Honeywell International Inc (HON) — Q1 2019 Earnings Call Transcript

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

Thank you, Mark, and good morning, everyone. Let's begin on slide two. Honeywell had a tremendous first quarter delivering earnings per share of $1.92 or $0.07 above the high end of our guidance range, and up 13% excluding the impact of the spins in 2018. The strong earnings performance was driven by organic sales growth of 8% and 120 basis points of segment margin expansion. Our outstanding top-line results were driven by continued strength in our long-cycle commercial aerospace, defense, and warehouse and process automation businesses. In addition, we achieved a significant improvement in Honeywell Building Technologies which delivered 9% organic sales growth in this quarter. The first full quarter following our 2018 spin-offs was 1% in the fourth quarter of 2018 for all of Honeywell. Our long-cycle backlog increased more than 10% year-over-year and continues to position us well for the remainder of 2019. The investments we made in our sales organization, new product development, and M&A in the warehouse automation business coupled with our winning positions under right platforms in aerospace continued to drive outstanding top-line results. Segment margin exceeded 20% in the first quarter, driven by smart portfolio enhancements made in 2018, continued investments in sales excellence, increased sales volumes, and the benefits of previously funded repositioning projects. I'm also encouraged by the improvement in gross margin, which increased 300 basis points in the first quarter. Our concerted efforts to improve working capital generated adjusted free cash flow growth of 55% excluding separation costs and the impact of the spins in 2018. Conversion in the first quarter was 82%, the highest start to the year since 2010, and represented a 14-point year-over-year improvement. I'm extremely pleased with the progress we've made in this area while continuing to invest in our business. As a result of our first quarter results and continued confidence in our ability to deliver, today we're raising our full-year organic sales guidance to a new range of 3% to 6% and earnings per share guidance to a new range of $7.90 to $8.15. We continue to expect to generate nearly $6 billion in free cash flow with conversion in the range of 95% to 100%. As I said in January, Honeywell is a simpler, more focused company that continues to overdeliver on its commitments. We are encouraged by our results, particularly organic sales growth and free cash flow, which were two of my top priorities when I took over as CEO. Notwithstanding the strong start to the year, we continued to take steps to ensure we can deliver on our commitments in a potentially uncertain macro environment, should things slow down in the second half of 2019. We took significant actions in 2018 to transform the business, the results of which we see in our performance today. Our combination of strong sales growth, favorable end-market exposure, and significant balance sheet positions us well for the remainder of 2019. I will stop there and turn the call over to Greg who will discuss our first quarter results and updated 2019 guidance in more detail.

