitely margin accretive. And you should think about it very much, like you said, as a recurring revenue base based on the catalyst reloads, which are going to be required to drive either SAF or green fuels and green gasoline.
Jeff Sprague
Analyst at Vertical Research
Right. And maybe just a housekeeping question for Greg. What was going on with minority interest in the quarter? Did something change with an ownership position? And what would you point us to going forward there?
Greg Lewis
Senior Vice President and Chief Financial Officer
You know, minority interest, you're probably seeing the full quarter impact of Quantinium. Because if you remember, we closed that in December 2017. And so now we're getting a full quarter of that minority interest. We get the consolidation of that, which you see in the P&L, which is all the OPEX. But then we get the offset for our partner's 46% share going the other way.
Jeff Sprague
Analyst at Vertical Research
So any direction on the go forward or the full year on that item?
Greg Lewis
Senior Vice President and Chief Financial Officer
We can look at it separately in our call later I'm not sure I have that right off the top of my head.
Jeff Sprague
Analyst at Vertical Research
Great. All right. Thanks a lot. I'll pass it. Thanks, sir.
Shannon
Conference Host
Our next question comes from Scott Davis with Melius Research. Your line is open.
Ann Madden
Senior Vice President and General Counsel
Hi. Good morning, guys. Good morning, Scott. And Ann. All right. Yes. So in your full-year guide of 4% to 7% on volumes, how much of that is price-based? And are you still raising price? Do you still need to raise price to offset this inflation that doesn't seem to be going away?
Darius Adamczyk
Chairman and CEO
Yeah, no, we are ongoing working our price. I mean, we basically are bumping up sort of the benefit of price by one percentage point. I think the one thing that, Scott, that I think you picked up, I mean, essentially in this guide, it is a substantial raise to our guide range. I mean, we didn't explicitly say that, but it's obvious because we're basically absorbing a $400 million hit due to Russia with a measured margin rate of over $100 million. So this is a fairly significant raise to our outlook. The way we can overcome that hit is through price, and we think now we're basically projecting an incremental point of price to a range of 5%.
Greg Lewis
Senior Vice President and Chief Financial Officer
Yeah, we had talked about 4 in the original guide. We now see it as 5, as you saw from the release, I mean, we were up 7% in the first quarter.
Darius Adamczyk
Chairman and CEO
Yeah. And because, you know, we started doing these price increases a bit more aggressively in Q4 and Q1. Now, obviously, as we get later in the year, that starts to lap itself. Although I will tell you, you know, that we're going to stay on top of this thing. And we're continuing to chase inflation and trying to stay ahead. And, you know, obviously, we have to do more price increases here in Q2 to continue to stay ahead of it.
Greg Lewis
Senior Vice President and Chief Financial Officer
So again, just simplistically, we lost a point from Russia. We picked up a point on price. We kept the overall organic number to 10. Okay.
Ann Madden
Senior Vice President and General Counsel
That's my one question. I'll pass it on. Thank you, guys. Thank you. Thanks, Scott.
Shannon
Conference Host
Our next question comes from Nicole DeBlaze with Deutsche Bank. Your line is open.
Nicole DeBlaze
Analyst at Deutsche Bank
Yeah, thanks. Good morning, guys. Hey, Nicole.
Shannon
Conference Host
Good morning.
Nicole DeBlaze
Analyst at Deutsche Bank
Just maybe digging into HPS and PMT a little bit more, what you're seeing from an order perspective, and if the higher oil price is reflecting its way through, you know, more interesting or advanced customer conversations.
Darius Adamczyk
Chairman and CEO
Yeah, no, I mean, I think as you saw in the quarter, we had very good order rates. I mean, double-digit north of 20% order rates in HPS. You know, UOP was a little lumpy. You know, frankly, our LST business was strong. Our UPT was a little bit less so. We expect a strong booking quarter in QT and UOP. You know, overall, particularly for UOP, we see strong orders growth, particularly as it relates to our natural gas-oriented portfolio. So think about, you know, absorbance, gas processing, midstream, LNG terminals, and all that business. You know, it's... We're a big partner with Venture Global for some of the projects that they're completing and their expansion. So overall, we're very bullish in terms of what's going on, particularly as it relates to the gas infrastructure that's currently being built up, both in North America, the Middle East, and Europe.
Shannon
Conference Host
Thanks, Darius.
Torsten Pils
Senior Vice President and Chief Supply Chain Officer
Thank you.
Shannon
Conference Host
Our next question is from Andrew Obin with Bank of America. Your line is open.
