Q1 2021 Honeywell International Inc Earnings Call
Okay.
Ladies and gentlemen, please standby and good day and welcome to the Honeywell its first quarter earnings release at this time all participants are in a listen only mode and the floor will be opened for questions. Following the presentation and the room.
This conference is being recorded I would now like to introduce your host for today's conference Mark <unk>, Vice President of Investor Relations. Please go ahead Sir.
Thank you Jake and good morning, and welcome to Honeywell. Its first quarter 2021 earnings conference call on the call with me today are chairman and CEO, Darius and Tom check 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 Honeywell Dot com 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.
Elements can change based on many factors, including changing economic and business conditions, and we ask that you interpret them in that light.
And then if I the principal risks and uncertainties that may affect our performance and our annual report on form 10-K, and other SEC filings.
This morning, we will review our financial results for the first quarter of 2021 share our guidance for the second quarter and provide an update to our full year 2020 one outlook.
As always we'll leave time for your questions after yet.
I'll turn the call over to chairman and CEO, Darius and Tom Jack.
Thank you Mark and good morning, everyone. Let's begin on slide two we delivered a very strong start to 2021 exceeding the high end of our first quarter organic sales growth segment margin and adjusted earnings per share guidance range and the first quarter. We delivered adjusted earnings per share of $1 90 day two sides.
Down 13% year over year, and nine cents and booked a high and all of our guidance range.
Organic sales were down 2% year over year, and five percentage points sequential improvement from the 7% organic sales decline and the fourth quarter of 2020.
We drove year over year organic sales growth and two out of our four segments H B T and Sps despite facing difficult comps since the first quarter of 2020 wasn't fully impacted by the pandemic.
Honeywell building technologies and returned to growth and safety and productivity solutions achieved an outstanding.
And 47% organic growth and the quarter. We also drove double digit year over year organic growth and connected software sales driven by strong demand for a connected buildings and cyber solutions. We delivered segment margin of 21 per cent.
10 basis points above our guidance with margin expansion aerospace HPT and Sps.
We generated $757 million of free cash flow and the quarter a strong performance despite increased investments and it's high return on capital expenditures, which were up approximately $80 million year over year as we position ourselves for the recovery.
Adjusted free cash flow conversion was 56%.
Up 500 basis points year over year on the strength of working capital improvements.
In terms of capital, we deployed $3 billion to dividends and gross capex share repurchases and M&A during the quarter.
We opportunistically repurchased 4 million shares throughout the quarter, reducing our share count to $705 million.
We're off to a strong start in 2020, one and I'm very confident that continued improvement and markets coupled with seller.
Accelerated innovation and strong execution will provide a long runway for continued business improvement and top tier value creation for our shareholders next let's turn to slide three to discuss a few of our recent business highlights.
I'm excited to share a few recent recognitions and partnerships that highlight our commitment to upholding the highest ethical standards and are focused on creating breakthrough innovations.
<unk> Honeywell is one of only eight competition and the industrial and manufacturing category to be named one of the world's most ethical companies by Ethisphere atmosphere is an organization that evaluates and onerous businesses around the globe and across industries for their strong cultural and why.
And our mental social and governance and diversity practices. We're proud to have earned this prestigious ranking.
Second Honeywell is named to fast company's annual list of the world's most innovative companies for 'twenty one and.
In addition to being recognized per 100 year heritage of creating groundbreaking technologies like quantum computing that transformed the way. The World works. Honeywell was also recognized for mobilizing quickly to help people and businesses cope with the pandemic, including our launch of new and 95 mask.
And our introduction of our UV treatment systems for airplanes healthy building solutions and innovative eckler edge bottles and vials.
We also recently announced our partnership with musician and entrepreneur will I am the launched of Superman and whatever kind of innovative smart facemasks for the mid and post pandemic world. The Supermac is easily adjusted book to fit a variety of face shapes and is enhanced with multiple functions for the modern lifestyle.
Including dual III speed fans and hepa filters for enhanced breathability active noise, cancelling audio and microphone capabilities and Bluetooth connectivity.
And finally, we're continuously evaluating our portfolio for M&A opportunities that can enhance our existing offerings. During the first quarter, we signed an agreement to acquire a majority stake and five <unk> Communications a company that develops in building communication systems, including bi directional amplifiers that provide <unk>.
And critical in building radio coverage and challenging environments to improve the safety first responders and building occupants.
Additional pipe list five flex products and software will enhance our offering in the fast growing and building communication market and complement our innovative industry, leading portfolio, enabling us to work towards creating the next generation of fire and life safety solutions now let me turn it.
Over to Greg on slide four to discuss our first quarter results and more detail and to provide and update on our 2021 outlook.
Thank you and good morning, everyone as Darius highlighted we're very pleased with our start to 2021.
While the COVID-19 pandemic continues to impact some of our end markets. Our laser focus on demand generation operational execution and cost management enabled us to over deliver on our commitments first.
First quarter sales declined by 2% organically due to the effects of the COVID-19, pandemic, which represents a five percentage point sequential improvement from the fourth quarter.
As Darius mentioned that was driven by robust double digit growth and our warehouse automation solutions and personal protective equipment businesses as well as continued demand for our building products and services advanced materials strength and strengthen our connected software.
We expanded margins year over year, and three out of four segments Aerospace HPT and Sps for the second consecutive quarter limiting Honeywell as overall segment margin contraction to 80 basis points and ending the quarter with a segment margin of 21%.
Our commercial excellence and strong cost management, as well as and approximately $30 million, one time benefit and aerospace drove 10 basis points of outperformance and segment margin compared to the high end of our guidance range. Despite the mix headwind from much stronger sales and our lowest margin segment Sps.
We delivered adjusted earnings per share of $1 92 down 13% year over year. This was <unk> <unk> above the high end of our guidance driven by segment profit improvement from higher sales volumes and by a lower than expected effective tax rate.
From a year over year perspective below the line items were at 11% headwind driven by lower interest income and FX and higher repositioning and interest expense, partially offset by higher pension income.
