Q1 2022 Honeywell International Inc Earnings Call
Good day, and thank you for standing by and welcome to the Honeywell first quarter of 2022 earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please.
Please be advised that today's conference is being recorded.
Further assistance, please press star zero.
Now like to hand, the conference over to your Speaker today, Sean Meacham, Vice President of Investor Relations. Please go ahead.
Thank you Shannon.
Morning, and welcome to Honeywell's first quarter 2022 earnings.
On the call with me today are chairman and CEO , Darius Adamczyk, and senior Vice President and Chief Financial Officer, Greg Lewis.
Also joining us are senior Vice President and General Counsel and Madden.
And senior Vice President and Chief supply chain Officer Torsten Pilz.
This call and webcast, including any non-GAAP reconciliations are available on our website at www Dot Honeywell Dot com forward slash investor hunting.
Honeywell also use our website as a means of disclosing information, which may be of interest or material to our investors and for complying with disclosure obligations under regulation FD Accordingly investors should monitor our Investor Relations website. In addition to following our press releases SEC filings public conference calls Webcasts and social.
India.
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 based on many factors, including changing economic and business condition, and we ask that you interpret them in that light.
We identify the principal risks and uncertainties that may affect our performance in our annual report on Form 10-K , and other SEC filings.
This morning, we will review our financial results for the first quarter of 2022.
Our guidance for the second quarter and provide an update on our full year 2022 outlook as always we'll leave time for your questions at the end with that I will turn the call over to our chairman and CEO Darius adoption. Thank.
Thank you Sean and good morning, everyone, let's begin on slide two.
First off our collective thoughts are the millions of Ukrainian refugees and we hope to see a peaceful resolution quickly.
Number one priority continues to be the safety and security of our employees and partners new region and respond to their immediate needs.
That said, we delivered a very strong first quarter. Despite the challenging backdrop that include ongoing supply chain constraints deflation headwinds in global interest I am pleased with our disciplined execution as we navigate these dynamics and capitalize on the ongoing recovery in our end markets, we met or exceeded our first quarter commitments.
Despite these challenges with adjusted earnings per share of $1 91.
Down 1% year over year, but <unk> above the high end of our guidance range organic sales grew by 1% year over year in our commercial aviation aftermarket building products productivity solutions and services advanced materials and recurring connected software businesses, all delivered double digit organic.
This was partially offset by two percentage point impact from lower Covid related masks sales as we lap the height of the demand in 2021.
Our strong price realization allowed us to stay ahead of the inflation curve, we expanded segment margin by 10 basis points year over year 10 basis points above the high end of our guidance range. Excluding the impact of our investments continue the margin expansion rate would have been 40 basis points year over year.
Orders and backlog growth accelerated in the first quarter, indicating strong demand momentum despite macro headwinds led by strengthened Errol HPT in PMT and.
End markets continue to recover we will go into more details on orders and backlog trends on the next slide the first quarter is seasonally our lowest from a cash perspective and as we communicated this year that is being exacerbated by the supply chain impacts and strong collections in Q4, we generated $50 million.
Free cash flow in the quarter. These results do not change our full year free cash flow guidance range of $4 $7 billion to $5 1 billion.
Which Greg will discuss later.
We continued to leverage our strong balance sheet deploy $2 billion of total capital in the first quarter, including $1 billion allocate to share repurchases as we began execution of our recently updated commitment to buy back $4 billion in shares in 2022.
From an M&A perspective, we closed the acquisition of U S. Digital designed a public safety communications hardware and software solutions provider.
Looking forward I continue to be encouraged by the strength, we're seeing in many areas of our portfolio as we execute our rigorous and proven value creation framework.
Our accelerator operating system is driving outstanding shareholder value now, let me turn to slide three to discuss our orders and backlog trends.
First quarter orders across Honeywell grew 13% the strongest growth we have since the start of 2021 with the exception of second Q 'twenty, one growth, which benefited from 2020 COVID-19 related loans.
Despite ongoing macro challenges over the last few years, our book to Bill ratio has been greater than one for the last several quarters, indicating the strength of our demand and commercial success long cycle orders grew over 20% in the first quarter led by strength in the overall aerospace portfolio.
