Honeywell International Inc (HON) — Q1 2017 Earnings Call Transcript

Thank you, Dennis. Good morning and welcome to Honeywell's first quarter 2017 earnings conference call. With me here today are President and CEO, Darius Adamczyk, and Senior Vice President and CFO Tom Szlosek. This call and webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com/investor. Note that elements in this presentation contain forward-looking statements that are based on our best view of the world and of our businesses as we see them today. Those elements can change and we ask that you interpret them in that light. We identify the principal risks and uncertainties that 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, highlight some exciting accomplishments across the portfolio and share our guidance for the second quarter of '17. And as always, we will leave ample time for your questions at the end. So with that, I'll turn the call over to President and CEO, Darius Adamczyk.

Thank you, Mark. And good morning everyone. Today, we reported our very strong start to 2017. We met or in most cases exceeded our guidance ranges and I'm pleased with our results in the first quarter. We recorded earnings per share of $1.66 normalized at our expected full year tax rate. This is $0.02 above the high end of the guidance we’ve provided in January. Excluding divestitures and normalizing for tax, EPS was up 11% versus 2016 or 10% on a reported basis. Organic sales were up more than 2% and we recorded double-digit revenue growth in advanced materials with performance material technologies on demand for our Solstice product line, and we saw continued strength in UOP as the oil and gas end markets improve. In home and building technologies, our global distribution business continued to outpace the market, while the products business generated strong results at 3% organic growth. In Aerospace, we had strong performance in the aftermarket, particularly in air transport, and robust repair and overhaul activity. In Safety and Productivity Solutions, we saw growth in most of the businesses, particularly noteworthy performance exhibited in Workflow Solutions, spending in IoT as well as Industrial Safety. We expanded segment margins by 70 basis points, we're delivering high-value offerings to our customers and our execution is improving as the ongoing benefits of our HOS Gold operating systems materialize. We continue to optimize our cost structure that I highlighted at our March Investor Day, driven by productivity initiatives and the restructuring actions we took through 2016. Driving segment margin improvement continues to be an ongoing focus for Honeywell. We delivered significant improvement in free cash flow year-over-year, largely driven by improved working capital performance. Free cash flow performance will continue to be a key priority for Honeywell. We are focused on working capital at all levels across the company and we expect to drive improved free cash flow conversion in every business. Given the strong performance, we are raising the low end of our full year EPS guidance by $0.05 to $6.90 to $7.10 and reaffirming our 2017 organic sales, segment margin, and free cash flow guidance. We are encouraged by the first quarter growth and execution but are taking a tempered approach to our forward outlook given the potential volatility in our end markets and limited view of the year at this time. Each of our businesses had significant commercial achievements in the first quarter. On Slide 3, I’d like to highlight some of them. In Aerospace, together with Airbus, we announced that our auxiliary power unit is now standard equipment on the A320 family of aircraft, replacing a competitor's APU as the base option. Airbus selected Honeywell because of our APU's superior reliability and fuel savings capability. In addition, both Japan Airlines and India's Jet Airways announced that they are using our GoDirect fuel efficiency software. Fuel consumption typically accounts for as much as 20% to 40% of our airlines' operating costs, and GoDirect can help customers to save more than 2% annually. In Home and Building Technologies, we launched MAXPRO Cloud for connected buildings. MAXPRO provides streamlined video and access management to our customers that manage multiple buildings. Honeywell Building Solutions also announced contracts to improve energy efficiency at 21 U.S. Federal Aviation Administration facilities and at the U.S. Air Force base in Los Angeles, as well as airport wins in emerging regions including Turkey and Singapore. In Performance Materials and Technologies, UOP Technologies and Honeywell process solutions controls were selected in China for one of the largest crude-to-chemicals complexes in the world. UOP will also provide the process technology for the largest Oleflex units in Europe. UOP hydrotreating catalyst will be used by Wantong Petrochemical to produce cleaner burning ultra-low sulfur diesel fuel without a costly re-modification of its existing hydrotreating unit. As you will hear shortly, the orders thus far for PMT have been very strong. Our customers recognize the value of Honeywell's technologies and this is allowing us to win in the marketplace especially in China. In Safety and Productivity Solutions, we introduced our AutoCube, a 3D dimensioning system that helps customers instantly capture the volume of parcels to enable space optimization in volume-based pricing. Safety and Productivity Solutions also won four prestigious international forum IF Design Awards recognizing our product design focus in the Honeywell user experience. As you know, driving organic sales growth is one of my key priorities. I'm pleased with the results we saw in the first quarter. Investing in development of new products, breakthrough initiatives, and commercial excellence will help us to accelerate our momentum. With that, I'll turn it over to Tom to discuss our financial results in more detail.