Andrew Obin
Analyst at Bank of America
Yes, good morning. So I'll ask sort of a long question. So short part, can you just talk about UOP, a revenue decline, sort of despite an easy comp and growing refinery output? What's the short-term explanation? I think I missed it. And a longer-term question, how do you think about longer-term impact of Russian oil having to find new markets I'm just sort of thinking about the fact that globally you'll need to recalibrate a lot of these refineries, right, so to take Russian oil and then to take oil that will replace Russian oil in places like Europe. So first one, near-term UOP, and second one, how do we think about longer-term opportunity on refinery upgrades? Thank you.
Greg Lewis
Senior Vice President and Chief Financial Officer
Sure, Andrew. I'll take the first one. And from a short-term perspective, two simple things to think about. I mean, first off, the way we had our plan set up was we were going to be completing some projects in UPT that had already been in flight. So we're going to have, you know, as that winds down, we're going to have a year-over-year comp in the equipment business in the early part of the year. That'll be negative. And we see the catalyst business growing throughout the remainder of the year, which is going to, you know, support the growth rate more beyond that. And the other aspect of that is, back to Russia as an example, the biggest place we're going to see the impact of Russia is going to be in UOP. And so, you know, UOP being down, I think, was 9% in the quarter. Roughly seven of that is from the loss of the Russia volume in one year.
Darius Adamczyk
Chairman and CEO
Oh, wow. Yeah. UOP gets disproportionately, you know, I talked about the 1% hit for our revenues for the year. That's disproportionately UOP-related, and you saw that already in Q1. So that's just to help that frame it up. As it relates to your second question, I mean, you know, essentially, in terms of, you know, Russia oil, I mean, it's simplistically said, instead of flowing west, we think it's going to start flowing south. And, you know, I think, you know, the good news about us is that we have a global presence across the west and the south. And I think that benefits, obviously, a lot of our PMT businesses. And as I mentioned earlier, kind of the gas infrastructure, build out in Western Europe, which will take place both in Western Europe, but also in the Middle East and in the U.S., will also have a positive benefit to our business. So all in all, I mean, I think we're well positioned there.
Andrew Obin
Analyst at Bank of America
How long do you think it would take to quantify for the industry?
Darius Adamczyk
Chairman and CEO
I mean, that's hard to answer right now. I think, you know, we're still kind of weeks into this. conflict, so we'll see. I mean, we're obviously involved in a lot of the discussions of the new projects and so on, and I'm very, very confident that any of the build-up that's going to take place, particularly with our modular design concepts, which really revolutionized LNG, I'm quite confident that we're going to be a player in that space.
Andrew Obin
Analyst at Bank of America
I figure as much. Thanks a lot. Thank you.
Shannon
Conference Host
Our next question comes from Sheila Kayalu with Jefferies. Your line is open.
Sheila Kayalu
Analyst at Jefferies
Hi. Good morning, Darius Gex. Thank you. Can we talk about price a little bit more because it was really good in the quarter up seven. You know, how are you seeing price and inflation across the business given some are shorter cycle and some are longer cycle like aerospace? Can you maybe quantify what you saw across the business segment, the inflation burden or the price mixed benefits?
Darius Adamczyk
Chairman and CEO
Yeah, I mean, let me start. I mean, if you think about price, price cost, the price inflation, think about a seven and five number in that kind of neighborhood. I mean, you know, we, you know, this is really the benefit of Honeywell Digital. You know, we talked a lot about that at Investor Day, but I now can tell you exactly on the impact of price costs for every of our 37 business units and exactly what it's going to look like going forward for the next three quarters. And I can tell you that in It's really enabled us to establish an operating system where we know what we need to do in terms of price. We know what we do in terms of coverage and where that business unit will be. And, you know, it's a weekly rhythm that we're on with all the business teams. As a matter of fact, we've got a meeting later on today to talk about that topic, and we continue to stay on top of it. But it's not as simple in some businesses than others. I mean, some businesses, we have contractual obligations, contractual limitations in terms of what we can do. pass on and when. And, you know, we're finding ways to be, to do that. I mean, everybody knows that inflation is with us. It's probably going to continue to be with us. We're going to stay diligent and we're very pleased with our results and able to stay ahead of the price cost equation. If you have anything to add.
Greg Lewis
Senior Vice President and Chief Financial Officer
Yeah, the only, to your point, just maybe expanding on your contractual obligations and also protections. We have some protections as well. So as you could probably guess, the The price equation is, you know, greater in SPS, HBC, PNC, and we're a little bit more constrained but also a little bit more protected in aerospace where we have more of the longer-term contracts.
Sheila Kayalu
Analyst at Jefferies
Great. Thank you.
Shannon
Conference Host
Our next question is from Josh Pokorwinski with Morgan Stanley. Your line is open.
Darius Adamczyk
Chairman and CEO
Hi. Good morning, guys. Hey, Josh. Hey, good morning.
