Honeywell International Inc (HON) — Q1 2023 Earnings Call Transcript

Thank you, Liz. Good morning, and welcome to Honeywell's first quarter 2023 earnings conference call. On the call with me today are Chairman and CEO, Darius Adamczyk; Senior Vice President and Chief Financial Officer, Greg Lewis; President and Chief Operating Officer, Vimal Kapur; and Senior Vice President and General Counsel, Anne Madden. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information that may be of interest or material to our investors on this website. Our discussion today includes forward-looking statements that are based on our best view of the world and other businesses as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings. This morning, we will review our financial results for the first quarter, share our guidance for the second quarter, and provide our update to our full year 2023 outlook. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to Chairman and CEO, Darius Adamczyk.

Thank you, Sean, and good morning, everyone. Let's begin on slide two. To open today's discussion, I'd like to take a moment to reflect on what our company has accomplished over the past seven years. We've consistently outperformed against the market and our peers, doubling our share price over that time frame. We undertook a radical transformation agenda, dramatically simplifying and digitizing our operations and supply chain, resulting in a much more contemporary company, which is a platform for growth. We launched our software business, Honeywell Connected Enterprise, that continues to generate not only value for our customers but also accretive growth and profitability for Honeywell. We also reshaped the portfolio, spinning off three sizable businesses while selling to others and adding 16 successful acquisitions, reducing cyclicality and enhancing our margins. We reconfigured our strategic business groups to better align with end-market opportunities and customer needs. We built a culture of innovation that's led to significant new breakthrough technologies and an ultimately meaningfully stronger organic growth. Last, and I'm not breaking any news here, this will be my last earnings call as the CEO of Honeywell, as Vimal transitions into the CEO role in just over a month, and I become Executive Chairman. It’s a great example of the emphasis Honeywell places on leadership development and succession planning. With his decades of experience and success leading businesses across our portfolio, Vimal is absolutely the right person to take on the CEO mantle for Honeywell into the next phase of our transformation. I look forward to supporting him over the next year, providing him with additional bandwidth by helping with mergers and acquisitions activity, spending time with customers and strategic planning. Our future is bright. With that said, the present is pretty good, too. Let's turn to slide three to discuss our first quarter performance. We delivered a very strong first quarter, exceeding the high end of our first quarter organic sales, segment margin and adjusted earnings per share guidance. Despite ongoing macroeconomic challenges, I'm pleased with our disciplined execution and differentiated technologies to enable us to over deliver on our commitments. First quarter organic sales were up 8% year-over-year, led by double-digit growth in our Aerospace and PMT businesses, underpinned by rigorous operational execution. The first quarter backlog grew to a new record of $30.3 billion, up 6% year-over-year and 2% sequentially, due to continued strength in Aerospace and Performance Materials and Technologies. Similar to last quarter, orders remained a very positive story in Aero and PMT, up double digits organically in each, leading to 1% organic growth and 8% sequential growth overall in the first quarter, overcoming the difficult year-over-year comps in HBT and SPS. We remain confident in our 2023 setup as we capitalize on recovering end markets combined with solid operational execution. Our segment margin expanded 90 basis points year-over-year, led by robust expansion in Safety and Productivity Solutions and Honeywell Building Technologies, as our strategic pricing actions enable us to remain ahead of the inflation curve and we benefit from our productivity actions. Excluding the net impact of the settlements, as we discussed in our guide, free cash flow was $300 million in the first quarter, in line with our expectations and operationally stronger than 2022. We deployed $1.6 billion to dividends, growth CapEx and share repurchases, including opportunistically repurchasing the same 3.5 million shares throughout the quarter, reducing our weighted average share count to 673 million. We also announced the acquisition of Compressor Controls Corporation this week, which Vimal will provide more detail on shortly. Looking forward, I am encouraged by the strength we are seeing in many areas of our portfolio. We continue to execute on our proven value-creation framework, which is underpinned by our Accelerator operating system. I am proud of our ability to over-deliver another quarter amidst a challenging external environment. Next, let's turn to Vimal to discuss some exciting recent announcements.