Thanks, Darius. I'm on Slide 4. As Darius mentioned, we delivered more than 2% organic sales growth this quarter. Now, truth be told, we were actually within inches of 3%, but it did come out at 2%. All of our segments were at or above the high end of the sales guidance we provided back in January, so a strong start from a growth perspective. Segment profit was up 8%, excluding divestitures, and segment margins expanded by 70 basis points from 2016. This accounted for the bulk of the EPS expansion, as you'll see in a minute. The segment profit growth was driven by sales improvement, our ongoing productivity initiatives, and benefits from the significant restructuring programs that were funded in 2016, as well as overall front-end commercial excellence. Reported earnings per share of $1.71 were up 10%, which includes a $0.05 benefit from a lower than anticipated tax rate. For proper comparability and to remove all tax favorability from our results, we’ve normalized 2016 to reflect the expected 2017 full year tax rate and to eliminate the $0.05 from 2016, relating to the divested businesses. On that basis, EPS was up 11% or $1.66, and that's as Darius said, $0.02 above the high end of the guidance range. Free cash flow performance was also encouraging in the quarter, as Darius mentioned, the entire organization at all levels is focused on our working capital performance. We’re breaking down our order to cash processes into a myriad of sub-segments and we’re systematically measuring and improving the cycle time of each of those sub-segments. We’re adjusting incentives to foster more improvement in working capital and we have a standard operating cadence that culminates in a monthly review with Darius and me by each business. There is still much to do in this area, and while it is still early in the year, we’re encouraged by our progress so far. Overall, a very strong start to 2017, but still a lot of opportunity for further improvement over the next three quarters. Let’s move to Slide 5 and discuss each of the segments. In Aerospace, we finished the quarter above the high end of our first quarter sales guidance range, driven primarily by a strong performance in the air transport aftermarket. We saw an uplift in spares demand and strength in repair and overhaul activities with our airline customers particularly in the sales, repairs, modifications, and upgrades, resulting in a high single-digit growth rate in the APR aftermarket. The aftermarket in business and general aviation was roughly flat, with stronger than anticipated RNO and connectivity revenue largely offset by a decline in spares. Our OE performance was as expected with volumes to our air transport customers up slightly on the strength of A350 shipments, offset by declines in business and general aviation. Defense sales were roughly flat, with the strong organic sales growth in our core U.S. and International Defense businesses offset by space and commercial helicopter weakness. There was continued strength in light vehicle gas turbo penetration particularly driven by new launches in Europe and China. There were also some encouraging signs in the on-highway commercial vehicle market globally and most notably in China and in Europe. Aerospace segment margin expansion in the quarter of 90 basis points also exceeded the high-end of our guidance, driven by productivity, commercial excellence, and the favorable impact of the divestiture of the government services business in 2016. Overall, a very strong start to 2017 for Aerospace. Home and Building Technologies generated organic sales growth of 3%, driven by a strong performance in environmental and energy solutions, security, fire, and our global distribution businesses. Growth in China business and HBT was nearly 15% this quarter, led by the clean air and water product portfolios and ENS. We continue to see momentum in the residential real-estate market in China, anticipating continued infrastructure investment that will help to drive future growth. Across HBT there was gradual sales improvement over the quarter with decent exit momentum. Segment margin, while below our expectations, was still quite strong at 70 basis points improvement, extending from our ongoing productivity initiatives and the restructuring actions taken in the second half of 2016. The mix dynamics of sales in the quarter were a bit less favorable than we anticipated. Performance materials and technologies had a very strong quarter. Sales were up 5% on an organic basis; margins expanded by 260 basis points and orders were up double-digits. The performance was led by advanced materials where softer sales growth exceeded 150% on an organic basis, enabled by the capital investments we've made over the past several years. Sales in UOP were up 3% organic, led by gas processing. There continues to be increasing interest in domestic modular units in particular. In the first quarter alone, we signed six new deals in the U.S. for pre-engineered cryogenic plants that separate natural gas liquids. This compares favorably to the 12 units we had for all of 2016, including two in the first quarter. Growth in the catalyst business was at low-single digits, driven by new Oleflex Units. The orders in UOP were up over 15% in the first quarter, signaling continued performance in this business. Sales and process solutions were roughly flat on an organic basis. We had healthy customer adoption of our insurance 360 service offering and good growth in our lifecycle solutions and services business, which was offset by slower sales in our large projects business. Orders in HPS were up nearly 10% on an organic basis. The margin expansion in PMT was driven by productivity, commercial excellence initiatives, and the impact of the spin-off of the former resins and chemicals business in 2016. So all in all, great results for PMT and encouraging forward indicators across all of its business units. Finally, in SPS, organic sales were up 3%, exceeding the high end of our guidance range. Industrial safety, the largest business within SPS, grew 4% on an organic basis, driven by our high risk and gas detection offerings. There was also significant growth in our workflow solutions business due to strong demand and improved supply chain execution. Growth in our IoT business was also strong with good performance in a number of regions, and Intelligrated grew in excess of 20% this quarter compared to the first quarter of 2016 when it was not owned by Honeywell. This was driven by large products in a number of key accounts. Excluding the first year's dilutive impact from M&A, SPS segment margins expanded by more than 300 basis points, driven by continued productivity, restructuring benefits, and the conversion on the strong sales volume. We’re encouraged by the trends that we saw in the first quarter in SPS and in the rest of the portfolio. Slide 6 contains a walk of our EPS from the first quarter of 2016 to the first quarter of 2017. In the first quarter of last year, earnings from our 2016 divestitures were $0.05, and we exclude those amounts from the 2016 baseline, consistent with the 2017 earnings guidance framework we provided. For comparison purposes, as I said earlier we’ve also normalized the tax rate for the first quarter of 2016 for the expected 2017 full year tax rate, and this effect was minor as you can see. In the first quarter of 2017, the segment improvement I highlighted for each business accounted for $0.12 of the year-over-year improvement in earnings per share. Below the line items, and a slightly lower share count contributed $0.04 this quarter, bringing our 2017 EPS excluding benefits from the lower tax rate to $1.66, which is that $0.02 beat to the $1.64 high end of our first quarter guidance. EPS increased by 11% year-over-year on this basis, and for the full year, we expect our share count to be consistent with the 772 million shares we projected in January. Regarding tax, our planned tax rate for the quarter was