Q2 2019 Earnings Call
Thank you for calling me ever confirmation code. Please.
Sorry can you repeat that.
Right.
Have your confirmation could please.
H O N two Q1 nine.
[noise].
You may have your first and last thing were smelling.
My name is Jacqueline J.C., usually you E.L.I.E. last name Garrahan G.A.R.R.A.H.A.M.
[noise].
And that was a d. as in Delta.
And our our HSN.
Two.
[noise].
In may of your company.
Its era I you are right.
[noise].
Just one moment all plays into your call.
Yeah.
Yeah.
Vince had been placed in a listen only mode and the floor will be open for questions. Following the presentation.
If you would like to ask a question at that time. Please press star one on your Touchtone phone.
If at any point. Your question has been answered you may remove yourself from the queue by pressing star too.
Lastly, if you should require operator assistance, please press star zero.
As a reminder, this conference call is being recorded.
I would now like to introduce your host for today's conference.
Luso Vice President of Investor Relations.
Thanks April good morning, and welcome to Honeywells second quarter 2019 earnings Conference call with me here today are chairman and CEO Dareus domestic 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 Dot Heigl dotcom forward Slash investor note that elements of this presentation contain forward looking statements that are based on our best view of the world and of our businesses as we see them today those elements can change and we ask that you interpret them in that light we identify the principal risks and uncertainties that may affect our performance and our annual report on Form 10-K , and other SEC filings.
For this call references to adjusted earnings per share adjusted free cash flow and free cash flow conversion and effective tax rate exclude the impacts from separation costs related to the to spin off of our homes and transportation systems businesses in 2018, as well as 2018 pension mark to market adjustment and us tax legislation, except where otherwise noted references to 2019 adjusted free cash flow guidance and associated conversion exclude impacts from separation costs related to the 2018 spin offs.
This morning, we will review our financial results for the second quarter of 2019 share our guidance for the third quarter and provide an update to our full year 2019 outlook and of course, we'll leave time for your questions at the end with that I'd like to turn the call over to chairman and CEO Dareus a downtick.
Thank you Mark and good morning, everyone. We're excited to be hosting our call. This morning from Charlotte North Carolina, which will officially become our corporate headquarters on August Onest. It is an exciting time to be part of Honeywell team as we continue to transform our business into a premier technology company with Charlotte as our home base, let's begin this morning on slide two.
There was another very strong quarter for Honeywell, we again delivered on our commitments generating earnings per share of $2.10 at the high end of our second quarter guidance up 9%, excluding the impact of spin offs from 2018.
This strong earnings result was driven by organic sales growth of 5% and 170 basis points of segment margin expansion.
Notably our segment profit excluding the spin on a comparable basis to 2018 was up 9% this quarter and was the largest contributor of EPS growth for the first half of 2019 organic sales growth reached 7%, which is a proof point to the investments we've made in our business in our sales force and new technologies that are winning in the marketplace. We continue to see the benefits from our strong positions on key platforms in our long cycle business aviation and defense portfolios in aerospace in our warehouse automation business, which is up over 20% organically year to date and now generates approximately $2 billion in annual sales.
In our building technologies business, which had another great quarter.
Our process solutions in Europe businesses, which principally serve the oil and gas industry also both grew 5% organically this quarter as we continue to be encouraged by the progress we are making the Honeywell connective enterprise, which drove double digit organic sales growth of our software in the quarter. In fact this quarter, we signed a framework agreement to deliver Honeywell Forge asset performance management and improve the reliability and performance of over 1000 industrial assets for large middle Eastern refinery.
Segment margin exceeded 21% in the second quarter up 170 basis points, driven by smart portfolio enhancements, we made in 2018, our investments in the commercial organization and the benefits of previously funded restructuring to improve our operations.
Excluding the favorable margin impact from the spinoffs segment margins expanded 80 basis points, which was 30 basis points above the high end of our guidance.
Building on the progress we have seen for several quarters, we delivered 100% free cash flow conversion and will remain on path to approximately 100% for the second year in a row I am encouraged by our progress in this area and remain focused on continuing to drive improvements in working capital. We also continue to execute our capital deployment strategy repurchasing $1.9 billion shares in closing four new Honeywell ventures investments in the quarter, bringing our total to 12 new investments in the first two years of the fund.
As a result of our first half performance, we are raising the low end of our full year organic sales guys by one point to a new range of 4% to 6% and raising the low end of our full year earnings per share guidance to a new range of 795 to $8.15. We expect to generate approximately $6 billion in free cash flow for the year and we have narrowed our free cash flow guidance to reflect this.
While we are encouraged by our performance this quarter, we're continuing to plan cautiously for the second half of the year given the uncertain macro environment in which we operate we've seen some slowing in certain short cycle businesses that has been overcome by the strong performance in the rest of the portfolio. We think it is prudent to plan conservatively in the event of a broader slowdown given that nearly 60% of our business is short cycle nature Im very pleased with our performance in the first half we still have substantial work to do to achieve our plan, but I'm confident that the team will continue to execute I'll stop there and turn the call over to Greg who will discuss our second quarter results and updated 2019 guidance in more detail.
Thanks, Eric and good morning, everyone I'd like to begin on slide three.
As various highlighted we delivered on our commitments again in the second quarter building on a strong start we had in Q1 organic sales growth and margin expansion performance across the majority of the portfolio was very good.
A few highlights to mention defense and space to 20% organically and the commercial aftermarket in aerospace grew 8% organically with strong demand across both air transport and business aviation.
Building technologies grew 5% organically after 9% in the first quarter and process solutions annual fee, which encompass our oil and gas portfolio both grew 5%.
The impact of the spinoff of guaranteed residuals, both large lower margin businesses contributed 90 basis points of segment margin expansion. The remaining 80 basis points was the result of our strong operational performance, primarily in aerospace and performance materials and technologies, we continue to effectively manage the impact of tariffs through well executed mitigation efforts and are in the final stages of eliminating all spin related stranded costs before year end.