Thank you, Darius, and good morning, everyone. Let's turn to slide 4. In February, we announced that ExxonMobil will deploy Honeywell's carbon capture technology at its integrated complex in Baytown, Texas. The plant is expected to be the largest low-carbon hydrogen project in the world at planned startup and projected to produce around one billion cubic feet of low carbon hydrogen per day. Honeywell technology will enable the facility to capture more than 98% of the associated CO2 emissions, which will be sequestered and permanently stored by ExxonMobil. In addition, Honeywell recently launched a European Clean Aviation project to develop a new generation of Aerospace-qualified megawatt-class fuel cells powered by hydrogen. Green hydrogen is an extremely clean power source that can be used to propel future aircraft, which makes it particularly appealing to the aerospace sector as we work to reduce carbon emissions. Work on this project will be performed at Honeywell Technology Solutions Research & Development Center in Brno, Czech Republic, and at all other Honeywell and project partner sites across Europe. Finally, this week, we announced a $40 million-plus win in our Connected Enterprise business with Globalworth, a leading real estate investor in Central and Eastern Europe. Globalworth is using Honeywell's Forge for building technology to help monitor energy consumption down to a device or asset level across their commercial office buildings in Romania and Poland, while maintaining occupant comfort and productivity. Our solution will help reduce operating costs and lower energy consumption, key outcomes for Europe's overarching climate objectives. These existing technologies provide us with new growth sectors while reinforcing Honeywell's sustainability message, demonstrating how we are helping the world solve its toughest challenges across all our end markets. Now, let's turn to slide 5 to discuss an exciting new acquisition we just announced this week. On Wednesday, we announced an agreement to acquire Compressor Controls Corporation, in short, CCC, a leading provider of machinery control and optimization solutions, including controlled hardware, software, and services, for $670 million in all cash transactions. CCC technologies primarily serve the LNG gas processing, refining, and petrochemical segment and will bolster Honeywell's high-growth sustainability portfolio with new carbon-capture control solutions, where the same turbo machinery is used to achieve effective removal of CO2 from process plant emissions. This acquisition will be integrated into Honeywell's Process Solutions business and strengthen Honeywell's leadership in industrial control, automation and process solutions, enabling customers to accelerate their energy transition. CCC's EBITDA margins are accretive to Honeywell, and we expect to achieve a cash basis return on investment of more than 15% by the fifth year that CCC is part of Honeywell. The transaction represents 15 times 2023 expected EBITDA on a tax-adjusted basis and 13 times EBITDA, assuming $8 million of annualized cost synergies. I'm excited about the new technologies and adjacencies we have unlocked through this latest transaction. We've said before that we have an active M&A pipeline, and this is further evidence that we are continuously enhancing our automation portfolio by investing in new opportunities. Now let's turn to slide 6 to discuss the first quarter results in more detail. As Darius mentioned, we delivered strong first quarter results despite a dynamic economic backdrop. Our operational agility enabled us to exceed our financial commitments. First quarter sales grew 8% organically with double-digit growth in PMT and Aero, where we generated continued volume improvement on a strong demand and an improving supply chain. In fact, volume grew 2% for overall Honeywell in the first quarter, despite an impact of traffic activity levels in our long-cycle warehouse automation business. Excluding SPS, volumes were up 7% for the first quarter. Our backlog grew 6% year-over-year and 2% sequentially, and our orders grew 1% organically and 8% sequentially, driven by long-cycle strength in Aero and PMT. Supply chain remains a constraint on our overall growth. However, Aero saw further output improvement, and we saw positive backlog reduction across all of our short-cycle businesses. In addition to strong organic growth, we expanded segment margins by 90 basis points year-over-year to 22%. We continue to reap benefits from our investment in Honeywell Digital that has enabled us to stay ahead of the inflation curve through the strategic pricing action, despite the top-line headwinds, SPS led the other SBGs with the largest segment margin expansion as they benefit from the right-sized cost base. Now, let's spend a few minutes on the first quarter performance by business. Aerospace sales for the first quarter were up 14% organically, led by 20% growth in Commercial Aviation, the fifth straight quarter of at least 20% organic growth and the eighth straight quarter of double-digit growth. Sales growth was strongest in commercial aviation aftermarket, where continued flight hour recovery resulted in increased spare shipments and repair and overhaul sales, particularly in air transport. Commercial original equipment sales were also up double-digit, driven by higher business and general aviation sales. Defense and Space returned to growth in the first quarter as we were able to convert our strong 2022 orders book into increased sales volume. Book-to-bill in defense and space remained greater than 1 in the