Josh Pokorwinski
Analyst at Morgan Stanley
Good morning. Just a question on the supply chain side. I mean, I think we're still kind of, you know, hit or miss in terms of companies out there seeing improvement into 2Q and over the balance of the year. It seems like, particularly in HPT, maybe some in SPS, a bit more kind of sequential improvement through the year than maybe others have seen. Is this finding more suppliers? Is it kind of an overall commentary that you guys have seen out of all the base? Yeah. kind of surprised that the China lockdowns have an impact. Could you speak to sort of how you're getting to that agreement?
Darius Adamczyk
Chairman and CEO
Yeah, I mean, there's a lot of variables here. Let me try to impact it a little bit. I mean, HPT and FTS over the supply chain is complex due to the variety installed base of our product. You know, it is somewhat contained primarily to the semiconductors. And we think about semiconductors, you're talking about the five to 10 core suppliers that we're monitoring. So it's it's actually a little bit easier for us to get our arms around the situation and know when things will come in, when they won't come in. And we're cautiously optimistic about an improving supply source coming through for Q2, Q3, and Q4. And frankly, looking into Q2 from the beginning, these are the Q1 or Q4, we actually looked a little bit better than we did in the other quarter. So we have reason to be cautiously optimistic provided we don't get decommits on semiconductors. Now, when you get into the aero segments, it actually becomes a bit more challenged. And to give you some very specific numbers, our level of decommits, which is sort of last-minute cancellations or push-ups, was at a level of 22%. I mean, that's what makes it so difficult. It was actually worse than Q4, where it was about 19%. We're counting on some improvement in Q2, and q3 and q4 but now you're not talking about you know less than 10 suppliers you're talking about tens if not hundreds of suppliers and trying to really figure out exactly how well they're going to deliver and when is it becomes more challenging obviously we've deployed our own people on resources to that supply base to help them through some dirt capacity challenges we've got a program around it but it is challenged and i can't tell you that you know we have
Torsten Pils
Senior Vice President and Chief Supply Chain Officer
bold and perfect view as to exactly what's going to happen. We're working through it.
Darius Adamczyk
Chairman and CEO
And as you can see, we certainly have the backlog to support more than to support the business. And, you know, we're not just watching. We're actually doing it.
Torsten Pils
Senior Vice President and Chief Supply Chain Officer
We've got a substantial force of people to just work the AeroSupply chain.
Julian Mitchell
Analyst at Barclays
Good detail. Appreciate it.
Torsten Pils
Senior Vice President and Chief Supply Chain Officer
Thank you.
Shannon
Conference Host
Our next question comes from Nigel Coe with Wolf Research. Your line is open.
Scott Davis
Analyst at Melius Research
Thanks. Good morning, everyone. Thanks for the question. Before I get into my question, we've got a few inbounds just to clarify the comments on China. Did you say early May, particular May, in terms of the Shanghai lockdowns, you know, moderating?
Darius Adamczyk
Chairman and CEO
Yeah, I mean, you know, that target keeps moving, but we think, you know, certainly in the first half of May, we expect some ease in terms of that Shanghai lockdown.
Torsten Pils
Senior Vice President and Chief Supply Chain Officer
That's what we're built into our guide for Q3.
Scott Davis
Analyst at Melius Research
Okay, great. Thanks, Darius. And then just a follow-on with the supply chain constraints, particularly in aero. You know, the commercial aftermarket up 20%, you know, not too shabby, but, you know, is that growth and that ramp-up, that recovery being constrained by supply chain, i.e. it's not just OE and defense, it's also aftermarket? And then within the aftermarket recovery, are we seeing yet the wide-body recovery sort of ramp coming through yet, or is that still on the come?
Greg Lewis
Senior Vice President and Chief Financial Officer
Yeah, so it absolutely is going to be a constraint on the aftermarket, you know, part of the business. I mean, certainly our MSP, you know, power by the hour is going to be a rev rec just based on, you know, flight hours, but the bit of that that's tied to spares and repairs is going to have a physical constraint, you know, for sure. And that's also, by the way, exactly what creates a little bit of our margin pressure as well because we've got firm commitments to our OEs. And so that creates a bit of a squeeze between where the products will go in the chain and what the profitability around that is. So that is for sure an issue. Are we seeing some return to wide body travel? We are. I wouldn't call it dramatic at this point in Q1, but we are seeing a little bit of a sequential move there. But we've said all along that is really going to be tied very much to, you know, travel across the globe as opposed to domestically. And so, you know, when particularly with China, you know, locking down and that curtails, of course, you know, anything in and out of China even longer.