Notwithstanding our strong performance across most of the portfolio as we message in April and again in May we did experienced challenges in safety and productivity solutions and more specifically and the productivity products business, which drove a sales and segment margin declined this quarter.
I will address that in more detail in a minute.
Consistent with last quarter. The majority of our earnings growth 16 cents came through segment profit improvement, we realized a six cents benefit from our share repurchase program, which resulted in a weighted average share count of 733 million shares this quarter.
Our effective tax rate was 21.5% largely consistent with the outlook, we provided of 22%.
Importantly, we are also able to fund a substantial amount of fast payback repositioning in the quarter more than $80 million that will support our continued productivity focus functional transformation and supply chain initiatives that we discussed at our Investor day in May.
These proactive measures will be helpful. In the event of a slower economy in the coming quarters.
Finally, adjusted free cash flow in the quarter was $1.5 billion with conversion of 100%. The strong cash generation was most notable in aerospace and building technologies.
We're very pleased with our results and are focused on continuing the strong performance in the second half, let's turn to slide four now to briefly discuss the second quarter EPS Bridge.
Slide four walks our earnings per share from the second quarter of 2018 to the second quarter 2019, as Derek mentioned segment profit growth was the main driver for the quarter.
That acceleration was most prominent in aerospace and PMT due to combination of higher organic sales volumes commercial excellence and our continued focus on productivity.
We also continued to utilize our balance sheet below our share count we deployed we deployed nearly 2 billion towards repurchases Honeywell shares consistent with our plan to reduce the share count by at least 1% during the course of this year.
Finally, we had a five cents headwind on an adjusted basis from below the line expenses, primarily due to the proactive restructuring actions I mentioned earlier and lower pension income year over year as a result of the de risking actions we took in 2018.
That was partially offset by benefits from net interest expense and foreign exchange.
Funding a strong pipeline of future repositioning continues to be a key lever for our productivity playbook and will serve us and our shareholders well as we go forward.
The punch line here is we had another high quality quarter delivering EPS at the high end of our guidance range.
Now, let's turn to slide five and we can discuss our segment performance.
Starting with aerospace sales were up 11% organically. This marked the fourth consecutive quarter of double digit organic growth and capped off an outstanding first half for 2019.
Defense and space grew 20% organically led by global demand for guidance and navigation systems as well as increased spares volumes on us DMD programs, including the F 18 F 22.
The defense business is well positioned more than 50% of firm orders with delivery through 2020 already booked.
In commercial OE sales were up 4% organically driven by continued strength across the business jet platforms, which more than offset declines stemming from the timing of air transport shipments.
Notably we saw increased deliveries across all Gulfstream platforms and strong avionics deliveries on certain does so platforms.
Regarding the Boeing 737, Maxs situation, we remain aligned to Boeing stated production schedule and we'll continue to monitor the situation closely.
But as we stated previously we do not anticipate significant impact to honeywell's operational results in 2019.
Aftermarket sales were up 8% organically driven by demand across both air transport and business aviation.
And growth in retrofit modifications and upgrades, including related to the DSP safety mandates.
We continue to see good adoption of our connected aircraft technologies, which drove strong software sales growth in aerospace and continued to gain traction for our jetwave solution across all aerospace verticals as demonstrated by the Cseventeen when we announced in May our first defense business.
Aerospace segment margin expanded 330 basis points, driven by commercial excellence higher sales volumes and margin accretion from the spin of transportation systems.
The spin contribute approximately 60 basis points to arrows total margin expansion.
The Aero business continues to execute well investing in future technologies driving productivity in commercial excellence and has a healthy long cycle backlog heading into the third quarter.
In Honeywell building technologies sales were up 5% organically driven by global demand for commercial fire products as Emeka poor and his team displayed at our Investor Conference in May we are innovating and launching new products in this business at a much faster rate than we had in the past and we continue to see good acceptance from our customers and strong growth as a result.
We saw good growth across building management software platforms, including including for treating which as you may remember is our platform for integrating building management systems and data using open and proprietary communication protocols.
In building solutions, we drove growth in global projects across the Americas and in the airport vertical in the Middle East.
HPC segment margins expanded 390 basis points in the second quarter, driven by the favorable impact from the spin off of the homes business.
The team continues to make steady progress on our goal to eliminate the remaining stranded costs by year end stemming from the home spend.
Segment margins, excluding the favorable impact from the spin accretion were roughly flat this quarter, a big improvement from the first quarter and we continue to make progress on supply chain optimization post the spin.
Overall, it was another great quarter for the HBT business with double digit projects backlog growth in building solutions position the business well for the second half of 2019.
In performance materials and technologies sales were up 4% on an organic basis process solutions sales were up 5% organically driven by continued strength in our short cycle businesses, primarily in software maintenance and migration services and field instrumentation devices.
We also saw growth in smart energy, primarily in North America.
The short cycle backlog across process solutions is up over 12%, giving us confidence that the growth in the automation portfolio should continue into the second half.
You will see sales were up 5% organically driven by growth in licensing and engineering as well as refining catalysts. We saw particular strength in North America with reinvestment in existing refining infrastructure and select new investments and petrochemicals and strong backlog conversion in the middle East.
You will see orders and backlog were both up over 10% for the quarter. Additionally, on a year to date basis, you will see orders in China were up double digits, primarily driven by growth in equipment licensing and catalyst.
Organic sales growth in advanced materials of 2% was driven by demand for our solstice line of low of low global warming refrigerants and blowing agents. However, this was partially offset by lower pricing due to the impact of a legal HFC imports from Europe .
Enforcement and monitoring of the U.S. gas regulation has been in emerging challenge and we're working diligently in partnership with other producers he regulators and EU member countries to address the harmful illegal imports.
Overall PMT segment margins expanded by 140 basis points in the second quarter, driven by commercial excellence across all lines of business direct material productivity and further improvements in our supply chain.