Our effective tax rate was higher than the first quarter of 2020, primarily due to benefits realized in the prior year period from tax law changes and India and the resolution of certain U S tax matters driving a <unk> <unk> headwind. This was partially offset by a <unk> <unk> EPS benefit from lower share count.
Average of all of this from <unk> 20 to <unk> 21, adjusted EPS can be found in the appendix of this presentation.
We generated $978 million of cash from operations up 4% year over year, Despite lower net income free.
Free cash flow for the quarter was $757 million down 5% year over year due to higher capital expenditures, particularly and Sps as we continued to expand PPE capacity.
Working capital improvements, including strong collections offset these headwinds during the quarter driving adjusted free cash flow conversion of 56% up 500 basis points from the prior year.
As you know the first quarter is historically, our lowest from a cash perspective, and we remain on track to our full year cash guidance I'll talk more about our full year outlook and a few minutes.
We strategically deployed $3 billion to M&A share repurchases dividends and Capex and the first quarter, which significantly exceeded our operating cash flow, we paid $640 million and dividends deployed approximately $220 million and capex up 60%, we purchased over 820 million.
A honeywell shares reducing our share count to $705 million and also we completed the purchase of Sparta systems deploying a total of $1 $3 billion to further bolster our software controls and analytics capabilities and the attractive lifesciences space. The integration as BARDA is progressing well and in fact, we.
Our first quarter financial expectations with sales and sparred up 25% year over year and bookings up approximately 75% year over year.
In March we also repaid $800 million and maturing senior notes as we began the process to repay debt taken on to provide incremental liquidity during the COVID-19 pandemic we.
We maintained a strong balance of cash cash equivalents and short term investments at the end of the first quarter of $12 $7 billion.
So all in all we had a very strong start to 2021, we are investing for the future continuing to execute commercially and operationally with the discipline and rigor and you have come to expect from Honeywell positioning ourselves well for the recovery ahead.
Now, let's turn to slide five and talk about the individual segment results.
Starting with aerospace first quarter sales were down 22% organically driven by lower commercial aerospace demand due to the ongoing impact of reduced flight hours and lower original equipment volumes, our air transport aftermarket sales were down 48% organically year over year and down 7% sequentially from <unk>.
And as rising infection rates the pace of vaccinations early in the quarter and the lack of the peak holiday travel contributed to flight hour declines as we messaged was possible and <unk>.
Our business aviation aftermarket sales were down only 6% organically year over year as we see a faster recovery in this space and.
And original equipment, while still down year over year, our business aviation OE grew.
Grew double digits sequentially from <unk>, 'twenty, driving a 6% sequential growth and the total commercial original equipment from <unk>.
Defense and space was down 2% organically as demand for U S defense and space was offset by lower International defense volumes.
Aerospace segment margin expanded 110 basis points to 29% driven by strong cost management and the face of organic sales declines and an approximate $30 million one time benefit.
Building technologies returned to growth and <unk>, despite facing the most difficult comps, we'll see this year since <unk> was only partially impacted by the pandemic.
Sales were up 2% organically driven by demand for building management systems, and security and commercial fire products as well as continued growth and building solutions services.
Orders and backlog for building solutions services were both up double digits year over year positioning the business for continued growth and 21.
In addition, our portfolio of healthy building solutions maintained strong customer momentum with exciting wins with the Jacksonville Jaguars, The Pittsburgh Airport and Syracuse University.
HPT segment margins expanded 200 basis points to 22, 5% driven by commercial excellence and productivity net of inflation.
PMT sales were down 47% excuse me were down 6% organically a six percentage point sequential improvement from the 12% organic sales decline we saw on <unk>.
Process solutions sales were down 9% organically driven by continued project delays and lower smart energy demand due to some softness on the end markets, partially offset by demand for field instruments orders for services process measurement and control products and thermal solutions grew in the quarter positioning the Acs service and <unk>.
And <unk> businesses for acceleration and the second quarter and beyond.
And <unk> sales were down 14% organically driven by the ongoing weakness and the energy and markets. However, this was a 16 point.
Sequential improvement from the 30% organic decline we saw on <unk>.
<unk> orders were up double digits, driven by gas processing catalyst orders. So we are seeing some signs of growth potential for the future.
And finally advanced materials sales increased 8% year over year organically driven by growth broadly across the portfolio, including strong growth and flooring products specialty additives chemicals, and our electronics materials demand.
PMT segment margins contracted 290 basis points and the first quarter driven by the impact of sales mix, partially offset by commercial excellence and cost management.
Finally, and safety and productivity solutions sales were up 47% organically as Darius mentioned earlier, driven by strength across the portfolio, including double digit organic growth and warehouse and workflow solutions personal protective equipment and productivity solutions and services, who drove market share gains due to strong demand and the U S and euro.
<unk>.
Sps orders were up double digits year over year for the sixth straight quarter, driven by continued demand for personal protective equipment and productivity solutions and services.
<unk> backlog was approximately seven 7% year over year remaining above $4 billion for the third consecutive quarter, including $2 1 billion of backlog on the warehouse and workflow solutions.
SPS segment margins expanded 180 points and the first quarter due to a $2 14, 3% driven by the impact of those higher sales volume.
So overall, we finished the first quarter with a return on sales growth and HPT and with continued growth and other areas of the portfolio as well as backlog strength and HPT warehouse and workflow solutions productivity solutions and services PPE and Yoki.
We expanded margins and three of the four segments, while strategically investing in high return.
Growth Capex, and R&D, giving us confidence that our businesses are well positioned as demand recovers.
With that let's turn to slide six and discuss our preview for the second quarter.
As the timing and speed of the economic recovery continues to unfold, we entered the second quarter, well positioned with strong momentum and some key areas of the portfolio continuing to make progress each quarter.
For the second quarter, we expect organic growth and the range of 10% to 13% as we lapped the first full quarter disrupted by the COVID-19 pandemic we.