quarter. As expected, the Aero supply chain continued to make modest progress sequentially. Improvements in material availability from the lower supplier decommitment rates enabled us to increase our original equipment and spare shipments by 20% year-over-year in the first quarter. Our positive backlog remains at historically high levels, as expected, with plenty of volume yet to be unlocked. Segment margin in Aerospace contracted 80 basis points year-over-year to 26.6%, driven by higher sales of lower-margin original equipment products, partially offset by our commercial excellence efforts and volume leverage. Performance Materials and Technologies' orders grew organically across all three businesses, ahead of our expectations, led by over 20% growth in UOP. We remain particularly excited about traction in our Sustainable Technology Solutions business, where orders doubled year-over-year. For sales, PMT grew 15% organically in the quarter with double-digit growth in all three segments of the PMT portfolio. This was the fourth consecutive quarter of double-digit organic growth in PMT. UOP grew 19% organically in the quarter, led by refining catalyst shipments and gas processing, partially offset by lower refining and pet-chem equipment volumes. Process Solutions grew 16% organically, driven by strength in projects and Smart Energy. In Advanced Materials, sales grew 12% in the quarter as we saw another quarter of robust demand for fluorine products that more than offset some softness in our Electronic Materials business. Segment margin contracted 20 basis points year-over-year to 20.6% as a result of cost inflation, higher sales of lower-margin products, and a previously communicated disruption in one of our PMT plants that caused some unplanned downtime, partially offset by commercial excellence and volume leverage. Safety and Productivity Solutions sales decreased 11% organically in the quarter. Sales declines were led by warehouse and Workflow Solutions and productivity solutions and services. The aftermarket services portion of our Intelligrated business continues to perform well as expected, with sales growing greater than 20% in the quarter at accretive margins. The Sensing portion of our Sensing and Safety Technologies business remains a bright spot in the portfolio. Continuing the trend from last year, the segment margin for SPS was once again a standout in the quarter, expanding 270 basis points to 17.2% as a result of productivity actions and commercial excellence, partially offset by lower volume leverage and inflation. In Building Technologies, sales increased 9% organically in the quarter, with growth in both Building Products and Building Solutions. Project sales were up double-digits for the fourth consecutive quarter as we continue to convert our strong backlog. Services volumes also increased in the quarter, resulting in 13% organic sales growth in Building Solutions. Turning to our product portfolio, the supply chain is improving as expected. Building Products grew 7% organically year-over-year to continued strength in our world-class fire franchise. HBT orders were stronger than expected in the first quarter, although down mid-single digits year-over-year organically as we lap outsized 2022 comps from the height of supply chain challenges. While inflation remains elevated, our strong building solution sales presented as mix headwind, our commercial excellence and productivity efforts allow us to mitigate these challenges and expand HBT segment margins by 170 basis points to 25.2%. Growth across our portfolio continues to be supported by accretive results in Honeywell Connected Enterprises, an ongoing indicator of the power of our strong software franchise. Robust overall growth was driven by double-digit growth in cyber, industrial, aerospace, and connected buildings. The future outlook is also strong due to double-digit growth in orders. Overall, this was a great result for Honeywell. Adjusted earnings per share in the fourth quarter grew 8% to $2.07, $0.11 above the high end of our first quarter guidance and up 16% excluding pension headwinds. Segment profits drove $0.21 of year-over-year improvement in earnings per share, the main driver of our EPS growth. Excluding pension headwinds, below the line and other added $0.03 year-over-year, a lower adjusted effective tax rate contributed $0.02 of improvement and reduced share count added an additional $0.05 for total EPS, excluding the pension impact of $2.22. This was offset by a $0.15 headwind from a lower pension income. A bridge from adjusted EPS from 1Q 2022 to 1Q 2023 can be found in the appendix of this presentation. We made good progress on cash for Q1. Reported cash flow for the quarter was negative $1 billion due to the payment of settlements signed in the fourth quarter of 2022, which we signaled in our guidance call. Excluding the net impact of these settlements, we generated $300 million of free cash flow, up from $50 million in the first quarter of last year. This increase was driven by improved working capital, including more favorable payables and inventory balances. As we discussed, our inventory planning focus will be a major contributor to our cash performance in 2023, and we are off to a promising start. So overall, Honeywell's operating playbook continues to deliver strong results. And that, combined with our differentiated portfolio of solutions, will enable us to drive compelling growth in earnings and cash for the quarters to come. Now let me turn it over to Greg, as we move to Slide 7 to discuss our second quarter and full year guidance.