Process solutions projects, and Sps warehouse automation, which will help facilitate sustained growth through the coming years.
First quarter backlog increased 9% year over year to $28 5 billion.
10%, excluding the impact of approximately $300 million of backlog, we move through the due to the Russia conflict.
<unk> growth has also been accelerating consistently over the last two years as our end markets recover giving us confidence increased shelf growth as the supply chain environment eases now, let's turn to slide four to discuss some exciting recent announcements.
Last month, we announced the strategic collaboration of Automotives, a division of clear path robotics that gives warehouse and distribution centers throughout North America, and automated option to handle some of the most labor intensive roles and increasingly scarce job market the collaboration.
Enables honeywell customers to increase efficiency reduce errors and improve safety by deploying autos autos.
<unk> mobile robots in their facilities.
These autonomous mobile robot channel repetitive and often time consuming tasks and allow scarce labor resources to be shifted to higher value jobs. This helps boost worker satisfaction, while reducing injuries and turnover rates that pandemic and its lasting effects of labor shortages is causing companies.
To reconsider the way they operate and companies are more willing than ever to invest in automation.
We also recently announced that we will supply.
Energy energy storage system for Solar Park located in northern New Mexico. When completed in mid 2022, a 50 megawatt solar farm the capable supply enough electricity to power up to 16000 average new Mexico homes, which will help meet the state's decarbonize.
Asian goals, when combining of Honeywell experienced energy control systems, the energy storage systems.
It will enable customers to accurately forecast and optimize energy cost at the site and will support access to reliable and cost effective clean energy Hunter.
Honeywell remains on the forefront of innovation. It is leading the energy transition energy storage will be a player who will play a critical role in renewable power generation.
Vital to the de carbonization of global power systems.
Lastly, we are keeping up with world energy.
Carbon net zero as a solution provider and air products, the world's largest hydrogen producer to build one of the most technologically advanced sustainable aviation fuel production and distribution sites ever constructed.
The facility will produce fuels that will displace over 76 million metric tons of carbon dioxide by 2050, the equivalent of $3 8 million.
<unk> net zero flights from La to New York World Energy and Honeywell collaborated over the past nine years and this long term engagement will continue to transform the industry.
Important the growth of zero carbon economy, and help accelerate the decarbonization of the aviation industry.
These exciting announcements reinforce our message at Investor day that our innovative culture, our commitment to providing efficient and sustainable solutions to meet the needs of our customers and our new technologies will be integral to the next leg of growth now let me turn it over to Greg on slide five to discuss.
Our first quarter results in more detail and to provide an update on our 2022 outlook.
Thank you Darius and good morning, everyone.
As Darius highlighted we met or exceeded our financial commitments. Despite a very challenging backdrop first quarter sales grew by 1% organically as supply chain constraints predominantly in Aero HPT and SCS continued to hold back volume growth and caused our past due backlog to increase by approximately $500 million in the quarter.
Our strong pricing was a highlight in the face of high inflation similar to the fourth quarter <unk> also had difficult year over year comps with lower COVID-19 related mass demand impacting growth by two percentage points and the timing of sales and warehouse automation dampening our growth rate.
Turning to the segments aerospace sales for the first quarter were up 5% organically compared to the first quarter of 2021. Despite continued supply constraints as the ongoing flight hour recovery led to more than 25% year over year sales growth in both air transport aftermarket and business in general aviation aftermarket.
Commercial original equipment grew double digits in the first quarter as air transport original equipment returned to growth.
That was partially offset by lower business and general aviation original equipment volume.
Growth from commercial aerospace was partially offset by defense and space sales that were down 14% in the quarter.
Aerospace segment margins contracted as expected in the first quarter to 27, 4% due to higher sales of lower margin original equipment products the impact of inflation and the absence of a onetime gain in 2021, partially offset by our pricing actions.
Turning to building technologies, where sales were up 8% organically led by favorable pricing across the building product portfolio, partially offset by lower volume in building projects.
Orders were up double digits in the first quarter as a result of strong demand for fire products and building management systems.
Backlog growth continued in building solutions projects and services, giving us confidence for the remainder of 2022.