We expect some of the areas and the portfolio that have been most significantly impacted particularly the commercial aerospace aftermarket and <unk> businesses to return to growth.
We also expect ongoing strength and safety and productivity solutions building products and advanced materials.
We would normally see a seasonal step up from <unk> to <unk>, which this year will be somewhat dampened by the calendar impact of having more days in the first quarter than we do and QQ.
We will be facing some supply chain constraints as the sourcing environment for direct materials and components, such as semiconductors and resins continues to be challenging we have taken swift actions to partner with our distributors to mitigate those impacts, but our second quarter sales will be somewhat constrained as these shortages create higher lead times, primarily and <unk>.
And to a lesser extent and HPT.
As a reminder, during 2020 responded fast and early to the pandemic by identifying and delivering on a two phase program that reduced our fixed cost base by one $5 billion and approximately 70% of these savings are about $1 billion were permanent reductions as such we will see approximately $500 million of headwind in 2021 for the year.
From the temporary savings measures, we implemented and as we resume some areas of spending including business travel and merit increases and investments and growth, particularly in R&D.
These impacts will begin to accelerate and QQ, though we are confident and our streamlined cost base gives us ample capacity to invest and positions us well to drive margin expansion across all four segments and sales recover.
We expect sales season, we expect segment margin and the range of $19, 8% to 23% for the second quarter, which represents 130 to 180 basis points of margin expansion year over year.
From a sequential perspective, our second quarter segment margin expectations. Due result, and contraction from the first quarter due to the mix impact of higher sales from lower margin businesses higher research and development expenses as we invest back into the business, particularly aerospace and the cost impacts that I mentioned earlier as well as the first quarter benefit and aerospace which.
Pete.
The net below the line impact, which is the difference between segment profit and income before tax is expected to be flat to a $55 million benefit with a range of repositioning between 50 and $100 million per the quarter as we continue to fund ongoing restructuring projects.
We expect the effective tax rate to be and in the range of $23 24 per cent for the quarter and our average share count should be flat to <unk> at approximately 705 million shares.
As a result, we expect second quarter earnings per share between $1 86.
And $1 96.
Up 48% to 56% year on year.
Now, let's take a moment just to talk through the segments and.
And aerospace, we expect flight hours to improve and the second quarter, driving sequential and year over year improvement and commercial aftermarket sales as domestic travel improves that will be tempered by ongoing softness in international travel as flight hours remain far below pre COVID-19 levels. There we.
We still expect a slow ramp and commercial original equipment build rates Mark.
Moderator U S defense spending should continue and the second quarter, though this will be pressured by lower international defense volumes.
And building technologies as business conditions improve and as the world prepares to safely return to offices and schools and travel. We expect continued demand for building products and management systems as well as sequential and year over year building solutions growth as we execute our projects and services backlog.
In addition, we expect continued customer demand for our portfolio of healthy building solutions, which we began converting into sales and the first quarter.
And PMT, we expect continued recovery and the process solutions products businesses as well as sequential improvement and automation projects, while <unk> orders were up double digits year over year and the first quarter as I mentioned earlier, we expect customer capex and opex budgets to remain tight into Q living and the delivery and execution of those opportunities and the near term.
We expect continued strength and advanced materials, and the second quarter driven by growth across the portfolio, particularly by strong demand for flooring products.
Finally, we anticipate continued strength and Sps with another quarter of robust double digit organic growth and warehouse and workflow solutions personal protective equipment and productivity solutions and services.
Our warehouse and workflow solutions backlog remains strong over $2 billion as I mentioned previously as customers make investments in advance of the busy holiday season, giving us confidence and continued growth.
Our PPE and productivity solutions and services backlogs are both up triple digits, which will drive growth and the second quarter. So as I mentioned, we will be managing some supply constraints here.
Overall, we expect another strong quarter for Sps.
So with that foundation for <unk>, let's turn to slide seven and talk about the key changes to our 2021 outlook since the guidance we provided in January.
Over the past few months, we've seen tremendous progress and the distribution and administration of the COVID-19 vaccine, particularly in the U S. The U K and the middle East coupled with improvements and infection rates and many of those geographic areas. We're also encouraged by talks of fiscal stimulus that will further support economic growth, including funding for <unk>.
Infrastructure clean energy and manufacturing investments, while the pace of recovery varies regionally with slower vaccine, Rollouts, and India, Europe, and Latin America, and with the emergence of new COVID-19 variance, we will continue to navigate the recovery with a balanced approach of investment and cost management in order to drive value longer term.
So, let's take a moment to walk through what's changed since our prior guidance.
Starting on aerospace, we continue to expect gradual improvement and our commercial aerospace business as the pandemic subsides.
The business aviation aftermarket is on track to recover as expected and perhaps at a somewhat faster paced and we thought and air transport the aftermarket business had a slow start to the year as I mentioned earlier being down sequentially compared to the fourth quarter as virus outbreaks and challenges with vaccine Rollouts tempered improvements and first quarter flight hours and the pace of this.
Acceleration will vary regionally with domestic travel clearly recovering faster than international travel and country by country dynamics will make this difficult to predict.
We remain cautious on our ramp expectations here as this unfolds we.
We continue to see moderate demand for U S defense and space offset by lower than expected International defense volumes.
As a result of these dynamics, we expect organic growth for the year and aerospace to trend towards the low end of our flat to low single digit guidance, which we provided in January and overall aerospace segment margin expansion to be somewhat impacted by the slower ramp and high margin commercial aftermarket sales.
And HPT, we still expect organic sales growth to be up low single digits for the year. The business is seeing robust activity and is trending towards the upper end and the low single digit range with continued demand for building products and management system and continued momentum and healthy building solutions fueling that growth. We continue to expect segment margin expansion driven by higher sales on our streams.
<unk> cost base.
And PMT, our expectations have not changed materially from our initial guidance, we still expect organic sales growth to be slightly.