Thanks, Vimal, and good morning, everyone. As we look to the rest of 2023, our original guidance framework continues to be solid. We delivered above our Q1 guide as we navigated known risks and have raised the year to reflect that. Our demand profile remains robust with record backlog and favorable order trends in Aerospace and PMT. We continue to monitor the macroeconomic backdrop and its impacts on our shorter-cycle businesses, and our rigorous operating principles enable us to stay agile to outperform through another challenging year. For our 2Q sales guidance, we expect to be in the range of $9.0 billion to $9.2 billion, up 1% to 4% on an organic basis. We now expect full-year sales of $36.5 billion to $37.3 billion, which represents an increase of $500 million in the low end and $300 million on the high end from our prior guidance, incorporating our strong first quarter results. We're raising our organic growth range now at 3% to 6%, and we continue to expect a greater balance of price and volume versus last year and have upgraded our full-year expectations in Aero while softening our outlook for SPS to reflect the demand we're seeing. Moving to our segment margin guidance. We expect the second quarter to be in the range of 21.8% to 22.2%, resulting in year-over-year margin expansion of 90 to 130 basis points due to continued benefits from our improving cost position and business mix in SPS and commercial excellence in HBT. For full-year 2023, we're upgrading our segment margin expectations by 10 basis points on the low end to a new range of 22.3% to 22.6% or 60 to 90 basis points of year-over-year expansion. Our rigorous fixed cost management and favorable price-cost strategies remain key elements of our operating playbook, helping us to drive margin expansion. Now let's take a moment to walk through the second quarter and full year expectations by segment. Looking ahead for Aerospace, demand across our end markets remains very encouraging. We expect modest sequential sales growth in the second quarter as flight hours continue to improve with particular strength in commercial aftermarket. This flight hour growth, enhanced by further recovery in wide-body aircraft as international travel recovers, will lead commercial aftermarket to be our strongest end market for sales in 2023. On the commercial OE side, we also expect strong volume growth as build rates, particularly for business and general aviation OEs, continue to trend upwards. In Defense & Space, we passed the growth inflection point in 1Q, and we expect similar organic growth rates throughout the year as we convert our strong defense order book into sales. While the demand environment supports rapid top-line acceleration, the pace of sales growth throughout 2023 will ultimately be determined by the rate of recovery in the Aero supply chain. Our expectation for the supply chain remains unchanged, modest steady improvement each quarter. Reduced decommits from suppliers should allow for sequential improvements in factory output. Given the positive signs from the supply chain and continued strength in our order book, we now expect Aero organic sales growth in the low double-digit range, an upgrade from our outlook last quarter of high single digits to low double-digit growth. However, we anticipate most of the incremental sales strength to come from our OE business, resulting in modest mix pressure on margins. We now expect Aero segment margins to be flattish for the full year. In Performance Materials and Technologies, the constructive outlook across our end markets will continue to drive favorable growth. For the second quarter, we expect sales to increase sequentially and year-over-year, led by continued strength in our projects and smart energy businesses within Process Solutions as well as life-cycle solutions and services. This strength will likely continue throughout the year, supporting strong growth for Process Solutions overall. In Advanced Materials, continued demand for flooring products will enable us to capitalize on our capacity expansion investments we made in 2022, but we still expect to see some softness in electronic materials until the second half of the year. In UOP, our growth outlook is supported by robust demand for gas processing equipment, and we see increasing global demand for our sustainable technology solutions as legislation has improved project economics. For the full year, another quarter of strong orders and backlog growth gives us confidence in our sales expectations, although more challenging comps moving forward mean that the first quarter will likely be the largest in terms of organic growth. We still expect sales for overall PMT to be up mid-single digits for the year. Segment margin and PMT should expand sequentially in the second quarter and throughout the second half, leading to modest expansion for the year. Looking ahead for SPS, we are expecting low double-digit year-over-year declines in the second quarter as we see continued impact from the decline in investment for new warehouse capacity and short-cycle demand softness in our products businesses. However, we expect sales to grow sequentially from the first quarter, led by strength in sensing and safety technologies. The aftermarket services portion of our Intelligrated business continues to grow at strong double-digit rates, and we anticipate this trend continuing throughout the year. In our short-cycle businesses, the demand outlook for 2023 is a bit more challenged than we initially anticipated. As a result, we now expect SPS to be down high single digits, lower than our initial guidance last quarter of down mid-single digits to high single digits. However, from a margin standpoint, we still anticipate another solid year for SPS as we see the results of our operational improvements and as sales mix continues to improve, as evidenced in our first quarter results. In Building Technologies, we are encouraged by our strong start to the year and the overall execution of the business. For the second quarter, sales should improve sequentially and lead to modest year-over-year growth as the supply chain environment continues to slowly improve, allowing us to further work down the past-due backlog we built last year in our Building Products business. We expect this robust backlog, along with stimulus-led institutional demand in verticals such as airports, healthcare, and education, to remain resilient throughout the year. On the Building Solutions side, we are encouraged by the strong demand for our building services, and we see our long-cycle Building Solutions sales likely outpacing product sales in 2023. For overall HBT, while we delivered high single-digit growth for the first quarter, comps get harder as we progress throughout the year, given that the impacts from our supply constraints were most acute in the first half of 2022. We maintain our full-year sales outlook of low single-digit organic growth. Although, as we've said previously, we'll continue to monitor orders for Q2 and may have an upgrade opportunity after we complete the second quarter. HBT remains well aligned to emerging secular themes of sustainability and energy efficiency, and we see runway for growth acceleration as we exit 2023. For HBT segment margins, we still expect year-over-year expansion in 2023 as we maintain our momentum from the first quarter. Turning to our other core guided metrics, net below-the-line impact, which is the difference between segment profit and income before tax, is expected to be in the range of negative $130 million to negative $185 million in the second quarter and negative $500 million to negative $625 million for the full year. This guidance includes a range of repositioning between $50 million and $100 million for 2Q and $225 million to $325 million for the year, as we continue to fund attractive restructuring projects and properly position Honeywell for the future. We expect our adjusted effective tax rate to be roughly 21% in the second quarter and for the year and the average share count to be around 671 million shares in 2Q and approximately 670 million shares for the full year. Earlier this week, the Board approved a $10 billion share repurchase authorization, providing us with continued flexibility on the best way to deploy our balance sheet. As a result of these inputs, our adjusted earnings per share guidance range is between $2.15 and $2.25 for the second quarter, up 2% to 7% year-over-year. For full year EPS, we are upgrading the low end of our guidance range by $0.20 and the high end of our guidance range by $0.05 to a new range of $9 to $9.25, up 3% to 6%, reflecting our continued confidence that 2023 will be a strong growth year for Honeywell despite the year-over-year pension headwinds. Excluding these headwinds, EPS growth will be 9% to 12% up for the year. We still expect to meet our original free cash flow guidance of $3.9 billion to $4.3 billion in 2023 or $5.1 billion to $5.5 billion, excluding the net impact of settlements. So in total, we executed a strong first quarter with outperformance across all guided metrics and are raising our full-year 2023 organic sales growth, segment margin, and adjusted EPS guidance ranges.