Thank you, Darius, and good morning, everyone. I would like to begin on slide 3. As Darius mentioned, we delivered another strong quarter across all of our businesses. 8% organic sales growth was the highest we’ve seen since 2011 and an acceleration from 6% in the fourth quarter of 2018. All the markets we serve remained strong. A few highlights to mention, commercial aviation OE grew 10% organically, driven by demand for new business jet platforms; defense and space grew 13%, continuing the trend of strong double-digit sales growth. Building Technologies grew 9% organically with strength in commercial fire and security as well as in building solutions, particularly in India and China. Our warehouse automation and sensing and IoT businesses delivered another quarter of double-digit organic sales growth, just as they did throughout 2018, leading to 10% organic sales growth in Safety and Productivity Solutions. The impact of the spin-offs of our Homes and Transportation Systems businesses, both lower margins than the portfolio, contributed 80 basis points of segment margin expansion this quarter. The remaining 40 basis points was a result of our strong operational performance, continued investments in commercial excellence initiatives, and increased sales volumes. We continued to effectively manage the impact of tariffs and material and labor inflation through our ongoing mitigation efforts, and we made further progress on the elimination of all spin-related stranded costs by the end of 2019. However, we did see some volume declines in our productivity products business which contributed to lower margin in SPS in the quarter. I'll discuss that in more detail shortly. The majority of our earnings growth, $0.15 this quarter, came from segment profit improvement. We realized a $0.06 benefit from our share repurchase program, which resulted in a weighted average share count of 739 million shares in the quarter. Consistent with our first quarter guidance, our effective tax rate was approximately 22%, which generated $0.04 benefit year-over-year. You will find a bridge of our first quarter earnings per share in the appendix of this presentation. Finally, adjusted free cash flow in the first quarter was $1.2 billion, up 55%, excluding separation costs and the impact of the spins. As Darius mentioned, we continue to see strong cash generation, particularly in Performance Materials and Technologies and aerospace in the quarter. We’re very pleased with our results across the board. Now, let's turn to slide four and discuss our segment performance. Beginning with Aerospace with sales up 10% on an organic basis, we continued to perform extremely well in today's robust demand environment, driven by our strong positions on the right platforms. Notably, this marked the third consecutive quarter of double-digit organic growth for Aerospace. Defense and space grew 13% organically, led by continued global demand for sensors and guidance systems, increased spares volumes on the U.S. DOD defense programs, and robust shipment volumes on key OE programs, including the F-35. Commercial OE sales were up 10% organically with increased shipset volumes across all Gulfstream platforms, increased avionics deliveries on the Dassault F900 and F2000 aircraft, and increased engine shipments for the Textron Longitude. We expect this momentum to continue in the coming quarters. In the commercial aftermarket, sales were up 8% organically, driven by strong global airline demand and tailwinds from ADS-B safety mandates. In addition, we saw robust connected aircraft growth, driven by demand for JetWave and business jet software offerings. Aerospace segment margins expanded by 250 basis points, driven by commercial excellence and margin accretion from the spin of Transportation Systems. The spin contributed about 80 basis points of Aero’s total margin expansion. Before we move on, I just want to take a moment to address questions we received regarding the unfortunate event surrounding Boeing 737 MAX aircraft. At this time, based on our customer's current production schedules, we do not anticipate a significant impact to our 2019 results. We will continue to monitor the situation as we move throughout the year. Now moving to Honeywell Building Technologies. Organic sales growth was 9%, driven by strength in commercial fire products and improved demand for our security offerings. We saw robust demand for our Niagara software platform, as well as further improvement in supply chain execution, which had been impacted in the back half of 2018 by the spins. Project growth in building solutions was also strong, particularly for international airport installations in the Middle East and Asia Pacific. The projects backlog in building solutions was up over 15% at the end of the first quarter. Stepping back for a minute, this quarter's performance is a result of specific actions taken by the new HBT leadership team, which is moving the business in the right direction. The team is building out its sales force and capacity, investing in innovation, and they are executing the commercial excellence playbook to deploy and train a high-quality sales team. They’re also focused on improving delivery and execution and are making steady progress to eliminate the remaining stranded costs related to Homes spin. HBT segment margin expanded 240 basis points in the first quarter, driven by the favorable impact from the spinoff of the Homes business. Overall, we are very pleased with their first quarter and are encouraged for the future. In Performance Materials and Technologies, sales were up 5% on an organic basis. Process solutions sales were up 7% organically, driven by broad-based demand in automation, including for our maintenance and migration services, and field instrumentation devices. Orders in HPS grew at a double-digit rate for the third straight quarter, and advanced materials sales were up 4% organically from ongoing demand for flooring products, including for our Solstice line of low global warming refrigerants and blowing agents. UOP sales were up 1% organically for the quarter, driven by demand in gas processing and hydrogen, partially offset by a tough year-over-year sales comparable and licensing and timing-related decline in catalyst shipments. We again saw strong orders and backlog growth in UOP, up 6% and 8% organically across engineering, equipment, and catalysts, which is a positive sign for future sales growth. PMT segment margins expanded 140 basis points in the first quarter, driven by commercial excellence, higher sales volumes, and productivity, including the benefits of previously funded restructuring. This largely offset the impact