To be down slightly to up low single digits for the year. The recovery is progressing with strength and advanced materials and improvement and product process solutions products, and a slower recovery and hps projects and Yoki catalyst as customer spending has not materially changed delaying projects and reloads, which contributes to our view that we are trending towards the low end of this.
At this time.
We continue to expect sequential segment margin expansion throughout the year and PMT driven by cost management, and some improved mix from <unk> and the second half, though the specific timing of that remains uncertain.
The recovery and oil and gas looks to be building momentum for a stronger 2022.
Finally, and Sps warehouse and workflow solutions, PPE and productivity solutions and services are all trending better than expected in January.
We now expect higher double digit organic sales growth and and our previous guidance as short cycle sales accelerated and productivity solutions and services and it will be accelerating and our sensor businesses, though that will be somewhat tempered by the supply tightness I mentioned earlier.
The increase and warehouse automation sales, which are lower margin as you know will impact our overall Sps segment margins, though this will be partially offset by increased sales and higher margin PPE and productivity solutions businesses.
Now, let's turn to slide eight and talk about our updated guidance for the year.
Given the macro and segment backdrop I'd just talk about our strong out performance in the first quarter and our confidence and our ability to deliver through the economic recovery. We are raising our full year sales earnings per share and free cash flow guidance. We now expect sales of 34.0 to $34 8 billion.
Which represents overall organic sales growth and the range of 3% to 5% and increase of two points on the low end and one point on the high and compared to our previous guidance.
Given that our strengthening sales outlook is heavily driven by our lower margin Sps segment, we are maintaining our segment profit guidance in the range of 27% to 21, 1% and expansion of 30 to 70 basis points for the year.
We still expect margin expansion and all of our segments as we carefully invest back into the business, while managing the multi speed recovery across the portfolio.
We do not expect material changes to our net below the line impact at this time, which we estimate to be and the range of negative $130 million to a positive $20 million for the year, including capacity for $400 million to $525 million of repositioning. We continue to expect our full year effective tax rate of approximately.
21% to 22% and a weighted average share count of approximately $705 million per year, representing our minimum one per cent reduction in shares.
As a result, we're raising the low end of our adjusted earnings per share guidance and now expect a range of $7 75.
And $8 up 9% to 13%.
This represents an increase of 15 cents and the low and effectively increasing the midpoint of our guidance by approximately eight cents.
We expect free cash flow and the range of $5 2 billion to $5 5 billion.
Which is higher than the low end of our previous guide by $100 million. So overall, a great start to the year and a meaningful upgrade to our full year view and sales and segment profit cash and ultimately adjusted EPS as we manage the initial stages of this recovery so with that I'll turn the call back over to Sirius.
Thank you Greg before we wrap up I'd like to take a minute on slide eight to discuss ESG and how.
Well, you can see and willing to say and firmly believe that a robust and environmental social and government framework enable us enables us long term success. In fact responsible corporate citizenship is an essential part of our value creation framework.
Importantly, we announced our commitment earlier this month to become carbon neutral and our operations and facilities by 2035.
This represents a continuation of our ongoing sustainability efforts, which have already reduced the greenhouse gas intensity of our operations and facilities by more than 90%.
Since 2000 and for them.
In addition work extensively to increase energy efficiency conserve water minimize waste and proactively champion and responsible remediation projects that restore valuable community assets.
And we plan to achieve our commitment through a combination of further investments and energy savings projects conversion to renewable energy sources completion of capital improvement projects at our sites and in our fleet of company vehicles and utilization of credible carbon credits.
You are decades long history of innovating to help customers meet their environmental and social goals and.
In fact about half of Honeywell, new product introduction and research and development investment is directed towards products that improve the environmental and social outcome for our customers. For example, the widespread adoption of Honeywell solstice line of low global warming potential refrigerants blowing agents and.
And aerosols is already reduced day equivalent more than 200 million metric tons of carbon dioxide to date.
<unk> two eliminating emissions for more than 42 million cars, a few days ago, we announced that whole foods market has adopted the solta solstice and 40, lower global warming potential refrigerant and more than one hundreds of U S stores as it seeks to reduce refrigerant emissions under the U S.
And our bar mill protections agencies Greenshield program.
This is just one example of how our innovative products and services continued to improve customer sustainability profiles and how Honeywell is playing an active role in shaping our future debt is safer and more sustainable for generations to come.
Now, let's wrap up on slide 10.
In summary, we delivered a strong start to 2021 first quarter results that exceeded expectations, we're seeing promising signs of rapid recovery and some of our markets and we're executing on a rigorous and proven value creation framework, which consistently deliver shareholder outperformance and all economic.
Cycles, and we will continue and enable us to return to our key long term growth commitments in 2021 and <unk>.
D.
And Mark let's move to Q&A.
Thank you Darius Darius and Greg are now available to answer your questions. We ask that you. Please be mindful of others and the Q by asking only one question Jacob Please open the line for Q&A.
Yes, ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your telephone keypad just keep in mind. If you were using your speakerphone and make sure. The mute function is released it to allow you to choose not to reach our equipment.
And Starwood for question and we will pause for just a moment to allow everyone an opportunity to signal.
We will begin with Steve Tusa with J.
J P Morgan.
Hey, guys good morning good.
Good morning.
I'll ask my one question and a five part.
On the up.
On on on the second quarter, you guys had said.
And the last call that margins would kind of you know build from <unk>, even excluding the $30 million and arrow.
They're down first of all kind of what changed relative to what you were expecting back then and then second of all just and kind of the second half of the year.
Normally things kind of level out from the second quarter is this youre going to be a little bit different seasonally and given the later cycle nature of of the company and then last one would be on aerospace how do you think your performance compared to like what you gauge as flight hours.
You know this this quarter on your on your aftermarket.
That was almost five but I think you've got the floor.
And so I'm sorry.
Margins on the margins on the biggest thing that changes is our debt. The mix makeup of our Q2 and sort of the fastest growing business for US is Intel are graded which was going to be growing even faster than we anticipated and it think about sort of a mid to high double digit growth rate for that busy.