Finally, and safety and productivity solutions sales were down 4% on an organic basis in the quarter and segment margins contracted 420 basis points.
The weakness we saw this quarter was principally in our short cycle high margin productivity products business.
Similar to the first quarter, we saw a combination of continued into distributor inventory destocking fewer large project rollouts in the mobility space and lower channel sell through.
The second quarter sales mix and Sps negatively impacted our margins as the volume declines we experienced were in more profitable parts of the business.
We continue to see growth in our sensing and IRA business and robust demand for voice solutions in aftermarket maintenance and services and warehouse automation.
As Dennis mentioned during last quarter's earnings release, Intelligrated is beginning to face tougher and tougher comps as we get deeper into the year falling five quarters of approximately 20% plus growth.
We are seeing timing of new major system rollouts push into the second half of the year.
This effect, coupled with tougher sales comps in the second quarter drove flatter sales intelligrated into Q.
The large project order push outs, we saw in Q2 are consistent with our customers latest planning and not an indication of project losses.
Intelligrated aftermarket business, which enhances customer outcomes through consultative engagements to improve productivity was up strong double digits organically driven by demand for comprehensive lifecycle support and service. The business is benefiting from the large installed base growth in the core intelligrated portfolio.
The outlook for this business overall remains very strong and we delivered organic sales growth of over 20% for the first half of 2019, and we continue to expect this to be a growth business long term.
Within the safety business organic sales growth was 1%. We saw continued demand for gas detection products, which grew low single digits organically and retail footwear, which was up high digits high single digits organically.
That was largely offset by decreased volumes of general safety and personal protective equipment.
In our key end markets for the safety business, we see solid demand for portable gas detection in the U.S, but slower activity in the industrial sector given distributor inventory levels.
Let's now turn to slide six and discuss our third quarter outlook.
Our planning assumptions are largely consistent with the second quarter dynamics with some further caution on short cycle.
We expect our growth this quarter will be driven by a combination of continued long cycle strength and aerospace and defense.
Coupled with short cycle demand and building technologies and healthy backlog in European process solutions.
The aerospace business as I mentioned has grown 10% or more organically the past four quarters and we expect continued strong performance due to the order growth rates and backlog in defense.
We've established a significant backlog of new major system awards for Intelligrated over the past year and that will drive growth into 2020 and allow for an expansion of our shorter cycle aftermarket and service businesses.
We are taking a cautious view on the short cycle growth as many of the macro signals the China GDP us China trade tensions and Brexit just to name a few are still cloud in the economic outlook.
We think it's prudent to plan conservatively, given the uncertainties and our three Q and second half guidance reflects that.
As it relates to the sale of weapons to Taiwan by the us government and potential sanctions from China. We see no reason why Honeywell will be potentially sanctioned by the Chinese government and we have received no official word from the Chinese government that Honeywell is on a sanction listed entities.
Now, let's discuss our segment outlook.
In aerospace we continue to see robust demand in both business aviation and in US and international defense supported by robust orders growth and from backlogs for orders with delivery into 2020.
Air Transport shipments should increase sequentially driven by demand for Athree hundred 50, and Athree hundred 20 aircraft and lower customer incentives.
We will see tougher comparisons in business aviation given the significant organic sales growth in the third quarter of 2018.
Consistent with last quarter, we expect the commercial aftermarket activity will be driven by flight hours airline demand and further tailwinds from the adoption of safety and compliance mandates principally in business aviation.
In building technologies, we expect good growth with strength, primarily in commercial fire products in Americas, and EMEA and growth in building management software in high growth regions and for treatment.
On the service side, we expect to see building solutions growth continue given the large order funnel and considerable backlog growth in projects and services.
As a reminder, HBT does have significant short cycle exposure, particularly in the products vertical and although we haven't seen order rates slow we are planning cautiously here in the second half.
In performance materials and technologies, we expect to see short cycle demand for products and services and process solutions and growth in equipment absorbers, and refining house New LP.
We saw good bookings and equipment and catalyst in the second quarter.
And growth in the process solution service bank for new contracts and renewals, which we believe sets PMT up for another good quarter in the third quarter.
Finally, given the challenges we experienced in productivity products.
And our assumption that the inventory Destocking continues for the balance of 2019, we are expecting to see continued headwinds in Sps from both a sales and segment margin perspective, but anticipate that will moderate in the fourth quarter.
We expect Intelligrated third quarter performance to be similar to Twoq with 20 plus percent growth in the aftermarket business, but slower large project growth.
We maintain a robust backlog of project awards from Blue chip customers and see a very strong pipeline of potential awards in the third and the fourth quarters.
The net below the line impact, which is the difference between segment profit and income before tax will be minimal this quarter.
The difference year on year is driven primarily by lower pension income the benefits and spins indemnification payments, partially offset by higher repositioning funding.
Now, let's move to slide seven to discuss our revised full year guidance.
As dairies noted we are raising the low end of our full year organic sales earnings per share and free cash flow guidance.
Our organic sales guidance moves one point on the low end to a new range of 4% to 6%.
While our segment margin guidance is unchanged.
Revise earnings per share guidance of 795 to 815 represents earnings growth of 8% to 10% adjusted excluding the impact from the spends in 2018.
We remain on track to deliver approximately a 100% free cash flow conversion.
Our position on tariffs is unchanged, we expect no significant impact in 2019, given the proactive measures we have taken to mitigate.
We also continue to closely monitor the Brexit situation and are communicating regularly with our customers partners and suppliers.
As we stated last quarter, we are planning for various potential Brexit outcomes, including a no deal Brexit scenario to ensure that as the terms of the UK. His departure from the EU are finalized we are well positioned to continue meeting our customers needs.
Our guidance continues to reflect a weighted average share count of 731 million shares and an effective tax rate of approximately 22%.