about 25%, but the actual rate was 22.7%, with the difference contributing an additional $0.05 of EPS growth resulting in a reported EPS of $1.71. Our expectations are that the effective tax rate in quarters two, three and four will be at or above 25%, and to the extent that changes, we will provide an update. Let's turn to Slide 7 to discuss what we’re seeing in our end markets heading into the second quarter. Last quarter, we told you about some encouraging trends in our oil and gas businesses and those have continued this quarter. The combined UOP and HPS book to bill ratio was strong at 1.15, and UOP orders, as I've said earlier, were up over 15% driven by our gas processing business. The domestic rustle businesses have outpaced our expectations as the demand for non-gas liquid separation technologies strengthened in the U.S. There are also more orders for licensing, which is typically one of the first indicators that the oil and gas cycle is restarting. The activity in UOP China has been particularly strong, and we’ve got a number of key projects which will allow us to leverage the capacity investments we’ve made over the past two years. Within Home and Building Technologies in the second quarter, we anticipate several large smart meter project rollouts in Europe and better backlog conversions in the Americas. The smart meter business came to Honeywell as part of the Elster acquisition and it continues to perform well. Overall, the short cycle demand in the commercial and residential segments continues to be robust. The aviation market continues to be resilient with high-end single-digit growth driven by spares demand and repairs, modification, and upgrades in the air transport and regional business. This is supported by the outlook for continued flight hour growth of 4% to 5% in air transport and regional. In the business and general aviation market, we had strong demand in the repair and overhaul business but weaker performance in spares, driven by a continued decline in maintenance events. We expect continued aftermarket strength heading into the second quarter, with the airlines business growing faster than BGA. Flight hours in BGA are likely to remain flat to down in 2017. Our connectivity business grew double digits in the first quarter and will continue to be a source of strength for aftermarket revenues. We are encouraged by the increased activity in our businesses that serve the industrial sector. Our industrial safety business was up mid-single digits driven by demand for gas detection and high-risk safety equipment. The backlog and pipeline of future orders at Intelligrated continues to be strong and we are encouraged about the prospects for 2017. As planned, we expect lower shipments and fewer engine maintenance events than 2016 for business jets. We continue to plan conservatively and do not anticipate a recovery until the 2018, 2019 time frame. On Slide 9, we have a preview of the second quarter. Aerospace sales are expected to be in the flat to down 2% range on an organic basis with continued strength from the ATR aftermarket and solid demand in the U.S. core defense. In transportation systems, we anticipate continued recovery in the commercial vehicles business combined with growth in light vehicle gas applications especially in China. These benefits will be offset by the ongoing secular softness in the BGA and space markets. We expect reported sales will be down 5% to 7% due to the 2016 divestiture of the government service business. Aero margin expansion would be driven primarily by the benefits from our 2016 restructuring projects and a stronger mix of aftermarket growth. Importantly, the second quarter is expected to be the last quarter of the headwind associated with OEM incentives. In the second half, they become an approximate $70 million tailwind to sales and segment margin as compared to an approximate $25 million headwind in the first half. In Home and Buildings Technologies, reported sales are expected to be down 1% to up 1% due to the impacts of foreign currency translation, with organic sales growth up 2% to 4% driven by the large Elster smart meter rollouts I mentioned earlier. In the other products business, we expect continued contributions from new product introductions like our T-series thermostat and do-it-yourself security products which were on display earlier this month at IFC. In China, we again expect double-digit growth driven by continued air and water demand and growth in security and fire systems associated with large real-estate projects. We also expect continued strength in our global distribution business and stronger growth in building solutions. HPTs segment margins are expected to expand by 70 to 100 basis points driven by cost reductions from prior restructuring actions, commercial excellence in ongoing productivity initiatives, partially offset by product mix headwinds associated with the strength of our distribution sales. In PMT, we anticipate continued strong performance across the group with 3% to 5% organic sales growth. Advanced materials are expected to be up significantly and continued demand for Solstice's lower global warming products. UOP improving oil and gas markets and the strong backlog will drive continued growth, primarily in licensing and equipment sales. We also expect modest growth in the process solutions business driven primarily by our short-cycle software and service offering. On a reported basis, PMT sales are expected to be down year-over-year due to the spin-off of resins and chemicals business in the fourth quarter. The projected segment margins expansion of 170 to 200 basis points is driven by higher volumes, productivity, and the impact of this spin-off. In Safety and Productivity Solutions, sales are expected to be flat, or to be flat to up 2% on an organic basis, with recorded sales increasing north of 25% due to the impact of the Intelligrated acquisition. The organic growth will be slightly lower quarter-to-quarter as the significant workflow solutions growth we saw from improved supply chain execution in the first quarter normalizes in the second quarter. In the safety business, growth in the industrial business will be driven by new product introductions and better end market outlooks. In Intelligrated, orders were strong, exciting the first quarter, and we anticipate double-digit growth to continue. For the company in total, we’re expecting EPS of $1.75 to $1.80, which will be up 7% to 10% year-over-year excluding 2016 divestitures and normalizing for our expected full-year tax rate. Organic sales growth is anticipated to be flat to 2% with 50 to 80 basis points of margin expansion. We expect the reported sales will be down 1% to 3% due to the 2016 portfolio actions I mentioned. Let me move to Slide 9. As Darius mentioned, we’re raising our low end of our full year EPS guidance by $0.05 to $6.90 to $7.10, up 7% to 10% excluding divestitures. At a total Honeywell level, we continue to anticipate delivering between 70 and 110 basis points of margin expansion for the full year driven by slightly better performance in aerospace and PMT overcoming a slower start in HBT. Let me turn to Slide 10 for a brief wrap up. In summary, we delivered a high-quality first quarter results with all of our segments contributing to the performance. Our end markets continue to improve across our businesses, and our execution is getting better as well. We expect second quarter earnings to grow 7% to 10% year-over-year excluding divestitures and normalize for tax, and we raised the low end of our full year EPS guidance by $0.05. Our businesses continue to win in growing end markets, and the investments we made in 2016, including the significant restructuring projects, are also delivering for us. Our Honeywell operating system is continuing to drive commercial gains and productivity improvements. We’re well positioned to continue to outperform for the remainder of 2017. So with that, Mark, let's move to Q&A.