So we our bookings our success our output is growing and frankly, it's mixing in it.
And even more as part of the overall portfolio. So that is the number one and primary reason debt.
There's a little bit of that changed some of the headwinds merits. The thing that we anticipated that so there is really no change on that but the short answer is the <unk> business is growing even faster than we anticipated.
And continues to be a growth engine for us.
You know in terms of the second half.
I think the one thing to debt to be to be to interpret it wrongly per our earnings releases that were somehow less bullish on the second half we're not.
We're actually very excited about the second half and but frankly, it's one quarter in and in a year, where there are many many unknowns, including you know COVID-19 of rates and terms of infection rates and current and supply chain and so on and we don't see anything in there that we're particularly worried about but.
It is one quarter into a year, which probably has many more unknowns than most.
And I think your third question was around sort of what's up what's down I would say I would characterize the following in terms of.
And our B G a flight hours.
And we're actually up.
These are D. Our initial assumptions. So that's what's up what's down is our air transport, which obviously is a bigger number vis vis D. G E. So.
And total were about the same but but you know it's.
It's a little bit different.
And then lastly, I would tell you that defense and space Wars, roughly where we expected the U S markets were strong international were a little bit.
Weaker.
Sort of looking at debt for the rest of the year. We don't know if there was some sort of channel loading that kind of happen at the end of the year not that we drove it but the.
The distributors themselves. So so those are sort of the puts and takes but.
The framework that everybody ought to just fully understand is we are very bullish on our markets and what we're seeing is the short cycle is coming back very strongly compared all you also add on to it and tell a great and I mean when was the last time, Steve you seen any segment and any of our peers grow 47% year over year I mean, that's remarkable.
And now and the second whether it's in the third or fourth quarter of this year youre going to see some of our longer cycle businesses coming back with its PMT and aerospace and I can't exactly call. It whether it's Q3 or Q4, there's a lot of moving pieces, but theyre going to come back and as you. All know those are higher margin businesses. So we're on.
I think we're on a really really nice ramp here coming up for a future Greg out or and if you have and no. I think you I think you hit it right on and and.
And we've positioned ourselves well set for what's to come.
You mentioned some of the temporary costs that we talked about coming back and they will be coming back starting into Q.
Merits go in and in April. So so these are these are things that and we're going to increase our investment and R&D as we said so.
I think you hit the salient points.
Thanks, and just FYI pool pumps grew 50% this quarter. So Dave maybe you guys on that front.
Cash flow pumps, just letting it out thanks.
So.
[laughter] Oh, it was pretty close to the 47%.
Yeah.
We'll now take our next question and that will come from Scott Davis with Melius Research. Please go ahead.
Good morning, guys.
Good morning, and good morning.
So I read your answer to mean that youre going to enter the pool pump business.
Apparently it's an opportunity we need to go investigate.
I think just moving off.
Her journey.
I'm going to keep it simple can you just talk about price and a broadly versus cost.
Sure Yeah no debt.
And that's definitely a watch out item for the year and.
And for Us.
Inflation is taking hold and there's no doubt about it we knew it we see it it's real and if you don't.
And stay on top of it the two areas, where and this is not a surprise steel.
Semiconductors copper ethylene and those are the four elements that we saw substantial inflation in Q1.
I can tell you that we stood up on pricing team, which has.
Been in place since the beginning of the year. We are quickly taking actions and you know we are staying ahead of it and we're going to continue to moderate or that happens and stay ahead of it but it's a watch out item I don't think things are going to abate.
You know the short cycle is definitely hot we all read the same articles around semiconductors, and what's going on there and and I think we're gonna have to just stay ahead of it but we do expect and inflationary environment This year and.
We're going to be to stay out of it that's our commitment.
Okay I'll pass it on thank you guys.
Thanks, Greg.
Well now hear from Julian Mitchell with Barclays.
Okay.
Hi morning.
Maybe just sticking to the one question and rule and the Sps margin outlook and maybe just give us some context short and long term I think you'd said Q2 the margins.
Yeah, probably.
So maybe you know how and.
How large is that sequential step down and Sps.
And also longer term, you've got that close to 20% guide out there.
And what's the approximate sort of aspiration of when people should think about that or is it just sort of off the table for the medium term because of how good the growth rates.
Yeah. So Julian I don't think we said that margins contract in Sps sequentially I think what we were trying to highlight is simply it's.
And the Fourteens, it's the lowest one and the portfolio and its driving the biggest part of the growth. So it gives us some.
And some pressure to the overall margin expansion.
And for Honeywell.
We're going to see margins.
Prove modestly for for Sps during the course of the year.
Because even for <unk> and <unk> as an example.
And have our peak quarter, most likely here in Q2 on a revenue side and then that will start to abate a little bit is as the year progresses is while you know that debt business can be very lumpy on the install that's not new news.
And the movement of that will will influence the margin progression as it relates to your 20% target, we absolutely still have that in mind and in the longer term.
It's probably not 24 months from now.
We've talked quite a bit about the trying.
Trying to capture the installed base, particularly in.
The warehouse segment and the whole point of that has been to follow with a terrific service and aftermarket business with software attached and so.
As and when that that shift occurs then we will see those margins mixing up and then again with the recovery that we've had and places like PSS.
Which I think Kevin Dave Hoffman and the team there have done a terrific job and that business, we start seeing margin accretion again and there so.
We still have a very much.
Line of sight to that 20%, but with.
Roughly maybe even close to a $3 billion business and and and warehouses. This year at the lower margins and that's going to give us. Some short term pressure if I could just maybe add a little more color on galore and long term and this is I think very very consistent with the framework. We provided the <unk> business is growing and highly dynamic range.
And I think mid to high double digit kind of range and.
And and mixes down even moving the Sps portfolio.
And that's not news I think what is news is that we're continuing to take substantial market share and the marketplace building installed base and as the build out of the warehouse infrastructure moderates.
We're going to get higher margin business. Because obviously then it is go to Mitch mix and much more to the yellow vest. So theres really no bad news here. This is actually fantastic news that we're taking share.