Thank you, Greg. In summary, we're off to a strong start to 2023, over delivering across the board versus our guidance, allowing us to meaningfully raise our full-year guidance for organic growth, segment margin, and earnings per share. Our value-creation framework is working. The macro economy remains uncertain, but we continue to grow our record backlog, and executing at it provides significant runway in the near term. Honeywell remains well positioned to outperform in any environment. Thank you to all of our Honeywell colleagues who continue to drive differentiated performance for our customers and shareholders. With that, Sean, let's move to Q&A.

Thank you, Darius. Darius, Greg, Vimal, and Anne are now available to answer your questions. Liz, please open the line for Q&A.

Thanks, good morning.

Good morning.

Congrats again, Vimal, on the change in your...

Thanks.

I guess your first call is going to be, I guess, the second quarter. But on that front, maybe give us some color on the sequential trends as far as earnings are concerned for the rest of the year, 2Q, 3Q and 4Q, just to kind of level set everybody after this pretty strong first quarter.

Yes. So sequentially, as Greg gave you the full year view, we do expect the growth momentum to continue even though at a slightly different rate. Part of it is, we had a pretty strong quarter in PMT and HBT prior year, so we are dealing with the tough comps. There is certainly going to be some revenue comparison issues there. Aero will be very strong. And SPS, as we guided, will be moderated performance over the rest of the year. But overall, we remain confident in our new guide of 3% to 6% organic growth rate, and we'll work hard to perform on that. Greg, if you want to add anything?

No, I think you made an excellent point. I expect the second quarter to deliver very positive results across the portfolio, even though we are coming off four quarters of impressive double-digit growth in PMT and high single-digit growth in HPT for three to four consecutive quarters. Nonetheless, the underlying business performance moving forward is expected to be very strong.

Sorry. So what's the sequential performance for EPS? Should we think about that as kind of in line with normal seasonality, or…

Yeah, when you look at our…

…like how do we think about the phasing of EPS for the rest of the year?

Yeah, when you look at EPS sales, I mean, we're going to be roughly in line with normal percentage of the year in those quarters. This year and last year, a little bit heavier in the back half. This year, a little less so, but it's not going to look out of the norm.

What is the norm? Can you just remind us because it's been a couple of years of abnormal.

Well, you're asking about many different metrics, Steve. So it depends on which one you're talking about.

EPS. EPS. EPS.

We anticipate that the later part of the year will be a bit stronger. The fourth quarter is likely to be larger than the second and third quarters, but those two will be quite similar to each other.

Okay, great. Thanks a lot for the color.

Hi, good morning.

Good morning.

Good morning. Maybe I just wanted to try and understand, dialing in on the second quarter for a second. So you've got a smaller than maybe normal sequential sales increase. It doesn't sound like that's anything macro or demand-related. It's maybe more on supply, so any extra color on that? And also, it looks like you're guiding for sales to be up sequentially in Q2 firm-wide somewhat at flat margins. So is that just something around maybe Aero OE mix? Just any thoughts on that, please?