Thanks, Tom. Darius and Tom are both now available to answer your questions. So, Dennis, can we open up the line for Q&A?

Can you remind us where we stand with the European Solstice capacity additions? And when do you expect to see the majority of the revenue increase from that? I know each of these points could be separate questions, but I will leave it at that.

Yes, so I would say that the biggest facility that we've been building for the last couple of years comes online at the end of Q2, early Q3, which is really the last portion of the capacity expansion. Starting early this year with the MAC initiatives kicking in in Europe, we saw a nice volume ramp-up and our Solstice product line is up double digits so far this year. We expect that to continue and even accelerate further as we head into 2017 and further into '18 but. I think that the short answer here is that as we get into the second half of 2017, we're going to be exactly where we need to be from a capacity perspective.

And I would add, Scott, to that, that the orders are supporting that. I mean we had, as we mentioned, double-digit orders growth in PMT overall. It was across all of the businesses, but especially in the ones where we're making those capacity investments and the backlog is picking up nicely.

Can you clarify what your capacity utilization will be or whether you are profitable with those new orders in the first year? Does it take reaching a specific capacity utilization percentage to achieve profitability? Please help us understand that. Thank you.

Yes, I mean I think remaining process start-up, I mean we are obviously not going to be operating at full capacity because we had plans for that, and things are going to get ramped up. But I would say we're targeting well north of the 80% once we get into 2018 and beyond. We can bring even more capacity online as we secure new orders. We think that Solstice, we've done a really nice job securing orders. A lot of that is in our developed markets, but we see a lot of potential in our HGR markets as well given the acceptance of some of the payers' outcomes. We have some extra capacity that we can bring to bear to generate revenue and we also have plans for further expansions should some of those regulations be enacted, which we think there is a very good chance that that will happen.