of material and labor inflation. Finally, in Safety and Productivity Solutions, sales were up 10% on an organic basis. Intelligrated continued to outperform with another strong quarter of double-digit sales growth, driven by the conversion of our major systems backlog, aftermarket services, and increased demand for Vocollect voice solutions. We also saw double-digit sales growth in our sensing and IoT business, which was a continuation of the double-digit growth we achieved in 2018. Our China business also generated double-digit sales growth. Productivity Solutions sales were partially offset by decreased volumes of scanning and mobility products due to slower project ramp-ups and planned distributor destocking, mostly in North America. We highlighted this potential weakness in the business in early March. We anticipate that the productivity products business will improve in the second half of the year but are planning conservatively in the second quarter, given the decline we experienced in Q1. Moving to the Safety business, sales were approximately flat on an organic basis. Growth for gas detection products and retail footwear was offset by softer demand for general safety products and personal protective equipment. SPS segment margins contracted 250 basis points, driven by decreased productivity products, short-cycle volumes, the impact of inflation, and unfavorable mix stemming from the significantly higher sales in our warehouse and automation business, which offset the benefits from commercial excellence and productivity. Overall, the trends in our end markets are largely consistent with what we discussed in February. We remained confident in our businesses and our view is supported by strong long-cycle orders and backlog growth. Our focus on smart growth investments, breakthrough initiatives, and new product development coupled with continued productivity rigor has positioned us well for the remainder of 2019. With that, let's move to slide five, and we can discuss our second quarter outlook. Looking ahead to the second quarter, we anticipate that the business environment will be largely similar to Q1 with strength primarily coming from our long-cycle portfolio in commercial aerospace, defense, and warehouse automation. In aerospace, we continue to see robust demand in both commercial aerospace and defense with growth in narrowbody production rates and increased business jet deliveries as several new models have recently entered into service. We expect the commercial aftermarket to continue to be strong driven by flight hours, airlines' demand, and further tailwinds from the adoption of safety and compliance mandates. The industry dynamics of defense should continue to be positive, both in the U.S. and abroad. In Building Technologies, we anticipate continued momentum in commercial fire and security. The second quarter typically encompasses the peak season for demand in these markets. We expect continued conversion of our long-cycle backlog in building solutions and growth in services. In PMT, orders and backlog growth in UOP and in the automation businesses and process solutions should drive another quarter of strong sales growth in Q2. In HPS, we expect continued short-cycle demand in maintenance and migration services, and field instrumentation devices. In UOP, growth driven by licensing, engineering, and gas processing demand while in advanced materials, we expect to see continued adoption of Solstice products in refrigerants in foam applications. Finally, in Safety and Productivity Solutions, we expect the strong e-commerce and warehouse distribution macro trends to continue, as well as growth in maintenance, services, and voice solutions. We're expecting additional destocking in our distributor channel will drive a decline in mobility, scanning, and print in the quarter. On the safety side, growth should improve sequentially in both gas detection and personal protective equipment, and we anticipate continued demand in the retail footwear business. For total Honeywell, the net below the line impact, which is the difference between segment profit and income before tax will be approximately a positive $30 million to $40 million next quarter, driven by increased interest income and benefits from the spins’ indemnification payments related to asbestos environmental expenses, partially offset by lower pension income due to 2018 pension derisking actions we took, all as previously guided. Our guidance assumes a weighted average share count of 734 million shares and effective tax rate of about 22% and earnings dilution from the 2018 spin of approximately $0.19 in the quarter. Now, let's turn to slide six and we can discuss our revised full-year guidance. We have revised our full year sales and earnings per share guidance to reflect our strong outperformance in the first quarter. We continue to be encouraged by our business performance and outlook. However, we are remaining cautious with regards to the short-cycle portion of our portfolio, given the macro uncertainties that remain in the second half of the year. We are raising our full-year organic sales guide by 1 point on both the low and the high end to a new range of 3% to 6%. Our segment margin expansion and free cash flow guides are unchanged. We remain on track to deliver 95% to 100% free cash flow conversion while investing in the business through high return CapEx and research and development. The revised earnings guidance represents earnings growth of 7% to 10% excluding the impact of the spins in 2018. We continue to expect no significant impact in 2019 related to tariffs. We have mitigation actions in place to address the impact of potential tariffs and all remaining items imported from China. We are also closely monitoring the potential effects of Brexit on our operations and are communicating regularly with our customers, partners, and suppliers around these plans. We are planning for various potential Brexit outcomes, including a no-deal Brexit scenario to ensure that as the terms of the UK’s departure from the EU are finalized, we are best positioned to continue meeting our customers' needs. Our guidance continues to reflect a weighted average share count of approximately 731 million shares and an effective tax rate of approximately 22%. Our net below the line expenses are now expected to be in the range of $60 million to $70 million of net expense in 2019, slightly down from the original estimate of $80 million in net expense. The minor change is due to slightly higher full-year estimates for both pension and interest income. With that, I would like to turn the call back over to Darius who will wrap up on slide seven.