Yeah, Julian, if you actually look at the historical revenue step from Q1 to Q2, it's very much in line with what we've done historically. Last year was a bit of an anomaly given that it was more heavily impacted by some of our supply chain challenges. But if you look at this, the historical progression from Q1 to Q2, it's very much consistent and in line with that, if you look at the prior year averages.

Yeah. No, I mean, we've grown anywhere from 4% to 7% quarter-to-quarter sequentially. This guide has us right in like the 3% to 4% range. Last year, we had a really big step-up in PMT. It's a little bit less in Q2 this year. But again, very much within historical parameters. And from a margin perspective, again, last year, we went down in margin rates from Q1 to Q2. So our guide is solidly within our Q1 performance. I think at the top end, we're up 20 basis points. At the bottom end, we're down 20. So it's frankly right in the norm. So I wouldn't read too much into it.

Thanks very much. And then just my follow-up would be around the SPS piece updated thoughts on that second half outlook, particularly the PSS portion, how are you looking at that in the second half on revenue versus warehouse? And if there's been any change in your warehouse growth or sales assumptions for the year? Thank you.

Yeah. So I mean, let's take this piece by piece. And in terms of PSS, I mean, we've actually seen sequential improvement off of Q4. So we think that, that business is back on the rise, and we saw that sequentially. So I think that, that's very much consistent with our assumptions and is very much in line with our expectations. When it comes to IGS, that market continues to be relatively soft. But having said that, our quote activity and our opportunity activity is significantly increasing for Q2, Q3, and Q4. Because as we look forward in the pipeline, that continues to get better and better. So we're cautiously optimistic that we're going to see much better order trends as we head into the last three quarters of the year.

I think Darius expressed it well. IGS revenue for this year is already secured due to the long-term nature of the business. We are making significant efforts to establish a strong order base for 2023 to ensure a solid performance in 2024. I can assure you that we will not lose market share, and as the market improves, we expect to capture our fair share of demand.

Thanks. Good morning. Thank you for the question. It's a bit mixed, but I want to clarify what surprised us positively. It seems to be partly due to supply chain issues, but also significantly influenced by strong demand. We also noticed a considerable increase in accounts receivable on the balance sheet, which might suggest that March was quite strong. I'd like to hear more about that as well.

Sure. Let me take that. So if you think about our guidance 90 days ago, we talked about really three specific risks that we were watching. One was China with Chinese New Year and concerns about whether everyone was going to go home and then come back and wind up with lockdowns in China. It didn't happen. Things turned out quite well. There was really no disruption in China at all. Second, one was really, again, Aerospace and where we're going to get a substantial sequential improvement in output, and we did. We were up 20% in our output in Aerospace year-over-year, which was above the high-end of our guidance and was quite strong. And then the third one is PMT. And we talked about the fact that, in December, we had some challenges with the freeze in the Louisiana area with some of our factories there, and we had an outage early January, which we needed to shut down a plant and bring it back up again, and it came up quite well and, in fact, on time. After the plant was restored, it was operating at levels that were greater than before the outage even occurred. And so that's why what you're seeing is essentially PMT and Aerospace, in particular, drove probably over $100 million each, on the top-end of our own guide in terms of the revenue outlook. So those are things that we were conscious of and we're watching and managing where we could, and things turned out quite well. And then again, as you mentioned, accounts receivable goes up. As you recall, 50% of our revenues in any quarter in the last month of the quarter, we had a really strong revenue performance. ARR goes up, and we've got a lot of receivables here to collect in April, and I'm sure that will bode well for strong cash here in Q2.

Great. Thanks, Greg. I'll leave it there with one question.

Yeah.

Hey. Good morning, guys.

Good morning.

Good morning.

And welcome, Vimal.

Yeah.

You announced a significant buyback of $10 billion, which is a substantial amount. We're hearing from other companies that mergers and acquisitions are reaching a favorable point where valuations are becoming more reasonable and the competition is possibly less intense. How do you view your pipeline of potential deals in relation to your guidance? A reduction of about 1% in share count suggests you might not be immediately using the entire $10 billion for buybacks. What is your perspective on the balance between buybacks and M&A? Additionally, can you provide insights on your backlog and pipeline? I'll pause there. Thank you.

Hey Scott, real quick, just what you saw with the $10 billion authorization, that is like what we always do. We work our authorization down to about a $2 billion range. And then we, frankly, almost as a matter, of course, re-up it to $8 billion or $10 billion. And so you should view that as us just doing our normal re-staffing of our buyback authorization to give us the flexibility that we always have. So there was nothing abnormal in that at all in terms of the cycle of the way we operate. But I'm sure Darius will talk about the capital allocation aspect.