Our net below the line expenses are now expected to be approximately 120 million in 2019.
This reflects slightly higher reposition expense charges, partially offset by greater interest income.
We continue to be confident in our ability to execute and in our outlook. We're sticking to the playbook around short cycle caution given the macro uncertainties that remain in the second half of the year.
With that I'd like to turn the call back over to various who will wrap it up on slide eight.
Thanks, Greg we are encouraged by the performance for our businesses, thus far in 2019.
We continue to execute on our commitments to shareowners.
Our generating strong organic growth in many end markets and have multiple levers to enable further margin expansion.
Our operational performance is generating strong free cash flows and conversion.
While investing in the business to ensure we are well positioned for the future.
I'm also encouraged by our progress with the business transformation initiatives, we discussed at our Investor day, particularly given the.
Because of the significant opportunity as seen these areas in the future of Honeywell, let's be clear we have a lot of work to do to execute these initiatives, but I continue to be excited by the energy enthusiasm I see across the employee population to move to both forward and truly differentiated Honeywell from our competitors would that mark let's move to Q1.
Thanks, Darice Dairies and Greg are now available to answer your questions April as you could please open the line for QNX.
Thank you.
The floor is now open for questions. At this time, if you have a question or comment. Please press star one on your Touchtone phone if at any point. Your question has been answered you may remove yourself from the queue by pressing star Tim We ask that you pose your question. Please pick up your handset.
Thank you. Our first question is coming from Joe Ritchie from Goldman Sachs.
Thanks, Good morning, everyone.
Good morning, Andrew.
So look nice nice quarter I guess the.
Obviously, there is going to be a lot of questions around the short cycle commentary.
I heard you guys say you know.
Cautious a few times during their prepared comments I guess, maybe as I think about your business today, and the safety and productivity solutions side, maybe talk a little bit more why you expect the destock to last and whats really driving that through the fourth quarter and then secondarily in that business the commentary around new major system rollout.
Being pushed out I'm just curious whether you guys are seeing any saturation in that market.
Well lets maybe take that come to segment. So number one is.
We anticipate at some level destocking to occur I mean, obviously.
The distributor levels were supported by the level of business. So what we've projected for Q3 and Q4 is some level of moderation, but but certainly account continuation of the trend in terms of softness in that end market as the Destocking continues where our obviously our plans are a bit better than that but what I don't want to do is.
In the short cycle business I don't want to be forecasting too aggressively and then end up disappointing. So that's kind of where we do have baked in particularly into the Q3 outlook, which is still negative and moderating a bit more into the Q4 because.
One of the things, we're trying to really assess and.
How much of this is market and how much of this is off I mean, it's still unclear. Some early indications we add that the market is getting softer, but again until we see all the data points in several competitors reported put all that that piece that all that together, we're really not sure for now we're going to assume it's off because I think I don't want to just.
Say well, it's the market. So we don't need to do anything we I can tell you we have a very aggressive commercial program to address some of these challenges and to drive business at the end user level.
The good news here on productivity products is this is not a technology issue.
We actually have very good technologies theyve been successfully launched.
Most recently in Q2 around our warehouse or warehouse business, and our TLC, which was our strongest segment. So I'm very encouraged by that.
So thats really the story on Sps.
I should say on productivity products in terms of Intelligrated.
It's a very different story.
Intelligrated is been growing by strong double digits like think well north of 20% on average for the last several quarters.
And what's happening there is simply some of the orders that we expected in Q2 got pushed out a little bit there are still out there we expect to book them in Q3 Q4.
We didnt lose them I know that for a frac and the business is going to continue to grow and we're very bullish on the business. So there isn't a greater or a different story here at the businesses gaining share it's performing extraordinarily well.
We see a little bit of a blip and delay in terms of the order bookings and Thats. What we are accounted for in our outlook. Yet I would also just add that the aftermarket business, which as you know capturing the installed base and then going in mine in the aftermarket is a big part of that whole thesis is doing terrific were up over 20%.
On the on the Lss business and have been for multi quarters.
And as you know that also carries a higher margin profile. So I think that that part of the playbook is working nicely.
That's helpful to hear and obviously, we prefer for you guys to be prudent measure planning assumptions go for the second half of the year I guess I guess on the in that vein right. Like you started the year off with roughly 7% organic growth.
Above where your organic guidance for the year long cycle backlog still plus 10% I guess.
What is then the embedded planning assumption for the short cycle businesses it seems like.
Seems like you're planning for it.
Very very low growth if any growth in short cycle in the second half of the year and maybe what are some of the puts and takes you got there.
Well again, Joe the productivity products. One is is a big contributor to that but you are right for the remainder of the short cycle businesses.
I would say outside of maybe the aerospace aftermarket I, we're planning for low single digits and.
You know again use is we've seen that can turn very quickly. So we don't want to get too far out ahead of our skis. There yeah. I mean, I think you have it right Joe I mean, its I think.
LSD for short cycle thing MSD to it maybe even a touch higher for the longer cycle lows, depending upon the segments, but that's sort of the rough rough math. So you know the punch line is we are planning somewhat cautiously for the second half because.
The geopolitical and economic movements are pretty volatile right now Allen.
We try to do is we try to guide that somewhat cautiously based on what we're seeing today in the short cycle is somewhat unpredictable and can turn very quickly.
Got it thanks, guys I'll, let others.
Get on the call appreciate.
Thanks Jackie.
Our next question is coming from John inch with Gordon Haskett.
Morning, everybody.
Good morning, Hi, guys.
I think Greg you had mentioned that you are taking proactive steps for Brexit.
What exactly in case, there's a hard Brexit what exactly does that mean does that mean, you're sort of yeah.
Really about certainly John .
Okay, that's really about certifications and making sure.
You know that.
Certified bodies.
In the in the EU are going to allow the product flow to continue so we've been basically.
Recertifying our products.