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

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

Hey, guys. Good morning.

Good morning.

Good morning.

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

Yes, I'll begin. I don't have any significant concerns for the second half of the year. The main uncertainty is the short-cycle business, which remains unpredictable. While we were satisfied with our Q1 results, the nature of short-cycle business means outcomes can change significantly in the second half. Regarding PMT, I’m quite pleased with our Q1 results. Whether you look at bookings, revenue, or margin growth, I have no disappointments there. I am very pleased. Additionally, projects in HPS showed strong double-digit growth, our backlog increased, and our book-to-bill ratio in the long-cycle business rose to 1.2. I don’t see much cause for disappointment in those areas.

Yes. My main point was regarding UOP. It remained relatively flat this quarter, but I expect it to accelerate for various reasons. Therefore, I don't believe this should lead to weaker revenues in the second half of the year. Regarding SPS, I wanted to ask about the productivity business. The overall sentiment at ProMat seemed quite positive. Is there any update on the launch of Mobility Edge that might be causing some changes? I would appreciate more insight into the SPS business, as its performance was a bit below our expectations.

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

Have your priorities on capital allocation changed at all? Given where multiples are today, are you considering more buybacks than acquisitions? Are you still pursuing opportunities with your pipeline?

Yes, unfortunately the environment hasn't improved. We want to focus more on mergers and acquisitions, but we are also trying to be disciplined, and the multiples remain high. Something will have to change, but we have been directing more funds toward buybacks. Last year, we made significant investments with an average share purchase price around $150, which was before the spin-off of Garrett and Resideo. Given our current position, that has proven to be a solid investment. We continued with an additional $750 million in Q1, which also looks promising. When in doubt, we believe in our capabilities. We are confident in the Company and our prospects, as reflected in our backlog and bookings. We remain assured that Honeywell will continue to perform, so we are currently leaning more towards buybacks. However, that doesn't mean we are uninterested in M&A; we simply aim to be disciplined and seek fair valuations, which is exceptionally challenging in this situation, as seen with the current multiples.

Yes. When you're beating and raising and growing 6% to 8%, you can be patient. So I get it. Thanks a lot.

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

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

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

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

There isn't much to critique in this quarter. Are you surprised by how strong everything has been? I mean, China was expected to be a bit slower, and Europe was supposed to be slower as well. It doesn’t seem like that’s what happened with you though. Could you provide some insights on what you observed globally?

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

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

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

Good color. Just switching gears a little bit, the connected enterprise initiative, how much of a headwind is that on margins right now or is that turned into more of a neutral?

No. That's actually accretive to what we do and by the way that grew in the teens again, so that...

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

We are doing very well with our ERP rollouts. We are progressing as planned. In 2016, we finished with 71 platforms, and we are likely to reduce that by about 20 this year as we aim to reach 10 core platforms by 2021. We are making solid progress, with extensive integrated planning to ensure business readiness. IT readiness is also in place, but we need to effectively manage the changes that come with the ERP transitions and business needs. Overall, we feel confident in our position; it has not been disruptive, and we have a strong plan to avoid overwhelming any single quarter or business with additional risks.