So you guys did about $0.12 of kind of continuing ops improvement year-over-year in the first quarter. I think you had these OEM incentives and what were the OEM incentives in the first quarter? I think you said 25 in the first half? Where were they in the first quarter?

Yes, they were minor. The year-over-year impact was minor on OEM incentives in the first quarter.

Okay, so that will be in effects, so that will be in the second quarter?

In the second quarter, you will see that.

When comparing the second half of the year to the first half, you're seeing a $0.12 increase year-over-year in your core businesses during the first quarter. It might be slightly less than that due to the OEM incentives in the second quarter, although your guidance doesn’t indicate this. Can you clarify if there are any factors in the second half, aside from the OEM incentives, that might make the year-over-year comparison more challenging? It seems like the second half may have slowed down a bit, leading to easier year-over-year comparisons. Is there anything we should be aware of, such as changes in mix, order timing, or anything else, or should we expect the $0.12 from the first half to actually improve in the second half of the year?

Yeah, I think the incentives, clearly, as I said, a drag in the first half, a nice tailwind in the second half, and that will continue into '18 and '19. We do get the ramp-up of repositioning in the second half. We’re continuing to integrate the acquisition. We’re still actively integrating nine deals, including the Intelligrated, and those tend to get better as the year progresses in terms of operating margin improvement when those synergies kick in. I’d say those are the major impacts, first half and second half.

So, those are good guide from a run-rate perspective?

Yeah. They should be helpful.

Okay. So, I think the go ahead.

Yeah, I was just going to say, Steve, that we can't point to any specific headwinds other than frankly market uncertainty. Although we're excited about the kind of long-term orders performance we had in Q1, in most of our businesses is short-cycle and the environment is probably fairly volatile. So we’re being a little bit tempered in our expectations for the second half. Given that it's kind of weak into the new role, we’re being a little bit, I would say tempered around our expectations, but certainly excited about the kind of start we have here.

I would agree that your guidance indicates only a minimal improvement in run-rate. It seems like a smart move considering you've only been in the role for a few weeks. Thank you.

So, just want to pick up on Steve's last question about how it's having a start here, and Darius, you mentioned the environment is uneven and volatile. Is that a reference to kind of what happened in the second half of last year, Q3 very weak, Q4 came back, and then Q1 back for raises? Is that what you're referring to, or you're seeing inter-quarter volatility during Q1? And then on top of that, maybe you can just kind of color in sort of what you're seeing today versus what you saw back in December when we put the plan together?

Yeah, no, the answer to the first part of your question. No, I actually had nothing to do with Q3 or Q4 last year. Overall, and I think consistent with what I said at Investor Day, the environment in 2017 is better than 2016. I think we certainly see that in PMT, we see it in HBT, SPS, and so on. I would also temper that, but it's not dramatically better, but it's better, but certainly not the kind of recovery. In terms of comps versus December and how we deal today versus back then, I think maybe the only deal a little bit different is that I think Dave sort of called it the expectations around what's going to happen around tax reforms have been tempered a little bit as well. We continue to remain optimistic that things will happen, but I would say that there was almost clearly expectations, and now I think there is a little more hesitancy. We have the elections in France coming up this weekend. There is still quite a bit of uncertainty in terms of the geopolitical environment at the moment.

Sure. To elaborate on TS, you mentioned the commercial vehicle trends on and off the highway. We're seeing ongoing growth in gas penetration, but it's being countered by some production challenges in the second half, possibly even in the second quarter, and diesel penetration in Europe appears to be declining. I’m curious about how we should combine these factors when considering TS growth for the latter half of the year.

Yes, and I think you've got all the factors laid out there, Nigel. The overall global market will probably be flattish to up a little bit in terms of total production. So when you look at the way we've modeled it out, I would say that the second quarter is not inconsistent with what you can expect for the rest of the year for TS.

Yes, so just the question on free cash flow, very impressive first quarter. Can you just provide us with more insight as to what are the areas that you are looking for improvement, what businesses you are targeting, what accounts, and what should we see throughout the year?

Yes, sure. First quarter for us, the biggest driver, as we've said was improved working capital performance. We saw that in particular in PMT and in Aerospace. But I think we're just at the outset, so that's going to be the major area focus for us in terms of driving improved free cash flow conversion. You've also got the CapEx, and as you know we were at that peak in 2016, and in 2017 that starts to moderate the investments that Darius is talking about ramping down, and we get into the full run mode, particularly in PMT. With the combination of those two things, we expect to continue to drive that conversion higher.