With other you bodies as opposed to the UK bodies than we had on many of our certifications through and that's been an ongoing effort and we're substantially complete at this stage, which is a which is very good and then we're just also setting up.
Additional.
Triage in terms of actual movement of goods.
In the in the event, we need to do anything special or different in terms of.
Air freighter or premium freight in that in that sense.
Is it to get product to flow. So those are really the two things that the teams have been working most closely on and you can imagine too when you think about that even from our own internal wiring theres, they're system changes and so on that need to allow those things to be true for us internally as well. So that's what the teams have been furiously preparing for so that we're ready no matter, which way this with which way this goes.
And then how did Europe and China do his regions I remember, China was down a little bit last quarter.
Obviously, you've given sort of some of the.
The shorter cycle stuff going on there.
I think Europe was more resilient with any sort of real change and change in terms of China and the kind of regional impact like the Malaysia sort of middle East impact was there anything else that you would call out there.
Yes ill take that one John I mean, I think overall, we're kind of pleased I mean ill highlight a couple of things for example, our PMT bookings in China were around 20% in Q2. So I mean, you know some real strength, we had some tough comps.
Think flattish to slightly up for China for Q2, but that's driven by particularly some tough comps that we had in PMT.
So overall I mean, obviously there is some.
Level of concern for the China economy, but overall given to bookings we saw in PMC debt that was strong Europe stayed strong think low to mid single digit for us sort of some spotty in places you know, Germany was strong Italy, not so much but you know overall fairly good growth rate for us Middle East was very very strong.
We're very encouraged by that India was up double digit very strong growth.
Their lab, Pam doing well so for the most part we're still seeing pretty good growth the wrong.
Across the globe granted China, maybe wasn't what it was last year, but also not a complete.
Meltdown and move downward. So overall, we're still encouraged by what we're seeing out there.
Gary do you feel that the backlog of restructuring projects that you have.
We'd be more than sufficient to sort of the cadence of the global economy continues to soften a little bit or would you actually be looking to do more projects. Obviously you guys are pretty aggressive in terms of your your playbook. So sorry, yeah, well I think you know John I think thats. The highly that's maybe one of the highlights of the quarter I think we really invested in our future. This quarter. We had some very very attractive restructuring projects and we wanted to make sure. We fund them. Because you know we probably could have delivered even higher EPS result in Q2, we didnt bundles, but we thought it was prudent particularly in this level of economic uncertainty to fund those restructuring projects now, particularly given the kind of paybacks, we saw mills.
But the real answer your questions I guess it all depends upon how much of.
Economic hit we would take it were kind of protected to the levels were forecasting if those economic cycles are deeper than that then obviously, we would have to do more so it's it's it's a bit of a wild variety as you can as you can see right now is sort of a new news items coming every day, but we do what we do all the time, which is we plan cautiously.
We're productivity.
And if the environment is worse than we anticipated and we're going to take another round of cost actions to offset those yes, I mean, just so you know the.
The repositioning pipeline as a process just like a sales pipeline or an R&D pipeline, we're working that.
At all times, so that we are ready when the opportunities present themselves.
From a funding perspective, and obviously as the economic.
Environment moves so so thats, absolutely part of our routine all times.
Got it thanks very much guys appreciate it.
Thanks, Jonathan.
Our next question comes from Deane Dray with RBC capital markets.
Thank you good morning, everyone.
Good morning.
Hey, maybe we can follow up on some shows beginning questions on the push outs that you're seeing.
And so for Intelligrated the push outs are they attribute it to anything in particular is that macro uncertainty is you just have any sense of what's driving the delay and capital commitment and then similarly, one of your competitors and process has been talking about seeing big project push outs on to the second quarter into third and fourth quarter be interested if you're seeing some of those dynamics as well.
Yes.
Third of Intelligrated.
I'm not sure there is a single cause for that some some of these projects are fairly substantial from a capital perspective, and there's timing around board meetings and so on but we have an indication from our customers that these projects will happen. So I don't anticipate they will result in cancellations.
The timing is always unpredictable long large projects, we expect selling those to land in Q3. It Wouldnt shock me if they land in Q4, but.
They are they're not disappearing and they're not being canceled.
In terms of the large projects I mean, PMT had a pretty good booking quarters overall, we will stronger new elpida and wasn't hps.
We are seeing something somewhat similar on the large projects per se.
Those are getting sliding to the right a little bit, but we saw some other strong bookings, particularly on the shorter cycle. Some of our services Bill that business. Our advanced solutions are software businesses. So.
A bit of a mixed story when it comes to larger projects here, maybe perhaps those are sliding a little bit to the right, but in our backlog grew our bookings were good in PMT and.
And we anticipate.
The pretty strong second half of the year.
And then across the shorter cycle portfolio and the softness that you're seeing are you seeing any competitors beginning to use price as a weapon here to drive some volume and take us through the portfolio and where pricing may have seen some of that pressure.
Well I think.
All short cycle isn't the same I mean, as we look at HBT I think our short cycle is actually stayed fairly strong I mean, I think the results speak for themselves.
Couple of really good first half for our HBP business and we actually are are you expecting that to continue into Q3 with the business is doing very very well.
An sps.
You know, it's it's the productivity products issue that we talked about.
Earlier.
I can't really necessarily point to price I mean, as the market is softer pricing becomes more of a challenge you know some of that is definitely true.
But I don't want to point of competition at this necessarily indicative of pricing thing I mean, yeah, there's there's greater level of competition when markets get softer that.
But weve had bill I mean, we're getting price and we're getting growth still in the short cycle. Currently again exception of productivity products story, and then as we mentioned in the prepared remarks.
In the HFC business, that's one place where we're seeing a very specific competitive.
You know move going on with some of the illegal imports coming in.
Into Europe , and so thats really the only place that I would highlight is something really visible that we can see competitively.
Yes.
Thank you.
Thanks Deane.
And we'll take our next question from.
Scott Davis with Melius research.
Hi, good morning, guys.