In addition, our healthy buildings portfolio maintained its momentum with orders over $100 million in the first quarter.
Segment margins expanded 100 basis points to 23, 5% to our pricing actions and a favorable sales mix, partially offset by cost inflation.
In performance materials and technologies sales grew 6% organically in the quarter, despite an approximately 1% headwind from Russia sales.
Growth was led by advanced materials, where the business experienced double digit growth, despite lower automotive refrigerant volume due to supply constraints affecting automotive OE production.
Process solutions sales growth was led by thermal solutions and lifecycle solutions and services.
Florida systems grew approximately 20% and turned in operating profit in the quarter earlier than expected in our acquisition model.
<unk> sales were down in the quarter due to lower process technology equipment volume, although sustainable technology solutions continued to excel growing over 75% organically year over year.
Orders increased double digits year over year headlined by over 20% growth in process solutions.
Segment margins expanded 230 basis points in the quarter to 28% driven by favorable pricing and sales mix, partially offset by cost inflation.
In safety and productivity solutions sales decreased 15% organically in the quarter remember that the first quarter of 2021 with near the height of our Kobe, driven mass demand, creating a 9% year over year comparison headwind in the quarter.
Productivity solutions and services advanced sensing technologies, and our gas detection business all grew at double digit rates in the quarter. Despite the supply constrained environment, highlighting the strength and much of the underlying Sps portfolio.
As we expected the timing of <unk> sales is shaping up to be a mirror image of 2021 with sales down in the first quarter and we expect growth in the back half of the year.
Segment margins expanded 20 basis points to 14, 5% led by favorable pricing and sales mix, partially offset by lower volume leverage and cost inflation.
Honeywell connected enterprise continues to underpin the growth we're seeing across the portfolio in the first quarter recurring revenue grew over 15% with SaaS growth of over 50% led by this part of business we.
We also saw double digit growth in our connected buildings cyber and connected industrial solutions.
So for overall Honeywell, our execution allowed us to deliver 10 basis points of segment margin improvement 10 basis points above the high end of our guide with margin expansion in PMT, HPT and Sps ending the quarter at 21, 1% and keep in mind. This expansion is net of a 30 basis point year over year headwind.
Associated with our investment in <unk>.
On EPS, we delivered first quarter GAAP earnings per share of $1 64.
And adjusted earnings per share of $1 91.
Which was down 1% year over year.
A bridge for adjusted earnings per share from <unk> 21 to <unk> 22 can be found in the appendix of this presentation.
Segment profit was a one set headwind driven primarily by lower volume and supply chain constraints, partially offset by strong price realizations.
A lower effective tax rate, 22% this year versus $22 three last year drove a <unk> 10 tailwind.
Fair Count reduction drove a 4% year over year tailwind to earnings per share we saw <unk> <unk> headwind from below the line items, primarily due to lower pension income and increased repositioning.
In response to the Russian invasion of Ukraine, we suspended substantially all of our sales distribution and service activities in Russia and as a result, we recorded a charge of $183 million or 27% impact to our GAAP EPS.
Moving to cash we generated $50 million of free cash flow in the quarter, which is closely aligned to our expectations.
This decrease was driven by higher working capital, including lower payables and higher receivables from strong <unk> collection. In addition to higher inventory as we continue to work through the constrained supply chain environment.
Cash taxes due to the impact of tax legislation and R&D capitalization. We're also a free cash flow headwind in the quarter consistent with our full year guidance.
Finally, as Darius mentioned earlier, we continued to leverage our strong balance sheet.
$2 billion towards high return opportunities for our shareholders, notably, we repurchased $5 5 million shares for $1 billion in the first quarter as we executed on our updated commitment to buy back $4 billion of shares in 2022.
We also paid approximately $670 million in dividends spent approximately $180 million in capital expenditures and invested approximately $180 million in M&A as we closed the acquisition of U S digital design.
So overall, we executed better than expected managing through a very difficult first quarter and accelerated our capital deployment as promised.
Now, let's turn to slide six to talk about our second quarter and full year guidance.
Signs of the recovery continues to unfold in our key markets underpinned by strong orders growth across many of our businesses as Darius highlighted in his opening.