In terms of our framework, we maintain a minimum buyback of 1% per year on average, and we have consistently adhered to this. The $10 billion authorization supports this approach. While it may not warrant excessive attention, it is aligned with our strategy. We will continue to repurchase shares as market conditions permit, ensuring we achieve at least 1%. Regarding mergers and acquisitions, I believe this is a crucial topic. I have always indicated that there are times to buy and times to sell, and right now, I see a great opportunity to be a buyer, especially considering the recent deal we executed. Our pipeline is stronger than ever, and we are exploring several promising bolt-on opportunities that we aim to finalize in the coming months.

Darius, as a natural follow-up, you mentioned that now is the best time to be a buyer. I don’t think I’ve ever heard you express such strong sentiments during your time here. Are you considering any larger acquisitions in addition to the smaller bolt-ons you discussed?

No. I mean, I think, we said the bolt-on for us is up to $5 billion, $6 billion, $7 billion range. So I would say that, that’s decent in size. The reason I’m more bullish is, look, the cost of money has gone up significantly. I mean, you see the interest rates. And frankly, the competition is different. The competition for assets now is primarily strategic. A lot of the PE activity is not — I wouldn’t say it’s non-existent, but it’s not as nearly as strong as it used to be. And I think it’s smart to be a buyer or a seller in various cycles of economic conditions and interest rates. And I think right now, I think it’s smart to be a little bit more aggressive on being a buyer.

Very encouraging. Thank you. I’ll pass it on, guys. Good luck.

Thank you.

Thank you and good morning, everyone. Maybe bigger picture as well. Can you talk about what you guys are seeing, Darius, across the pricing portfolio? I think, Greg, you mentioned pricing contributed 6 points to organic growth of 8%, including SPS. How does pricing balance out and volume throughout the remainder of the year? And how do you see it playing across the segments?

Yes, I think you noticed a 6:2 mix as we progress. We are still estimating a 4% price impact for the year. Pricing will likely be more challenging in the second half as we compare to previous figures. However, pricing will remain a crucial value driver for our performance due to the unique technologies we have in our portfolio. We expect to come off of a 6% increase to project 4% for the year, anticipating something slightly lower in the latter half. This aligns with the expectations we had for the year, and we are gaining confidence in our projections as we've raised both the lower and upper ends of our ranges. Greg, do you want to add anything?

Yes. No, I think you said that, this is not really that different from what we talked about, and we have positive price every quarter of this year. So no concerns in that. Again, we’ve talked about it for the last six, nine months. As inflation settles down a little bit, there are going to be pockets where it won’t be as necessary as it was a year ago. And so, that’s what you’re seeing now.

Great. Thank you.

Thank you. Good morning, everyone.

Good morning, Jeff.

Hey, good morning. And just a two-parter on kind of Aero OE. I mean it looks like you're making pretty good progress, as you stated and you acknowledged some supply chain issues. But I was a little surprised, one of your customers called you out by name yesterday. Just wondering if there's something Honeywell-specific that's hung up from a delivery standpoint, or you would just kind of point your finger further down the line to your suppliers as just kind of part one, if you could add any color there. And then just also one OE kind of incentive payments and the like, where do we stand for 2023 now? Is this still kind of a peak year for headwinds, or does some of that maybe move into 2024, if deliveries aren't quite what you thought they might be?

Yes. So let me kind of start with the first part of your question. I think as we look at our output, so ranges depending upon whether it’s avionics or some of the mechanical things, were up anywhere from 20- to 40-plus percent. So I think we’re actually very pleased in terms of the output. Like, I can assure you that in terms of the bottlenecks, it’s not Honeywell. It’s not sort of throughput to our facility. So we have a lot of issues with our supply base as well and frankly, some of those being large public companies. I’m not going to sit here and call them out on a call like this. Frankly, it’s our responsibility, and it’s our job to deliver. And I’m not going to use somebody else as an excuse for us not delivering. That’s our job to manage. And frankly, the earnings call is not the right place to actually have those kinds of discussions. So we’re going to work at it. We own it. I know the supply chain in Aerospace is not perfect. It’s getting better and it’s getting better relatively quickly, probably even better than we anticipated. But there’s work to do. And there are four or five layers of the supply chain. And what we’re seeing and feeling flows down to our suppliers we’re still getting some very inconsistent supply base. I mean, our decommit rate went from being 19%, 20% Q4 down to 15%, but 15% is still not good. But improving, and we’re making those improvements, and we’ve launched hundreds — and I mean, literally hundreds of people into our supply chain to assist our suppliers and, frankly, probably put more time and effort to be responsive to the needs of our OE base. And I don’t know, Greg.