Good morning, Scott.
Yes, Sir.
Putting up pretty predictable on numbers each quarter and I just begs a question. You know you spent a good chunk of that Investor day talking about forge and connectivity and all these interesting things you're working on and also the supply chain stuff.
Is there any way to measure kind of your progress in these areas like for example, it.
The.
The big margin gains you had this quarter could you.
Could you ascribe any of that supply chain or is that still.
Kind of out there on the com.
Yes, Yes, I think let me let me start taking this I think.
In terms of a lot of our IC transformation I can't say we are in.
We're not even in the top of the first we're just I mean, they were just got a we are grabbing to the bad at this juncture. So that's something that you're going to see a lot more pronounced really in 2020 and beyond.
We're just getting started so I am not going to tell you. There is a lot of attributed to the IC transformation, you probably shouldn't expect much until 2020 and beyond.
In terms of forge and our software play I think that really the best way to measure that business's growth.
That's sort of the single biggest come metric values and is it profitable growth and.
And I was very pleased with what we're seeing in double digit software growth margin, that's accretive to Honeywell margin thats very attractive.
And we are gaining traction we're winning jobs, we pointed to a large middle east win that we had which is very large in scope.
And and our customers Trust us so I'm very pleased with the strategic progress, we're making in but our measures are typically financial in nature. Because you can make yourself feel good by looking at actions, we look at financials and especially for.
Forwards in connected enterprise Ultimate we look at the growth rates and they have been double digit which is which is good which were unexpected and the other thing I guess I would highlight is internally. We're looking obviously at recurring revenue streams and trying to continue to enhance our recurring revenue stream. So thats something that as we measure the progress.
In the connected that will be one that we watch as well pretty closely.
Okay.
Makes sense and just had kind of it.
A question about Intelligrated in the sales cycle I mean.
When you install when you do the Big project.
But presumably there is some sort of warranty period I mean, when when do you start getting aftermarket from those installs.
It's it's after the completion and turning over the.
The project over to the user because a lot of times, we'll get the service contract as soon as the jobs completed yet and granted there are some things that are under warranty, but we're trying to have the same approach with the intelligrated business as we do have our hps business, where we have these longer cycle. The assurance 360 type of contracts and we've had great traction in that over 20% growth in Q2 and.
This by the way this I'm not indicating any kind of a slowdown in this business I don't think we can expect a 20 plus percent growth rates that we've seen but we think that this is going to be a high single digit to double digit growth kind of business.
But.
What weve seen that although the push outs of the orders although disappointing the good news into strategic and the fact that our strategies are working as this which is.
Our services business was up over 20% in enable that that business to have an accretive margin to what it had last year and the strategy. We're trying to execute is working.
Unfortunately, we can't control the timing of when the orders of land, but I can tell you that they are not due to losses.
Yes.
I mean, just a quick follow up on that I mean.
At what point does aftermarket become a bigger piece than the.
Install revenues as well.
To be honest, Scott I hold on I've or why it right because that means that our project cycle is slowing.
But you know it's a bit of a function that is still the projects businesses the predominant component in that business.
So what it would have to occur.
The services business are already growing at over 20% of projects business slowed a little bit this past quarter actually hope that we get more of the project and I think that will happen I don't think that this is now the sign of OCA. The warehouse automation segment slowly I think that this could be a blip for a quarter or two and is will resume.
But thats really kind of how things will work is ultimately the projects business will slow down I don't think thats necessarily now.
And the Lss is going to become a bigger growth component of the business, we kind of saw a little bit of a preview of that in Q2, but I don't think thats a long term trend.
Yes, okay.
Okay. Good luck. Thank you guys.
Thanks.
Our next question is coming from Steve Tusa with JP Morgan.
Hey, guys good morning.
Hi, good morning.
Just so we're all on the same page here on the Sps thing.
How should we think about.
Kind of absolute profits for the third quarter, and then I know you guided to something like.
Now a billion won or something like that for the year are we kind of just south of 1 billion for the year now when it comes to profitability and then just as a follow up.
Pretty big Big Miss you guys were out at EPG.
No not not too late but you know late may.
Did something change significantly in June or was this something that you knew about but there was enough you know offset in the rest of the portfolio that you didn't feel the need to call it out.
Yes, well I think Steve let me get to maybe start the second comment and I'll turn it over to Greg.
In terms of.
Sps in more more specific you productivity products I think we called that out both in our Q1 earnings report and John talked about it at our Investor Day, I think that we were pretty clear that this is going to be another quarter, where we're going to see this stocking and some challenges on sort of commercial so I think that.
Was this a little bit greater than we anticipated. Yes was did we signaled I think we did and we maybe specifically even talked about of VPG, but we certainly did at our Q1 earnings call and John talked about specifically at Investor day. So.
I'm not sure that were shocked by what we saw for its like I said, a little bit more pronounced than we anticipated, but not totally out of whack with our expectations, Yes, and then on the on the profitability front, Steve I think given the the mix of of sales that we're seeing in the second quarter. I think it is going to look fairly similar in Q in Q3, So I would expect margin rates to be.
In that same.
Range of.
11, 12% type margins in the third quarter fourth quarter should get a little bit better.
But that that's how we're thinking about it as we exit the second half okay. So like 2% to 25% to 50 in the fourth quarter some to that extent on proud on segment profit.
Yes, the margin rates are going to be in that.
Again, similar similar range.
Okay. One last quick one just when you guys talk about short cycle I mean to me.
When I kind of look at the results in commercial aftermarket and some of the shorter cycle stuff in PMT.
Billing technology perfectly fine I mean, you really you are not necessarily talking about like all short cycle. It seems like it's a kind of an Sps type of.
Dynamic and how bad was the kind of scanning and mobility side. The stuff that you compete with zebra onemain, how negative kind of was that in the quarter.
Yes, I mean, I think Thats right. Steve This story is really.