I want to emphasize that working capital is important. There is renewed focus across all Honeywell businesses, and I believe each has an opportunity. We are managing receivables and inventory effectively in these areas. PMT has performed especially well in receivables, partly due to the recovery in the oil and gas markets, where some customers are seeing significant improvement, particularly in Q1. However, there is still more work to be done, and I anticipate further progress in all four SPGs moving forward.

And just a follow-up question then on PMT. Great commentary on UOP, but generally, what are you guys seeing on large project discussions, and maybe outside of UOP, and maybe you could just go around the world just to give us some context on what you are seeing?

Yes, I mean overall, actually nice orders performance. High single digits up for HPS, teens, high teens up for UOP, so we're seeing the order activity returning. I would characterize the order as kind of medium size, so we didn’t have the mega orders like we did in the last 12 to 18 months, which HPS has won. These will be kind of the medium-sized orders. As we look at the region-by-region, South America continues to be relatively soft. The Middle East has had a nice comeback, China, very, very strong performance in the first quarter, won a lot of work there, and that continues to come back also in the U.S., especially in our GPNH business in UOP, which is well correlated to the extent of the unconventional segment. As you see the rig count being up 80% in the U.S. and much more than in Canada, we saw a very, very strong order activity in our GPNH business with the cryo-plants. So, overall, as the oil price stabilizes here at $50 and above, we’re encouraged that some of the news we’re hearing about the production freezes that OPEC is encouraging its members to do, I think that this is going to continue to be a tailwind for us for the rest of the year.

Thank you. Just a couple of things from me. I wondered if you could just elaborate a little bit more on what's going on with Intelligrated? Obviously, I think we’re all aware of the e-commerce effect on retail and its knock-on effects to distribution. But really my question is, how much of the strength that you're seeing relates to Intelligrated now being part of Honeywell, and you’ve been able to open it up into other areas? Or should we think of this as a kind of truly organic Intelligrated as it stands now? And if the answer is, that’s really just kind of this just legacy Intelligrated, maybe a little bit more color on the integration of the business and how you see the growth going forward?

Yeah. I think it's both, Jeff, because for example, one of the elements we're investing in heavily right now is that Intelligrated is predominantly a U.S. business, and we’re globalizing that business, investing, and let's say metricizing it, and we see the international growth is a big opportunity for us in the future. That hasn’t come through in the form of big orders yet, but I can tell you that a lot of the big customers that we currently have in the U.S. would want us to have a much broader global presence. We’ve invested in that, and we expect to materialize that. In terms of overall business performance, I think I would describe that in one word, terrific. This business has substantially exceeded any financial metrics we’ve had for it and continues to impress us with its rate of growth. We see strong double-digit growth rates both in revenue and bookings for this year, and the more I learn about it, the more of the customers of this business I meet, the more excited I get. I think that we have a very exciting growth profile for this business both in terms of making it more global, expanding our software solutions, and expanding into robotics. There are a lot of different directions to go organically and potentially inorganically.

I would also like to highlight the value of Honeywell, particularly regarding its aftermarket positioning. We observed a 20% sales growth this quarter and a substantial increase in backlog, showing strong double-digit growth. We are creating a significant install base, and developing this aftermarket business model, along with the opportunities Darius mentioned about Europe, will be a great catalyst for Intelligrated's growth.

And just maybe one last thing to add, and I've highlighted this before, but just to reinforce. The sweet spot of the Intelligrated business is e-commerce. It's high throughput and high-speed package processing, which as you know is the segment that's growing the fastest right now. So this is exactly in the sweet spot of where the big growth vector is at the moment.

And then just a separate, unrelated question. On UOP, can you just elaborate a little bit more on the licensing uptick you are seeing? What verticals is that in? Any color on what's going on in the refinery turnaround and chemical plant turnaround landscape? Thank you, that's it from me.

I would say the big uptick is in the petrochemical sector, particularly in China. We've had a lot of recent success with much larger integrated complexes, and the combination of HPS and UOP is working very well. There are a number of wins here in a very, very strong Q1. So as the economy grows, so does the demand for petrochemicals. I would point to that as one of the highlights of the booking activity here in Q1 and certainly, China, India has been good but really strong globally. And even from activity returning in the Middle East, which is really nice to see.

Your four priorities that you laid out at the outlook, we're not expecting you to touch and check off every box every quarter, but we did see the accelerated organic revenues. You got that expanding margins. You got that certainly more excitement and traction around it being a software industrial. Maybe not hearing much here this morning about more aggressive capital deployment. So maybe you can just touch on that. What kind of expectations do you want to set over the near term?