Okay. But it still is a mathematically headwind, though, is that correct Greg?

When you say mathematically a headwind, what you mean?

Just on the payback. I mean are you at the point yet where the payback is greater than what your dollar output is?

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

Yes. I think if you were to look at this, Scott, on a year-over-year basis, the impact is, I would say, very, very slightly accretive, but negligibly so.

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

In terms of margin expansion guidance for the full year, aero and HBT are tracking well ahead of that, PMT is at the high end of the range. How do we think about continued runway from here in margin expansion? And maybe as my follow-up on SPS, I understand margin mix pressure and maybe a little bit of inflation, how does that play out throughout the rest of 2019? Thank you.

Yes. So, Sheila, our guidance for the year remains at 30 basis points to 60 basis points, I believe, at this point. We've talked about that being our framework and what we continue to do is add initiatives and elements to be able to continue having that runway in front of us. And so, with things like our connected enterprise growth, which is margin accretive from a software business perspective, with our digital transformation efforts, Scott just mentioned, things like the productivity around the ERP deployments, as well as just our HOS Gold playbook, that's driving commercial excellence into each of the businesses, and then, again, our continual repositioning pipeline, we see that 30 basis points to 50 basis points framework, that we've laid out, as very much sustainable over the coming years. So on a portfolio basis, we feel very good about where we are in that regard. Now, as we mentioned, with this year, we're always talking about the elimination of stranded costs. We continue to see some of that impact in the first part of this year, and that will dissipate. We've talked about having those stranded costs eliminated by the time we get to the end of 2019, and that will be fully behind us. So, broadly speaking, feel very good about the margin expansion potential. It is a portfolio. In different quarters and years, some business will have more or less opportunity depending on where they are in particular. And then, as it relates to SPS, and the mix component, with very high growth in the Intelligrated business. When we bought it, it started out below the line average for margins, and we continue to improve that as we've integrated that business, but it is still below the line average for the rest of the segment. And so as we get through the destocking in productivity products and we normalize, let's say, to perhaps growth rates that aren't multiples of double digits per quarter in Intelligrated, we expect to see that SPS margin rate continue to improve throughout the year.

I would like to add a few points. The framework has shifted slightly, and you can see a much stronger organic growth rate along with an increase in the margin rate. We're firmly committed to delivering returns of 30% to 50% to our investors, and we are currently right in the middle of that while maintaining a significantly higher growth rate. If you're worried about our ongoing focus on margin, there's no need for concern; we have many avenues to enhance productivity. This includes our previous discussions about ERP, simplifying our ISC performance, and improving direct material productivity, which we believe still has room for enhancement. We will persist in our restructuring efforts, similar to what we accomplished this quarter, and we expect to undertake more of these actions in the second half of the year, including Q2. Additionally, we have some stranded costs to eliminate in both HBT and corporate, so there is ample opportunity for productivity gains. Although we faced some challenges in Q1 due to our Intelligrated business growing at a robust rate—think of it as really strong double digits—this impacted our overall mix. However, we won’t shy away from a lower-margin undertaking if it can run with negative cash flow, as this expansion will eventually lead to a higher-margin business once we establish a solid install base.

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

Our assumption aligns with what Boeing has stated regarding their production rate reductions, which we have accounted for. We have various systems integrated into the aircraft and anticipate that deliveries and production will resume in the latter half of this year. As Greg mentioned, the impact on us is minor, especially for Q2. Given that nearly everyone expects a resolution, we do as well, and we believe that this is an excellent aircraft that will be operational again in the second half of the year. I don’t have anything further to add on this topic.

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

No, air and water didn't perform well in Q1, but overall, HBT did well. What's impressive is that despite the challenges in air and water, HBT still managed to grow by 9%. I find that encouraging rather than discouraging. However, I would say that the air and water segment is not significant for the overall annual performance. It did present a challenge for HBT in Q1, yet they still achieved 9% growth, which I consider a very positive result.

Good to hear. Thank you.

Thank you.