About productivity products that was the goal was what we signaled a little bit worse than we thought it was a good outcome.
And you know it was down for the quarter. So it was a little bit down the more down than we thought.
Some of that is my guess, although I I want to emphasize I don't know yet because I always assume it's our issue not a market issue.
I think there was obviously some issues in the market and market slowing.
We've had some early data points, which would indicate that.
And some commercial execution things that we need to fix as well as really that this document thing was the biggest factor is frankly.
Inventory levels.
Really exiting 2018, our and supported by the business levels and and as some of our distributors are taking actions to do that so thats thats really it's really kind of the negative story, it's not you're right. It's not widespread it's predominantly limited to one business, which.
I didn't have a great Q2.
Yes, and that's why you guys plan conservatively for the second half. Thanks, a lot appreciate it right, yes, yes, thanks to.
Our next question is coming from gotten them Khanna with Cowen and company.
[noise] [noise] $1.9 billion stock in the queue, I think thats, a multiyear record or or close to it.
Are you still thinking 4 billion repo in the year and then also another second question is if you could please just like speak about the M&A pipeline and whether or not you are seeing anything attractive.
Thank you I'm sorry.
This is mark can you restate. The question if we missed the first part of your you got cut off in the beginning.
Oh, I'm sorry about that.
Yes. So my question was.
So related to the stock repurchase we bought 1.9 billion in the quarter are you still thinking around $4 billion for the year and the second question was.
If you could just kind of give some color about the M&A pipeline and whether youre seeing anything attractive.
Thank you.
Sure. So you're right 1.9 billion was.
Was it was a fairly.
Healthy amount of repo in the quarter I think we're about $2.6 billion on a year to date basis and all of that is is still aiming at getting the 1% reduction from year to year. So 4 billion for the year is probably in the right.
Neighborhood of where we'll land obviously some of that depends on the the share price performance for the remainder of the year, but I think that that's a reasonable assessment of what the end of the year will look like and then as it relates to the M&A pipeline I mean, we continue to be active.
I wouldn't say, we had other quarters, we've come in and talked about having things that were right at the one yard line that Didnt happen I don't think we had anything that was quite that close in this particular quarter, but we continue to be very active across all four of the businesses and then as we've talked about we're ramping up the activity, particularly in HBT given the fact that that business is now in much much firmer footing.
Okay, Thanks, and if I can squeeze one more in here.
What are your what are the demand trends and expectations for PMT in the second half.
Kind of or what sort of growth are you looking at for those pretty LP Hps and advanced materials.
Okay. I think about that is it's mid single digits, we again with with the backlog that we have entering the back half of the year. We think maybe mid single digits is.
Is a very reasonable spot for us for PMT.
Okay. Thanks, guys.
Yes.
[noise].
And our next question is coming from Jefferies frog with vertical research partners.
Thank you good morning, everyone.
Good morning, gentlemen is a warning that we spent a lot of time on Sps for good reason, but.
Hi, Arrow for a moment yeah the margins were.
Extraordinarily strong there stronger than I might have guessed given the mix I know you've got some commercial like margins in part of your defense and space business, but can you give us a little bit more color on.
What really played out in the margins in the quarter and how you see the rest of the year playing out there.
Yeah, I mean, I think that's good that said margin growth is really a testament to the execution proudest of the aerospace team in a lot of our spreads are working I think sometimes we forget that our software business isn't just in the Honeywell connected enterprise.
It's also in our avionics franchise and that that group has done a tremendous job and really shifting its focus to our amuse and upgrades enhancements and you know we saw the benefits in that because it obviously as accretive margin rates they've done a great job of driving productivity in the business. So although you know this is that that ultimate combination. We also want to see which as you drive productivity, while getting good growth and you really have you really expand the margins.
Obviously focus on the connected enterprise and connected aircraft is helping margins as well.
Good growth on spares.
You know the BG a market is very very strong right now both in terms of OE and aftermarket. It's a testament to a lot of the great wins, we've had on the platforms, but also in supporting our customers in flight.
So overall, you know and then lastly, potentially importantly defense and space is just been on fire and just about any segment you want to look within there whether it's you know HEALOS, whether it's the U.S. International defense all those segments are doing well and I think this is it really an important fact, Jeff that as we look from now through the end of 2020.
End of 2020, we have more than 50% of the business already booked.
So her really in.
Really nice shape as we look into the future.
Great Thanks for that.
Just back to this.
China question.
Fully understand your position and statement this week as it relates to this.
I wonder if.
You are seeing or how you would kind of keep an eye out for maybe.
More subtle pressures.
You know not only on you, but obviously, you're you acute in your own business, but.
Any indication that us or western companies are just kind of getting a little bit of the cold shoulder around the edges or any other kind of behavioral change in the business that you picked up.
No I mean, no I don't and I think as Greg pointed out is I mean I don't.
No we receive some interesting press on this subject, but we have seen no indication from.
Sure I know authorities that.
Or any sanctions coming our way we have we have received no sanction I think I'll point to a couple of things.
Number one is we received our first Jetwave order in China in.
Which is which is very promising I mentioned the PMT bookings in China were very very strong in Q2.
China is an important market for us we play it locally we.
I have a lot of manufacturing out of R&D facility in China, It's a market that we take great pride in serving local for local and and we expect that to continue.
Great. Thanks, a lot.
Thank you.
Our next question is coming from Julian Mitchell with Barclays.
Hi, good morning, Thank you.
When you're already doing good morning. Good morning, maybe just the first question around overall.
Cadence of denial and in recent months.
The organic sales growth was 8% in Q1, it's guided at the mid 0.3% in Q3, so a pretty severe slowdown with comps that are not that different.
Aside from what you've talked about in Sps.
Have you seen any changes in demand in recent months several companies talked about June .
Being materially worse than the rest of Q2.
Just wondered what you've seen recently in that respect.