While uncertainties and persistent challenges remain in the macroeconomic backdrop, a rigorous operating principles have enabled us to demonstrate our agility and resiliency positioning us well for the recovery ahead.
Our end market set up continues to be strong with ongoing improvement in global flight hours returned to public spaces and elevated oil prices.
Global energy production continues to transition to a low carbon future and Honeywell will lead that evolution with our strategically differentiated and sustainable technologies.
We expect supply chain impacts remain as challenging in the second quarter as they were in the first quarter, but to start to abate as capacity for electronic components comes online in <unk>.
We're confident in the eventual return to normalcy in the aerospace supply chain. However, the timing remains difficult to call.
Inflation will continue to be a significant headwind however, our strategic pricing actions will continue to dampen impacts to margin throughout the year.
In response to the Russian invasion of Ukraine, we suspended substantially all our sales distribution and service activities in Russia, representing approximately 1% of total 2021 sales for Honeywell that we do not expect to return. This this year.
In addition, we are actively monitoring and navigating the worsening COVID-19, lockdown situation in China that is creating sales and supply chain.
With that as a backdrop, we expect second quarter sales to be in the range of $8 5 billion to $8 8 billion down.
Down 2%.
Two up 2% on organic basis.
Or flat to up 4%, excluding the one point impact of the mask sales decline and a one point impact of loss of Russian sales.
This sales range assumes that COVID-19, lockdowns in China alleviate in May and that the Chinese operating environment remained relatively normal.
Despite the ongoing macro uncertainties, we now expect full year sales of 35, five to $36 4 billion.
Which represents an increase of $100 million on the low end from our prior guidance.
4% to 7% organically with accelerating growth as the year progresses.
It represents organic growth of 6% to 9%, excluding the one point impact of the lower mats demand and one point impact of lost Russian sales.
We expect that our disciplined price actions will keep US ahead of the current inflationary environment contributing approximately 5% to our sales growth, which is higher than we anticipated in our original guide.
Offsetting the majority of the approximately $400 million of.
Lots of Russia sales.
Now, let's take a moment to walk through the second quarter and full year expectations by segment.
An update on our 2022 and market outlook can be found in the appendix of this presentation.
Starting with aerospace the overall industry supply chain complex continues to be a challenge that we do expect to see moderate improvement throughout the year.
Sequential growth in flight hours will lead to another quarter of robust growth for our air transport and business in general aviation aftermarket businesses.
This momentum will carry through to the end of 'twenty two with growth led by the air transport aftermarket.
With build rates improving as expected business in general aviation original equipment will grow sequentially each quarter for the balance of 2022.
At 22 progresses in our comps ease defense and space will see sequential improvement from the first quarter and return to year over year growth in the second half.
We still expect full year organic sales growth for aerospace to be up high single digits.
Growth in the original equipment will lead to mix related margin headwind throughout the year, but we expect aero margins to grow sequentially from the first half of the second half.
In building technologies, we expect momentum to continue with sales growth both sequentially and year over year throughout 2022.
Fly chain constraints, particularly around semiconductors begin to ease and we deliver on strong demand for fire and security products and building management system.
Our targeted pricing actions will also provide growth on top of that AUM lock volume.
We expect building solutions to return to growth in the second quarter and rebound well into the second half, finishing the year off strong.
Underpinning the growth throughout the portfolio, our healthy buildings offerings, which will benefit from increased demand for air quality and touchless technology.
Higher government spending on infrastructure will provide additional growth opportunities for us as well.
Overall, we now expect full year organic sales growth up high single digits to double digits trending better than expected.
We continue to work diligently to combat the current inflationary environment and our cost controls and pricing actions will ensure that we maintain and build upon our margin expansion in both the second quarter and the back half of the year.
In performance materials and technologies, the macro setup remains favorable for our portfolio as we are uniquely positioned to both participate in the oil and gas reinvestment cycle as well as enable the energy transition.
However, PMT has the largest exposure to Russia, among our segments and our decision to substantially suspend operations in the country represents a near term sales growth headwind, particularly in Europe .
Process solutions projects orders are expected to remain strong throughout the year and volumes in the products businesses will increase that supply availability improves.