Growing extraordinarily quickly and as I said, all along and celebrated.
He is the best acquisition, we've ever done at Honeywell now, it's more and more or less undeniable and and Oh, It's a business that continues to do well and I see it I see it being primarily a projects business mix you know short to midterm because the demand is still very very high whether it's North America and Europe.
And we're going to capture that share ultimately, what's going to become a higher margin business as it becomes a bit more installed base centric.
That's great. Thank you.
Thank you and you bet.
Next up we have Nicole <unk> with Deutsche Bank.
Yeah. Thanks, Good morning, Dave.
Good morning, Nicole.
And so maybe I wanted to focus a little bit on HPT and and.
And that's part of the home margin mix down dynamic for the year, but it should be seen margins continue to move higher and we're a lot better than we had expected that's quite a I.
And I guess, how do you think about the sustainability of the strong Incrementals and you saw that and in the first quarter excuse and kind of talk about the <unk> dynamics as well.
And how you see margins progressing throughout the recipe or and not business.
And we're very we're very bullish on the HPT business the healthy buildings.
Offerings has kicked in as you know we booked roughly.
100 million and of that business and and.
Your 2000, and we expect it to be several hundred million and the year 2021.
We're as we look at the bite and infrastructure plan, there's a substantial amount of money something to the tune of 50 billion for particularly education and infrastructure, we think that they were going to be able to play and there are.
On the team has done a great job managing the margin profile and and mix.
So we you know we.
We're very bullish on on what's gonna happen and HPT and and we think we're very constructive on and for the rest of the Europe, Yeah, and I would just say.
As you mentioned very strong margins and the first quarter 'twenty, two and 5%.
Our long term target and this business was 23. So this is one this is the beauty of our portfolio you don't get everyone exactly at the same time, but this is one that's trending towards the high and.
Some of that is is going to be a little bit abated and the second half and perhaps even in the second quarter as the as the projects business becomes a bit bigger and the mix. So but we feel very good about the progress that that team has made overall and.
Over the last 18 to 24 months post the.
That's been in the homes business I think they've done a terrific job on productivity on footprint.
New product introductions.
So I really think with them on that team have been doing is is quite good and there. They are approaching they are approaching their their long term target here.
As we as we roll through 2021.
Got it thanks I'll pass it on.
Thank you.
We will now hear from Deane dray with RBC capital markets.
Thank you and good morning, everyone.
What are you learning and would love to get some color on Sparta debt those are pretty heady numbers sales up 25 per cent bookings up 75% just give us a sense of what's the normalized run rate what are the applications and it is kind of reminiscent of the way and tele grade it started and it turned out to be pretty sustainable on.
In terms of double digits. So just set level side is here. If you could please yeah no. Good question and we're very very happy with the start and Sparta and you know sometimes when you acquire a business you kind of hold your breath and until you actually own it and so did we did we buy what we thought we bought and and I'm very very happy to report.
We're very excited about the business, we bought exactly what we thought were going to buy.
You know that the first quarter numbers speak for themselves.
Strong double digit growth.
Bookings that are sort of multiples of that.
And being in the life Sciences space and providing quality management.
Solutions is I think.
Have a very very long runway for the future.
We've got a great team in place there, we augmented the team with some professionals as well and we're extraordinarily well positioned to make that a big winner and then drive the synergies of our Honeywell process solutions business. I mean, we forget that that business is now really growing the life Sciences segment of the business at a.
And at what rate this will be a further catalyst to enable even more growth and.
And and by the way, it's substantially margin accretive too so.
And it wasn't it wasn't a kind of day. It wasn't maybe the typical of Honeywell acquisition that we make but we feel very very good about it now kind of being the proud owner for about a quarter and.
It all looks good for Q2, and and the rest of the year as well.
Great. Thanks, I'll pass it on.
Thank you.
Moving on to Jeff Sprague with vertical research.
Good morning, everyone.
Good morning, good morning.
And we'll keep an eye on smart, but for now the second best acquisition Honeywell ever did was.
I Wonder if we could.
And talk about that a little bit more.
And and really the kind of the nature of my question is is very interested and we see the backlog pick up right. We're seeing this high level of activity.
And the <unk> space in particular, that's probably pushing out turnarounds, but maybe you could just give us a little bit more color on how you see the year playing there how the business.
Kind of mix and.
If there is any kind of related commentary and hps as part of that answer that would certainly be interest.
Yeah, well you know I think there was certainly some encouraging signs in Q1, I mean, you know what.
We had double digit bookings and <unk>.
Yellow their services their catalyst part of the business is coming back and those are.
Book to Bill is in much better shape this year than versus our assumptions this year versus.
And where it was last year. So that's also a promising signs we're seeing some activity come back.
And I also want to highlight may be a very important part of the portfolio for a future, which is the sustainability and technology solutions business. It's quote logs is and the 100 millions of dollars range now and growing very very quickly. It's bookings were up 25% and if we're talking to.
Really tens of different energy.
Producers today about our sustainability and technology solutions portfolio, which is.
Highly expensive on me from plastics Recyclability to eco fining, two energy storage to hybrid to hydrogen energy to carbon capture we have all these solutions. So.
I am very optimistic about that business and it may look.
And different three to four years from now than it does today, because we've overinvest and into our sustainability technology solutions portfolio now on the larger projects and and you know this sort of the opex capex budgets and I sort.
Expect that although that I would view the price of oil and gas to be very.
Friendly towards investment.
Think that debt still could be a couple of quarters away just because of where the budgets were set for a lot of the majors and you know as you know they were depressed for this year.
Or they are investing into refurbishment of catalyst and so on it and if you look at and lastly on your question as it relates to <unk>. If you look at the H P. S. U P cycle Hps typically trails and <unk> by two to four quarters, that's sort of mathematically how things work so.
We are we see some encouraging signs and those signs are going and get better and the business is going to get better for the next several quarters. So we're you know we're going to be patient, but we're very confident in this environment is going to keep improving because.