Darius Adamczyk
Chairman and CEO
Yeah. And to be, you know, just a couple of other things. I mean, yeah, I mean, as Greg pointed out, wide body travel has been still constrained and limited and that's, you know, still upside to go for us, you know, given particularly our installed based on those aircraft. But, you know, the fact is, if you look at our backlog position, we're in tremendous shape in aerospace. And, you know, probably the biggest issues we see in defense is defense in space, where we have a growing past due backlog at a faster rate than even some of the other segments. So really, we don't, we're not that worried about the commercial inbound and You know, we saw just an incredible order rate, strong double-digit order rate in Q1. You know, all our focus is really on output and the supply chain. We get that going. Things get very, very good very, very quickly.
Greg Lewis
Senior Vice President and Chief Financial Officer
And just, again, to put some numbers behind it, we talked about our past two backlogs going up a half a billion dollars in the quarter. About 200 of that was in aero. About half of that was in defense and space, but the other half was in commercial, so... there is clearly an impact in both areas. But as Darius said, as that unlocks, then the volume and the leverage that will come along with that are really attractive.
Scott Davis
Analyst at Melius Research
That's great, Keller. Thank you. Thank you.
Shannon
Conference Host
Our next question comes from Dean Dre with RBC Capital Markets. Your line is open.
Dean Dre
Analyst at RBC Capital Markets
Thank you. Good morning, everyone. Good morning. I'd like to stay in Arrow. If I look at the segment outlook, the defense in space being flat surprises me a bit. And at the analyst meeting, Darius, you said you would not be surprised to see that be at high single digits this year, given the uptick in international defense budgets. Is it the fact that the U.S. defense budget is flat offsets that? But why is that arrow not pointing higher?
Darius Adamczyk
Chairman and CEO
Well, because we're really not seeing a lot of new orders yet to some of the geopolitical conference to replenish the inventories. I mean, I think, and by the way, checking with some of the other OEs, that's not necessarily unusual. So that could be an uptick. You know, when we talked about Investor Day, there was some built-in optimism around that coming in. And I still think it will happen. I'm just not going to call it yet. until we actually see the orders coming through. Having said that, we did see double-digit orders growth in defense and space in Q1 just naturally without the addition of plus-ups in the defense budgets. So I think, you know, it could still be at that level. I'm just not going to call that until we actually see it more pronounced in our orders rate. And I'm still optimistic that it will happen. Great. Thank you. Thank you, Dean.
Sean Mecham
Vice President of Investor Relations
Shannon, we have time for one more question.
Shannon
Conference Host
Our last question is from Andy Kaplowitz with Citigroup. Your line is open.
Andy Kaplowitz
Analyst at Citigroup
Good morning, everyone. Thanks for fitting me in.
Shannon
Conference Host
Hey, Andy. Good morning.
Andy Kaplowitz
Analyst at Citigroup
There's 9% of the highest backlog growth honey was recorded this cycle, and despite macro uncertainty, do you think the higher backlog is just a reflection of the handoff in your businesses from short of long cycle demand? Or is this maybe a function of the fact that if we go back to what you said during the heart of the pandemic, that Honeywell's portfolio wasn't really set up well in the pandemic. Maybe the opposite is happening now. Would you expect your orders and backlog trajectory to stay at these elevated levels for a while?
Darius Adamczyk
Chairman and CEO
You just nailed it, Andy. Yeah, that's exactly, you've got it exactly right, which is, you know, as we look at, because we look at short cycle, longer cycle, and you see now a little bit of a transition from, it's slow because short cycle is still very good for us, But now we're starting to slowly see the long cycle coming through. You see it in our backlog. You see it in our order rates. And now it's the time of the cycle where the long cycle businesses will start to have a bit more traction. And a lot of people are saying there may or may not be a recession in the next six to 12 to 18 months. But I certainly hope it doesn't happen. But if it does, I actually think that Honeywell can weather the storm quite well. given the kind of backlog position in the markets we're in, which is energy and aerospace, which frankly have been hurt disproportionately hard during the pandemic, and now are starting to come back strong. So I'm very, very optimistic about kind of the position, the backlog we're in. And I think you said it exactly right. We're seeing kind of a transition occurring slowly but surely. And it's not because our The short cycle is weak, but the long cycle is now starting to slowly pick up.
Andy Kaplowitz
Analyst at Citigroup
Appreciate it, Darius.
Darius Adamczyk
Chairman and CEO
Thank you, Andy.
Shannon
Conference Host
Thank you. I would now like to turn the conference back over to Darius Sadamchik for closing remarks.
Darius Adamczyk
Chairman and CEO
I want to thank our shareholders for your ongoing support. We delivered strong first quarter results in a typical Honeywell fashion and will continue to navigate the numerous uncertainties operational rigor and agility in order to drive superior shareholder returns. Thank you all for listening, and please stay safe and healthy.
Shannon
Conference Host
This concludes today's conference call. Thank you for participating. You may now disconnect.
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