In <unk>, we see sequential improvement in the second quarter and throughout the year as catalyst reloads increase and refining markets and we are encouraged by the order pipeline for our sustainable technology.
<unk> is also a significant contributor to the liquefied natural gas capacity globally and recent government announcements suggest incremental LNG capacity may ramp beyond what has already been committed.
Presenting a promising opportunity for the business.
Advanced materials pricing will continue to be a tailwind throughout the year and we are expanding capacity to position ourselves for further growth.
In total we still expect PMC sales to be up mid to high single digits for the year.
PMT margins will benefit from our pricing and productivity actions and we expect sequential and year over year margin expansion in <unk> and continued sequential improvement in the second half.
Turning to safety and productivity solutions, we expect productivity solutions and services advanced sensing technologies and gas detection to build on their momentum from the first quarter and continue to grow throughout the year.
These businesses saw year over year backlog growth of over 25% in <unk> and have demonstrated their ability to execute in difficult macro conditions, giving us confidence in the growth trajectory there.
Specially as the supply chain environment improves.
Lower COVID-19 related mass demand will continue to be a year over year drag into Q, but as we enter the second half of the year, we'll lap the difficult pandemic comps and personal protective equipment sales returned to growth led by other product offerings in the portfolio.
And in <unk>, we are encouraged by the progress we've made in improving our operational efficiency and profitability and we're increasing our focus on project selectivity, finding the right balance between top and bottom line growth as we discussed.
We still expect SCS sales to be flattish year over year for the full year with sequential improvement each quarter. However, we anticipate margins to expand sequentially throughout the year as business mix pricing and volume compounds.
Now, let me turn to our expectations for the other core guided metrics.
For second quarter segment margins, we expect to be in the range of 25% to 29%, resulting in 10% to 50 basis points of year over year margin expansion.
Excluding the 30 basis point headwind from continuum, we expect margins to expand 40 to 80 basis points.
Second quarter net below the line impact, which is the difference between segment profit and income before tax is expected to be in the range of zero to $45 million with a range of repositioning between $40 million and $80 million as we continue to fund ongoing restructuring project.
We expect our second quarter effective tax rate to be approximately 24% and the average share count to be approximately 687 million shares as a result, we expect adjusted second quarter earnings per share between $1 98.
And $2 8 million.
Down, 2% up 3% year over year.
Turning to the full year, we continue to expect segment margin to expand 10 to 50 basis points supported by higher sales volumes price cost management, and our continued rigor on fixed costs.
Excluding the 30 basis point headwind from <unk>, we expect margins to expand 40 to 80 basis points in the year.
Sps will lead to margin expansion for the company as we continue to prioritize profitability in 2022 and that business, followed by HPT and PMT with arrow about flat year over year.
We continue to expect our full year net below the line impact to be in the range of negative 100 million, a positive $50 million, including capacity for 300 million to $425 million of repositioning of the year.
We expect the full year effective tax rate of approximately 22% and we now expect a weighted average share count to be in the range of 684 to 687 million shares for the year, reflecting our updated commitment to repurchase $4 billion of Honeywell shares in 2022.
We have raised our full year earnings per share expectations to $8 50.
To $8 80.
Up 5% to 9% adjusted an increase of <unk> 10 on both end versus our prior guidance due to our accelerated share repurchase commitment.
We still expect to see free cash flow in the range of $4 7 billion to $5 $1 billion in 2022, or four 9% to $5 3 billion, excluding the impact of <unk>.
So in total we're raising our full year earnings per share guidance and increasing the midpoint of our sales range absorbing the impact of external macroeconomic factors now let me turn it back to <unk> to discuss our enhanced environment commitments coming out of our recent investor day.
Thank you, Greg, let's turn to slide seven and talk about the more aspirational approach, we're taking to our ESG commitments.
ESG has been part of Honeywell's DNA for decades, there would be an established track record of success in this area.
Since we stood up our sustainability program in 2000 and for the <unk>.
Every one of the ambitious targets, we have set for ourselves reduced our greenhouse gas emissions intensity by approximately 90% while spending over $4 billion of renew.