And as you know you have to reinvest and.
Although we are moving to a more non carbon energy infrastructure were good and you'd carbon for a while and so we've got two different growth vectors number one is to sustain the current but also to help those businesses transition to the future.
Just as a brief follow on Darius are you seeing any of those large and a transportation fuel to Petro Chem projects kind of coming back on the board.
We're seeing some activity and some discussions because as you know that's exactly right, which is you know a greater switch from you know fuels to petrochemicals. So that's very much a part of our debt kinds of discussions and and.
And and quote logs that were having so frankly some of the projects are not being released yet they're being delayed but we're highly highly confident those will happen.
Great. Thank you.
Thank you.
Now, we will hear from Peter Arment with Baird.
Hey, good morning, Darius Greg.
Darius.
Question more on a regional basis, just particularly focused on Europe.
And we look at the first quarter flight activity and general and domestically we were in the U S. We were down 32%, but we were down 62% and Europe I guess and the question is really how are you looking at Europe and they just more broadly speaking not just aerospace across your businesses, how you're seeing the recovery there yeah.
Yeah, No I mean, Europe, probably was a bit slower than we anticipate in terms of flight hours I mean, that's clear and Q1.
And Europe.
And I think there's a direct correlation towards vaccinations, right and and we kind of as we look at Europe Theyre, probably you know, let's call. It three to six months behind the U S and terms of vaccination rates. So we're going to kind of continue to see slow rate of recovery here as we move through the year and we actually.
Expect a fairly robust domestic flight market and the U S and probably won't be the case in Europe, and we think that that's probably got pushed back into default, but Europe.
Sort of the leaders are U K U S. Israel UAE those are those markets are recovering fairly quickly.
Europe will be next.
China is and a pretty good place and.
He is a bit of a trouble spot and Latin America is a bit of a trouble spots. So those will probably recover late this year and then we see a very strong pickup next even stronger pickup next year, particularly on the international routes, but some of those will recover and the second half of this year I anticipate aspersion day U S Middle East Europe.
UK routes to be.
Fairly active.
Even in the second half of this year.
I appreciate it thanks.
Thank you.
And good Tom.
Hunter with Cowen has our next question.
Yeah. Thanks. Good morning, guys I was wondering if you could elaborate on yes, if you could elaborate on the commercial aerospace aftermarket you mentioned.
Sequentially It was down.
Maybe if you could tease out how much arrow large commercial ATR was down and then what are you mentioned that will be up and Q2. What are you seeing from a bookings standpoint, what kind of indications are you getting for magnitude of the improvement.
And Q2, and maybe your thoughts beyond that.
Yeah. It seems like the flight hours from Q1 to Q2 wont to be up and the call it 20% range.
Whether we have a little bit of a lag to that or not.
Remains to be seen on.
But as you highlighted and we talked about the Q4 to Q1 decrement is the lack of Thanksgiving and Christmas.
The January the December and January.
Infection acceleration, so as those things start coming down domestic travel we expect will be.
The main beneficiary and you see that from all the airlines who have reported.
<unk> West, which is mostly a domestic leisure travel.
Is doing fantastic and.
Who are reliant on more on the business travel are going to suffer so youre going to see that youre going to see that domestic and.
And and international and business travel bifurcation.
Xactly, how that's going to play out is is really kind of remains to be seen and even as was mentioned earlier with places like Europe domestic travel and intra Europe is.
It has been depressed a little bit given given the fact that they've had some additional lockdowns and some of the and some of the countries with the outbreaks. There. So it really is it's really a country by country region by region.
The impact and so putting a precise put a precise finger on that it's going to be a little bit elusive.
Thank you.
Okay.
And with Citigroup, we have Andy Kaplowitz for the next question.
Hey, good morning, guys.
And I'm wondering.
Does he talked about accelerating and cash deployment in Q1 with a 3 billion debt you allocated to high return opportunities and couldn't explored it but could you update us on the M&A pipeline Youre seeing obviously and we.
We've talked about valuations not being cheap out there, but do you think you can continue to ratchet up M&A over the next few quarters and what you see.
Yeah, No I mean.
The pipeline continues to be good youre right. The valuations are not exactly.
Low.
But you know we're gonna.
And we're gonna be opportunistic and and we're gonna look for kind of a I would call the needles and the Haystack and Inc.
Finding things that work for us it makes sense for us we think they exist and.
Sometimes you got to you have to go and places, where maybe everybody else isn't running too because obviously those things have a very very expensive price tags, and we have some ideas that I think could be pretty interesting for our portfolio. So.
It's a it's.
A very robust pipeline and we're always working on a couple of things that hopefully will land and I anticipate we're going to be doing more deals in 2021 and two.
And also looking at other levels levers of capital deployment as well.
Thanks, guys.
Okay.
Now, we will hear from Nigel Coe with Wolfe research.
Good morning, guys.
So just getting back into the pool pump.
And just get them.
Okay.
Yes.
I wanted to go back to the comments about the supply chain and constraints and <unk>.
And I don't know if you want to.
Try and quantify it but if you look at the normal seasonality and the <unk> to take a step up.
Doug you talked about it seems like it might be and the range of maybe $2 million to $3 million is that sort of the right range and where are you seeing these constraints is it is it maintenance and semi it was at the border and and.
Do you think <unk> and sort of peak paying for this and we.
And again, some semblance of and the milk and the second half of the FDA no. The constraints are significant and they are and semi and by the way and just to be very clear.
The constraints are reflected in our guide okay. So I just want to be very clear about that.
But the constraints are significant.
And they are primarily in our.
Sps and more specifically on PSS business.
And I think about a million over 100 million plus kind of a number.
So so.
And not it's not small it's actually significant we do think it will abate over the year, but Q2 is challenged because frankly.
And the guide could have been even higher.
And and we we are working and we've really projected.
And outlook for the rest of the year and we're looking for alternative source of actually Torsten Pilz is here as is our supply chain and officers. So I don't know of course, and if you want to provide.