I believe capital deployment, as I mentioned, is one of our main priorities. We're actively pursuing opportunities, and our pipeline for M&A deals is very strong. However, the market is somewhat expensive, so we are exercising caution. As I mentioned on our Investor Day, we aim to be proactive and secure the right deals while remaining prudent and avoiding overspending. This caution might explain why we haven't announced any deals yet this year, but I want to assure you that we are very active. Regarding buyback timing, we are committed to maintaining a stable share count as stated and possibly increasing our efforts later in the year. Timing is crucial from this viewpoint. Although things may seem a bit quiet, it's important to note that I am only about three weeks into the role, so I am pleased to see some leverage reflected in our results for the first quarter.

Got it, and then just as a follow-up. One of the goals that you've set is a new product vitality index; you expect to track to 20% in 2017, an uptick from last year. How did the first quarter play out?

I think it's played out well, but in full transparency I would say most of our new product launches are back-end loaded this year. We have some things coming out in Q3. Q3 will be a very, very big new product launch quarter. In fairness, I'll have to be in a better position to answer that question, as we get deeper into the year because right now it's really too early to tell, and I don’t want to declare a success until we see how some of the bigger, even more exciting new product launches happen in Q2, and especially in Q3, which is going to be a big launch quarter for us.

I wanted to ask if you can characterize any of the channels that may have any destocking still going on. Previously you talked about SNPS; wondered if that’s abated. Recently we heard some other aerospace companies talking about destocking on some of the aircraft programs, A7, 777, A380, etc. If you're seeing any of that or do you expect to?

Yeah. I mean I think, let me comment kind of SGS, and I think we kind of see this continuation of destocking. Frankly, as some of our distribution partners are operating at lower inventory levels than what we’ve historically seen, that's certainly true in SPS. In Aero, I'm not sure that we notice that as much; I think that’s been fairly steady at least for us, and that’s exhibited by the fact that frankly this performed a little bit better than we projected for Q1, especially in the aftermarket segment, which has been very, very strong, and we’re very pleased with it. So I'm not sure that we’ve seen that in Q1.

Okay. And just a quick follow-up on the M&A question from earlier. Are you seeing any areas that are more promising than others that you could comment on, where valuations are perhaps more stretched versus more attractive in looking at your interests?

Well, I guess unfortunately they are pretty stretched everywhere. The market is pretty warm right now. There is a lot of cash sitting around both on the private equity side as well as strategic. I wouldn't say that anything is particularly cheap at the moment. Now, having said that we have a very, very big pipeline and we have a lot of different options in terms of the segments that we’re looking at. I can tell you that we have attractive deals that we’re looking through in every one of our SPGs. Now what actually lands and what happens we’ll see. Overall, I would say things are a bit expensive, and I don’t think that’s a comment that's end market specific; that’s true really across our entire portfolio.

So, Tom, you mentioned interest this quarter in terms of organic growth. It sounds like order growth across many of your segments is currently positive. You've reviewed accounts for next quarter, and it appears manageable. I'm trying to understand the guidance of flat to 2% organic growth for Q2. It seems like an easy target based on your comments and the comparisons. Could you provide a bit more detail on this?

Yes, we anticipated that question. Overall, our business consists of about 40% long-cycle and 60% short-cycle. Currently, on the short-cycle side, demand patterns are not very consistent, and there's some volatility. We don't have a clear view on the short-cycle front. However, if we break it down by business, Aerospace is primarily long-cycle, except for the aftermarket, which is relatively stable. We remained flat in Q1 and are projecting a decrease of 3% to 1% for Q2, mainly related to original equipment. The incentives will largely impact the first half, particularly in the second quarter. The OE side has been relatively weak, and BGA has been somewhat flat. In terms of HBT, we're a bit more cautious on the short-cycle side. We achieved 3% in Q1 and are expecting 1% to 3% in Q2, depending on how demand trends develop this quarter. The same applies to SPS, although there are some additional factors affecting it. SPS recorded 3% in the first quarter, and we're projecting between 0% and 2% for Q2. We are adjusting our retail strategy to go more direct to customers, leading to some variations in timing within the channels.

Got it. That's an interesting observation on the bifurcation there. I guess the follow-up question I guess is maybe even slightly similar is really on the cash flow side. Seasonally incredible strong, it didn’t sound like you guys called out any one-time items this quarter. What's stopping you from potentially raising the cash flow guidance for the year?

We are projecting a growth rate of 5% to 7% for the full year. The first quarter was six times greater than usual, and it tends to be our most unpredictable quarter in terms of cash flow. With the new initiatives we've implemented for working capital, we've seen a notable improvement. However, we want to see this level of performance sustained. We'll reassess at the end of Q2 to determine if the improvements in working capital are enduring. I believe, like you do, that we may see further enhancements as the year continues. It's essential to notice that one strong quarter does not set the tone for the entire year. While we are encouraged by the first quarter's results, we need to see that performance continued into Q2. If we observe consistent performance at the end of Q2, we will consider adjusting our guidance at that time.