Mediation projects to restore thousands of acres of land for our communities.
While we are thrilled and the successes we've had in the past we believe we still have much to accomplish in the future.
On track to deliver on our 10 10 10 target set in 2019.
Further reducing our greenhouse gas emissions, while deploying renewable energy projects and improving energy efficiency at our sites.
<unk> last year, we committed to achieving carbon neutral facilities and operations by 2035, a full 15 years earlier than the Paris climate accord.
While these targets are successful in reducing our scope one and scope two emissions we didn't stop there earlier. This year, we submitted a commitment to the science based targets initiative to address our scope three emissions across our value chain lowering the environmental footprint of our products, we continue to innovate with prop.
<unk> and services that help our customers reduce their own emissions.
In addition to our ambitious sustainability targets. We've also enhanced our ESG disclosures with additional metrics on our Investor Relations website.
These include an ESG data sheet that is metrics for diversity water greenhouse gas and more defense and space fact sheet that includes more detailed information of our sales makeup in a document that breaks down honeywell's, many ESG oriented offerings, which compromise more than 60% over revenue.
Right.
Now, let's turn to slide eight for some closing thoughts before we move into Q&A.
As always our value creation framework helped helped us successfully navigate the quarter and over deliver on our commitments. Most of our end markets will continue to recover and we are optimistic about our future. Despite the ongoing geopolitical challenges, including approximately $400 million of loss Russian sales.
We raised the midpoint of our full year sales range and increased our earnings per share expectations are.
Our value creation framework is working the ongoing recover end markets, we remain optimistic about the future of our business.
While there is a heightened level of macro uncertainty at present, we remain confident our ability to execute and the pieces within our control, let Shaun let's move to Q&A.
Thank you Darius.
<unk>, Greg and and Torsten are now available to answer your questions we ask.
Please be mindful of others in the queue my only asking one question.
Amy Please open the line for Q&A.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Draw your question press the pound key.
Please standby, while we compile the Q&A roster.
Our first question is from Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
Good morning, just wanted to good morning.
Just wanted to understand maybe on the margins first.
So you're guiding for sort of the second quarter sequentially for revenues to be up maybe 300 million.
Margins down those sequentially.
So just trying to understand sort of what are the main segment drivers of that and then within aerospace.
Was the Q1 margin performance in line with what you expected and most of the conviction on that margin turning around through the year.
Yeah, well, let me start by saying the margins don't need to turn around they're actually quite good at 27, 4%. So so we're pretty happy with where they are and yes. They were in line with what we had expected we do see them coming down a bit in Q2, though because as we've talked about.
The OE equipment.
Margins are not favorable to us and so we are facing some some mix headwinds, which those will continue to want to.
Challenge us as the year goes on and we also talked a lot about in our Investor day.
Investment increases in R&D in particular, which again are very important for some of our longer term program. So.
We feel good about where we are but that is going to be we do expect a little bit of a sequential tick down.
They're in an aerospace in particular, probably get a little bit of a tick up in Sps.
But those are really the those are probably the two main movers. Overall, we will also have our corporate expense generally starts out a little slower in the early part of the year and.
Ramps up again, that's not big dollars, but as you know every $10 million is about 10 basis points for the company. So so those are really the three things I'd highlight.
Thanks, and then just one very quick follow up would be on China sourcing you said I think you were assuming in may the issues recede in terms of supply chain issues in China from Lockdowns could you give any kind of dollar number for Q2 will be expected impact.
I think Julian Thats really impossible to quantify I mean, what we're assuming in our guidance range for Q2 is that.
Essentially things come back to kind of normal state had made it the best data. We currently have if you think about our 20 manufacturing facilities that we have in China about half of them are operating more or less normally.
And the other half are kind of compared to some extent by either supply chain challenges inbound.
Or the operation itself, but we do expect that to improve in may and get back to normal with normal production certainly in June June but steady improvement.
Quantify that right now would be.
Possible, but that underpins our guidance for Q2, yes, if I just would add to that.
How this all continues to happen in China, obviously, no one can say for sure.