Yeah, Hey, Julien <unk> as Greg that we haven't seen any really clear pattern like that across the portfolio that would cause us to say that June at the beginning of.
A huge slowdown.
So so just.
Across the portfolio I would say the answer is no.
But his areas mentioned earlier that the portfolio is not one thing and so.
I expect and.
We're going to see different.
Dynamics across the different parts of the portfolio and across different parts of the globe Jerry talked about the strength in Europe earlier Theres a lot of strength there because the aerospace business is doing particularly well and as long as flight hour stay strong.
We expect to see Europe , continuing to do well there on the dynamics in China as we mentioned.
Our strong on the long cycle side with your key orders so.
We've got a very strong backlog and in PMT in their short cycle businesses. So.
So far the answer no real pattern down on but it's something we absolutely watch as you would expect yes, and just to maybe add to that I actually if you look at June it's on a year over year organic growth basis. It was our best month now granted we saw some softness in Sps.
Which was pronounced and Thats why we have.
A bit more of a cautious guide for Q3, that's really the reason is you know we're not we're not expecting a miraculous turnaround Sps in Q3, we.
Some of the softness we saw in June we actually anticipate.
May continue and that's why you see our guy, but but overall if you look at total Honeywell organic.
June on a year over year basis were actually our best month of the quarter.
Great. Thank you for that detail and maybe just picking up on your last point areas within Sps the warehouse and work flow solutions piece.
Revenue growth there was 7% in Q2.
After sort of 50% growth in Q1.
What should we expect in the second half in terms of warehouse and work flow solutions sales trends, specifically do you expect to pick up from Q2 as some of those.
Orders get realized that we are leaving it as a sort of single digit growth assumption for now.
Yeah, I mean it.
If you're referring to productivity products, which I think theres kind of two different from US. We don't expect a major turnaround here in Q3 like I said, we still expect that to be negative for Q3, and some level of moderation in.
Q4.
As it was it comes to Intelligrated, we're still expecting high single digit double digit growth for the year.
You know Q3 is a little bit dependent upon exactly when we land some of.
Orders.
You know, but that think about we now getting into the tougher and tougher comps. So you know we are thinking about single digit kind of growth rate.
For the second half.
But again just to be clear that's depending upon when those orders come because we're ready to execute those and we have every indication that their land.
Obviously getting those sooner in Q3 will be better getting them later or pushed out to Q4 would be worse and that's that's a little bit tough to predict but I'm very bullish on our ability to secure those orders when they do like that I'm not that concerned.
Perfect. Thank you.
Thanks Julien.
And the final question is from Josh Pokrzywinski from Morgan Stanley .
Hi, good morning, guys.
Good morning, Josh.
Just a couple of Oh.
I guess more clean ups than anything else I think we've been Sps to death, So hopefully John can take the rest of the day off.
On aerospace specifically, yes, clearly commercial aero aftermarket doing very well, we want to make sure that there is nothing unsustainable there, particularly as it pertains to the Max grounding and maybe with some of these other older aircraft filling a schedule that aftermarket gets a little bit of boost.
And we shouldn't expect all that to continue I know the trend line is good I just didn't know if there was a little extra that you got out of the quarter.
Yeah, I would say this.
There is probably a little bit of that where where you had more sort of older aircraft flying visa be certain but that's not going to have the kind of dramatic impact on our results. So I wouldn't I wouldn't say that that's really the cause and effect you know I think as long as the air miles stay strong as long as the economy stays in reasonable shape and people continue to fly business aircraft and by business aircraft defense and.
Space business like I said weve already more than half booked for the next 18 months.
You know things can always change, but overall, we're not this is not an area where we're concerned we wish you a very good visibility to Q3 and Q4, obviously this is a long cycle business.
Short cycle continues to look strong. So overall I don't think that this is some kind of a blip for unusual event here in Q2 I think this is a this is evidence that our strategies are working and Aero team is executing.
Got it that's helpful. And then just back on the topic of inventory you know I know that that's clearly driving some of the activity in Sps, but as you look back on maybe the second half of 18 are there any businesses that now with the benefit of hindsight, you can say and maybe we yeah. We saw distributors take on more inventory than than perhaps they were selling through and.
It's something we're watching a channel here and there.
That you can share with us or we should keep in mind as we go into the second half.
Yeah, you know like you said hindsight's always 2020, I mean, you know I think that the distributor to some extent play the same same role. We do is they want to be prepared for good markets and they want to be prepared to sell our products. So you know could you say that they took on a bit more inventory than they should have well, yes, I mean hindsight that sort of.
That is clearly the case and yes, you are right. We are watching days of inventory. We are we are bringing debt down when it came out in Q1. It came down in Q2 were planning to have it again did come down in Q3 and.
Get it to a much more.
Lower level, that's really that's really kind of a.
I want to kind of focus around the punch negative punch line over the quarter and overall I think this is a very strong quarter for Honeywell, but if we want to focus on the negative which is fair up that's really the punch line is we got to get those inventory levels moderated to levels that our distributors are comfortable with and we've planned that for the first half.
Got a little bit more to do now in Q3 and.
And we'll see around Q4, obviously the variable we don't know is sales out because that goes up and we have less of a problem goes down as well we'll have more work to do so that's sort of so short answer is yes, we're monitoring it and we're going to have be very closely watching yet here for well forever, but certainly for the second half of this year.
Great. Thanks, I'll leave it there.
Thank you.
That concludes today's question and answer session.
At this time I would like to turn the conference back to Mr. Dario Saddam check for any additional closing remarks.
I want to thank our shareowners for their trust and support of Honeywell, We have made great strides in 2019, but we still have a long runway to continue our progress we are focused on continuing to outperform for our shareowners, our customers and our employees.
This quarter marks the start up a new era for Honeywell in Charlotte North Carolina, I could not be more excited about what lies ahead for this company.
Thank you all for listening and have a wonderful relaxing in safe rest of the summer take care. Thank you.
Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.