Two things; first, maybe you could talk a little bit about the progress with connectivity. How many installs do you have and sort of what kind of customer feedback that you are now getting with that business? Is it becoming a little bit more prevalent in the marketplace?

We are expanding our organization and have made several important hires, including Que Dallara and Steven Gold in senior leadership roles. We’re enhancing our offerings, particularly in connected aircraft, where we've achieved several successes, as highlighted in our report today. Our focus also includes connected homes, buildings, and plants, with numerous partners signing on. While we don't specifically track the number of connections yet, we do assess our progress through customer engagements and interactions. Some connected enterprises are progressing more quickly than others, with connected aircraft and plants being further along, while some are still catching up. Overall, we are in a phase of engaging customers, optimizing our solutions, and rapidly iterating. The growth of this business depends on developing hypotheses, having discussions with customers, making adjustments, and demonstrating value, as customers often struggle to articulate their exact needs. We have a strong framework for optimization in place and are significantly expanding our capabilities, including through our Atlanta software Center of Excellence. Simultaneously, we are focusing on customer engagement for revenue growth. It’s worth noting that our software business saw double-digit growth in Q1.

I understand the challenge of doing that. I appreciate that. And then as a follow-up in the other area on HPT, you've called out that profitability was a little bit below what you might have expected. Can you elaborate on that, and then from a strategic point of view, we've seen a lot of what I'll call retail struggle a bit, and that has in fact benefitted the ecommerce world. So can you talk about that structural dynamic and then also the near-term issue?

Yes, I think Howard, you have it exactly right. I think the mix has been our biggest issue for Q1 in HPT, both from a mix from a product versus distribution perspective, but also geographic perspective, where we saw tremendous rate of growth in some of the HGR regions, regions we've seen slightly less accretive versus some of the developed markets. So that was issue number one. Now in terms of retail versus transitioning to more ecommerce, I'm not sure that was really one of the cases. Frankly, our North America business was a little bit softer than we had expected. But HPT, when I pointed out earlier, when I answered the question around new product launches, there isn’t a business out there that has more exciting product launches coming out in Q2 and Q3, and I expect that we're going to have a really, really nice strong second half of the year as well as a nice recovery here in Q2.

One additional point I would mention, Howard, is that in certain businesses experiencing faster growth, such as the Americas region mentioned by Darius, we are seeing significant growth in our OEM operations, where we supply parts and components. This area is growing quite robustly at low to mid-single digits. Although the margins on the initial sales are not very high, we are establishing a solid installed base, which allows us to create aftermarket opportunities. This trend is also visible in the Americas.

I noticed your comments on the several large smart meter project rollouts. Just wondering how much of that has developed since December and are there some complexities on how those came to fruition overall?

Some of them, certainly we secured those since December. Overall, we were very bullish on this smart energy business for really the rest of the year. Those revenues tend to be maybe more lumpy than we want to expect. We were kind of flattish in the first quarter, but I expect double-digit growth in the second quarter and high single-digit growth for the year. We've been very successful in securing some of those larger wins. Really pleased with what we saw in terms of win activity in Q1. So overall very bullish on the Elster acquisition and what we're seeing in our smart energy business.

Thanks. For the follow-up, could you provide an update on long-term pension income? It seems somewhat complex. It's a nice income right now. What are the long-term characteristics and variability regarding its impact on P&L over time?

Yeah. As you know, I mean I like to simplify the model into two pieces, one is the assets and the other is the liability. The assets, you use the word archaic accounting model. We just apply and assume the return to the assets, and that goes into our income. So as long as that assets pool that we have is performing, and it has performed fairly well. You keep applying that same rate of income and you tend to grow your pension income. On the liability side, it's interest rate related, so we're in a low-interest rate environment, and we apply that interest rate to the liability, which goes into our expenses as well as one of our expenses. As that interest rate rises, you would see a decline in the pension income. But overall, it’s flat, but the important part for us is that the plans are in very good shape; they are well funded. We’re in the mid-90s or higher in most of our plans, including the big one in the U.S. We don’t foresee any contribution in the foreseeable future. It just becomes kind of the bookkeeping things for us as we go forward here.

Thank you. I'm pleased with our performance in the first quarter, especially our sales performance and overall execution. It was a clean quarter all around with every business either meeting or exceeding the top line guidance we provided. However, there is more work to do; everyone in the organization is focused on our key priorities: improving organic growth, maintaining our productivity rigor, and becoming a best-in-class software industrial company. We’re going to continuously focus on outperforming for our customers, our shareholders, and our employees, and I look forward to sharing our continued success with you on future calls. Thank you.