Yeah, on the incentive side, we’re not making any adjustment to our expectations as far as that is concerned. It’s still very early in the year. As far as we know, OE deliveries are still going to be roughly in the range of what we had anticipated as we opened the year. And like you said, we expect this year is probably the peak. And then it’s going to flatten out or come down slightly next year but still be relatively high. Should that shift left to right a little bit, we’ll see. But at this moment, we’re keeping our expectations as they were.

I wanted to mention that the diversity of our portfolio in Aero is quite unique. We provide engines, avionics, navigation equipment, lighting, brakes, and more. Because of this diversity, our overall volume is growing, but there may be some categories where growth is slightly less than in others. This positions us uniquely in the eyes of our customers, as they naturally prefer consistent growth across all product lines. It's important to recognize that our diversity is a distinctive factor compared to our peers.

Thanks. Good morning. I want to understand Aero with my one question. As you consider the margins for the year, you mentioned they would be flat, starting off lower. What improvements do you expect as the year goes on? Is there a supply chain issue affecting the margins right now? Your aftermarket business is growing faster than original equipment. Can you provide some insights on how margins in Aero are expected to improve as the year progresses?

Yeah, sure. I mean think about it this way. The first and most basic one is volume leverage, right? We are very much in control of our fixed cost, and revenue is going to go up each and every quarter sequentially, and it will have a crescendo and probably the highest quarter in Q4. So just by that alone, we’re going to get some volume leverage. So there’s not like any big changes from one quarter to the next that I would call out from a mix perspective. Now, again, that can always fluctuate as time goes by. But the single biggest thing that you should expect is really around volume leverage. It’s fairly simple.

Okay. Great. Good enough. Thanks.

Thank you. Good morning, everyone. Darius, since this is your last call, I just want to say congratulations on your run as CEO. And look, all CEOs want to go out on a strong note, leaving the company in good hands. And I think this quarter speaks to that. So congrats.

Thank you. Appreciate that.

For my one question, on Intelligrated aftermarket, there was always this high growth in installations, and we are waiting to get that critical mass in the installed base to start to get to the aftermarket. Have you reached that point? And what's that mix going forward between OE and aftermarket? Thanks.

Overall, our aftermarket performance has seen double-digit growth over the last couple of years, including this year. In fact, we are performing exceptionally well, reaching high-teens growth. Regarding the mix, we are moving towards a two-thirds, one-third split, which is a positive development. This business has been around for 7 to 8 years, and looking ahead 15 years, the mix is likely to favor the aftermarket, similar to our experiences in other areas of Honeywell. Currently, the growth is exceeding our expectations at consistently above 15%, and we are very pleased with that, as margins are also quite attractive.

Thank you. So the guidance, at least at the midpoint, seems to suggest slightly better organic growth in the back half relative to Q2 and comes despite tough comps and maybe some macro concerns out there. So could you just maybe provide some more color on the subsegments or business lines where you think you could see better organic growth relative to Q2? And also, does this dynamic maybe reflect some Q2 conservatism? The prior commentary kind of said that Q2 seasonality is coming in below normalized levels? Thank you.

Sure. We anticipate good sequential organic growth in Aerospace as the year progresses, which provides significant overall support. This aligns well with our historical trends, and we are confident in our guided range. For the latter half of the year concerning PMT, we expect strong performance as well. SPS should experience somewhat easier sequential comparisons as the year advances. We are likely to see the peak of our declines in the first half, with conditions improving in the second half, which will alleviate some pressure on the overall portfolio. We foresee nice growth across three out of four business areas, and the easing of SPS comparisons will contribute positively.

Yes. And the other factor is that we're gaining more and more confidence in output out of Aerospace. I mean we're continuing to grow. It's the work that we've done in terms of mending the supply chain that's producing results. I quoted some of the year-over-year numbers earlier. And we expect that progress to continue and even accelerate, particularly as we get into the back half of the year. So we're very confident in our outlook for the growth that we have and looking forward for signs and especially order rates for HPT to see what that looks like. Because obviously, our Q1 results there were also better than expectations, both in terms of revenue and orders. So we'll see how Q2 goes, and that may offer some further upside.

Thank you. Appreciate that.

Once more, I want to thank our shareholders for your ongoing support. I valued our dialogue over the past seven years. Also want to thank the entire Honeywell family, including our colleagues, both present and past. We've built a tremendous company over the past two decades, and it's thanks to all your hard work and perseverance. It has been an honor to be able to lead this company. We delivered outstanding first quarter results. More importantly, I have the utmost confidence that we'll continue to do so in the future under Vimal's leadership with the typical level of operational rigor you've come to expect from Honeywell. This company's best days remain ahead of us, and we look forward to discussing this further at our upcoming Investor Day next month. Thank you all for listening, and please stay safe and healthy.

Thank you.