Yeah, I think we have two areas semiconductors, as one and resins as the other one and we believe that the resin impact will subside by the end of Q2, but.
Semiconductor impact will continue throughout the year.
[laughter].
Okay.
Okay.
Nigel you're breaking up we couldn't hear your question.
Okay.
Net.
The second do you think this is locked.
I think I don't know what you said.
And you said lost sales and we think it's a push because obviously a lot of these <unk>.
Pliers R R.
Unique it's obviously being impacted so it's not as if the demand is going away.
We think that this is probably a push to the second half of the year.
But we'll see it's a we've you know.
That business has been a really really nice success story for US and you know if we go back a couple of years, maybe it wasn't such a success story had a terrific year last year and.
And just further accelerated this year and absolutely.
And growing very very quickly so.
It's still going to have a good quarter and Q2, but it could've been a phenomenal blowout quarter and Q2.
Great. Thank you very much.
Thank you.
And drew <unk> with Bank of America will have the next question.
Hi, and good morning.
Hey, Andrew Yeah, I figured maybe Julien was messing with Nigel fly to keep him from asking too many questions, but who knows.
And a competitive business and.
Just a question on aerospace on Aero.
And on a very sort of twisted way, we're getting a lot of questions. The fact that your margin and Aero already so high at the bottom of the cycle and.
And I was just wondering if we could take a longer term view and if you could talk about.
On a longer term levers.
To keep margin expansion going on.
And as both in terms of specific end market recovery, but also operating initiatives.
Yeah, well I think you know I think Q1 was a bit telling and although we were very transparent about a $30 million one timer, even if you exclude debt element I mean.
The margins were still on the upper Twenty's. So I think we demonstrated the credibility of the say do that we believe this business can be and the upper Twenty's and this is a case and point and take out the 30 and we're still in the upper Twenty's. So I think that's really important.
Yes, I mean, this may be used and the high point and sort of the investment profile of barrel, but I can tell you and as Greg pointed out we are investing and aero today.
And some of the major platforms and products. So I wouldn't say, it's an all time low, but and our R&D dollars are going up from 2020 to 21, and we still expect extraordinarily attractive margins for that business. So.
I think Ted.
We're investing it's a great business and better things are yet to come which I think maybe gets misunderstood, which as you know.
The ATR aftermarket is not kicking in yet.
I think the VGA is going to get better I mean, so we have some brighter things on the future and even at this kind of business levels, we can print and something in the upper 20, So I just think debt.
People start believing that this is a very good business, which is going to get even better for the future Greg Yeah I would just.
Maybe just augment that so as you said, we printed 29% you take the $30 million out, it's still 28, and 2000 and high 20 Sevens.
Our long term target that we highlighted was 27 and so again, we're there on that.
But we're going to continue to invest and so.
I think this business has done a very good job and it was obviously that and PMT were the most impacted by the pandemic. They did a terrific job on on their cost management and realigning their cost structure to the size of the business and that's coming through.
But Darius is point, we're going to make sure that we continue to invest and grow it we're not going to over earn.
And print margins that are.
Let's say unhealthy for the long term viability of the business.
Jake let's take one more question please.
And that question will come from Sheila and kind of old lube with Jefferies.
Hey, good morning, guys. Thank you Sheila and good morning, good morning.
And I'll have to tell Andrew and it does mean nothing with Nigel fine So fair enough.
I guess sticking with arrow.
Mentioned commercial OE was up sequentially Biz Jets was up double digits. I think you said was that a surprise what platforms drove that and related to that what are you expecting on commercial OE build rates as we progress throughout the year.
Okay.
Yeah. So it was definitely up sequentially as highlighted not really unexpected.
Starting to see some of the some of the build rates.
Cover it's going to be slow from here I would say the level. We're at right now is going to be.
Kind of a slow ramp from from this point so it's not like we see anything changing dramatically to the upside here.
Imminently and so.
But not really unexpected for what we've seen you see what's happening with the with the Max coming back into service and so on so.
We feel like we're we're sized properly for for that ramp.
As we head into the second quarter and the back half of the year on Pega certainly.
That aftermarket stream. It's just it's just going to ROE and a faster pace than beneath the army people are shifting and this is actually a question for.
The ATR business people are shifting from <unk>.
Commercial travel too.
Business jet travel that's happening and so there's there may be some element of commercial first class travel that actually from a business perspective.
And fully come back. So so we do feel bullish about what we're seeing and the PGA space, particularly but as I said earlier there are so many variables as you know as.
Well as we do there are so many variables that go on to this between passenger behavior airline airline behavior.
That's a little bit as to why we're going to take this one quarter at a time, yeah and I'd just maybe add to that is yes. I think we have looking forward as the OE rates slowly increasing and I think that thats, we have a fairly high degree of confidence and there throughout this year, particularly second half versus free right.
First half and then increasing even more in 2022.
So that's sort of the math I mean, I think we also forget that.
As recently as three months ago, and some of the infection rates and the U S were very very high and were not dramatically different place so sort of the overall.
January and part of February were fairly difficult, but we see.
And we see the world slowly coming out of this and and if theres going to be a direct correlation to aviation and and we think this.
This is gonna be manifested and the second half this year than 'twenty, two and 'twenty three and we're set up for some very very nice quarters and years ahead of us which are going to be slowly ramping up. So we continue to be very bullish on aviation and we're investing in the business, but at the same time.
2020 was a good opportunity for us to really rationalize some cost structure and I think we can lever up nicely as that business starts coming back.
Thank you.
Yes.
Okay.
And I'm proud of everyone at Honeywell was consistent hard work and unwavering commitment and enable us to outperform in this challenging environment.
Thank you to our shareholders for your ongoing support we are well positioned for the recovery was strong start to the year and I look forward to our opportunities to come during the balance of 2021 and beyond.
Thank you all for listening and please stay safe and healthy.
Ladies and gentlemen, this does conclude your conference for today, we do thank you for your participation and you may now disconnect.
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