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

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

I wanted to revisit the overall top line and express my interest in the guidance. You increased the high end of the organic sales growth forecast, and I'm curious about the reasons behind the low end.

We took up a point on the high end and then a point on the low end.

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

Our long-cycle businesses are performing well. This includes PMT and segments of aerospace and HBT, where we had a strong booking quarter and a book-to-bill ratio of 1.2, which added to our confidence. This strength in long-cycle bookings is what led us to raise our guidance for the rest of the year. However, I still consider the short-cycle environment to be unpredictable, with limited visibility, particularly for the second half. We remain cautious about our outlook for short-cycle opportunities as we observe market developments. While we are not currently experiencing significant challenges, we recognize that they could arise. Nevertheless, based on our business performance, we remain optimistic, which supports our decision to adjust our guidance upward at both the lower and upper ends.

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

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

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

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

Darius, 8% commercial aviation organic aftermarket growth is the fastest growth we've seen from Honeywell in this cycle. We know aftermarket growth has been a particular focus of the aero team. But where has that improvement versus global flight hours come from? You did mention safety mandates are helping, but is it the uptick in performance-based contracting and increasing growth from connected aero is also helping and so would you agree that the trends toward continuing improved aftermarket growth for Honeywell looks sustainable moving forward?

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

Darius, could you provide more details on your remarks about how commercial excellence is contributing to margin improvement in the aerospace sector? What progress have you made in addressing supplier constraints in that area? Is there still potential for reducing G&A and fixed costs, and should we anticipate that the margin for the year could be significantly higher than the 24% you projected last quarter?

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

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

I think, Greg, it's fair to say that that 24% guide looks conservative now after a strong start?

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

I'm having a bit of a problem with my phone and accidentally hit the mute button. Good morning. We've covered a lot of ground already. The acceleration in HBT marks a significant change in trends. Considering that the separation of Resideo was a carve-out from the business, do you think that the distraction from that might have contributed to last year's weaker sales, and now we are observing stronger performance? Also, could you address China? There has been considerable stimulus there, and we've noticed some improvement in the products. How significant is China's acceleration for HBT's performance?

Yes, there were a couple of factors, including management distraction. The establishment of Resideo was a significant effort for the HBT team. The amount of work needed for the separation to create Resideo, especially in relation to Garrett, was substantial. I believe the team did an excellent job in bringing Resideo to life, and I continue to be very impressed with their efforts. Was it a distraction? Yes. Did it shift their focus away from growth? I don't believe so. However, they will certainly have more time to concentrate on that this year as they can focus on the markets and what's happening. The team has done a great job and continues to advance that business, which makes me very pleased. China is crucial for our entire business, not just HBT. We've been involved there for a long time and aim to be a local player. We are a local player. As I've mentioned several times, we strongly believe in local strategies, where we innovate, develop ideas, and handle manufacturing, marketing, and sales all within the markets we operate in, and that is certainly the case in China. The China team in HBT has done well in creating that kind of offering, which presents more potential for the future. Overall, while I'm not declaring any victories after just one quarter in HBT, I really liked what I saw in Q1, and I'm optimistic about what's ahead.

Yes. Thanks, Darius. And quick follow on safety, that the flat performance and safety sounds like it's mainly channel inventories. But we have heard one or two other players talking about some weakness in safety. So I'm just curious what you're seeing in there and how that results?

I would describe it more as a channel issue rather than anything else. As we mentioned, that's something we need to address, and it should improve in the first half of the year, allowing us to be in a better position by the second half of this year.

Hi. I'm curious to know if anyone will surpass your organic growth this quarter. Let's see what that brings. I have a question regarding software growth. You mentioned it earlier, but could you elaborate on the growth for both embedded and stand-alone software? Also, what was the stand-alone software business like in 2019 compared to 2018?

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

Do you want to talk a little bit about Honeywell Forge ahead of the Analyst Day?

No. I can't steal all the thunder. I've got to have something to talk about in May, and you are going to have to wait a little bit.

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

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

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