If things like what goes on in Shanghai happen early in the quarter like they are right now it's going to impact our April we're already paying that but assuming everything comes back as Darius mentioned in things open back up after the first week of May and we've got plenty of time to sort of make up that volume and recover.
The shipping but.
How will that be.
Is that the sell throughout the quarter and the rest of the year really is.
Yeah kind of unpredictable and as Greg pointed out timing does matter I mean, we expected a slightly softer April due to the outages.
With these Audi has kind of happened in month, one with time to recover we get outages in month, three that's going to be a much bigger problem.
So we're not anticipating we're anticipating a recovery.
Understood. Thank you.
Thank you.
Our next question comes from Steve Tusa with Jpmorgan. Your line is open.
Hi, good morning.
Okay.
Two two negatives and two positives.
The first could you just clarify maybe with a little more precision where you expect the aero margin to come in in the second quarter just to kind of like.
No.
Kind of cleared the decks on that and then also on Sps the warehouse business.
How does that trend kind of sequentially as we go through the year and then on the positive side anything that Youre seeing are embedding on a pickup in defense or oil and gas in the second half of the year or maybe is that stuff still out kind of in front of us.
Yes, I mean, let me maybe start.
And the second of your two question. So in terms of defence and space. Our orders in Q1 were actually quite good they were double digit orders growth in defense and space, but I wouldn't tell you that we're seeing a big uptick yet due to some of the geopolitical situation, but we do think it could happen, but we're not going to call. It that it is going to happen until we see it.
So the orders.
Growth in Q1, although good is not really.
Yeah.
Tied to any of the geopolitical situation.
Particularly in Hps, we saw good orders growth in Q1, we actually anticipate some strong orders in Europe , particularly tied to some of our gas portfolio. So that looks good.
So thats sort of your second question Greg.
I don't know, we don't guide individual segments any longer as you know we've not done that for a while so.
We do expect to see margins.
Ticked down in aerospace less than a 100 basis points more than zero.
And there is a range around those things as well, which is why we don't guide it any longer and as it relates to <unk>.
Yes.
That is a low single digit margin business.
We expect that to go up each and every quarter by <unk>.
Think about it is.
Maybe 100 ish basis points per quarter.
As we work our way through the 2021 job that we took the charge on for last year, which the completion of those will be at zero margin.
And we continue to get the benefit of the new projects in our execution improvements throughout the course of the year, which is why again, we see bulk between that as well as <unk>.
Volume leverage that we ought to get from our products businesses in the rest of the portfolio. That's why we see.
Pretty consistent margin expansion sequentially quarter after quarter after quarter and in Sps, which is what our best it's going to be.
Just to add to that.
I look at our backlog, which is which you just provided commercial activities not our issue.
Commercial activity is about as strong as we've ever seen it you see the improving.
Backlog positions orders positions and I think this is all about supply chain and there are still unknowns around supply chain I think on the semiconductor side, we probably have seen the bottom.
But I would tell you the aerospace supply chain is still challenged.
Our decommit rate from our suppliers is hot and.
That's why it's so hard to call. This thing because when you get a pretty high Decommit right.
It's difficult to call exactly what that's going to look like in Q2, Q3 and Q4. So we remain optimistic that it's going to continue to improve but we got to kind of see it in the numbers.
Okay, great. Thanks, a lot guys. Thank you.
Our next question comes from Jeff Sprague with vertical research your line is open.
Thank you and good morning, everyone.
Good morning, Jeff Good morning.
I was wondering if you could share a little more color on the SaaS.
SaaS project with a PD.
Products right.
Kind of the maybe the first really big benchmark deal that I've seen $1 billion project is there any way you can give us an idea of.
The Honeywell scope.
In terms of kind of the front end capital opportunity and then kind of what the kind of the ongoing recurring revenue on catalysts and other things might be on a project of that size and scope, yes, I mean, I think it's a couple of things. So so I would characterize it the following.
And we don't release specific numbers to that project, but think about it there's two dimensions. The first one is licensing and the technology itself.
Which can be recognized in one or two different ways, either upfront paid up license or license that recognizes the royalty rate is SAP is produced and then the second stream being.
Use of the catalyst itself.
<unk> drive SaaS conversion so.
This is not the only project that we're going to be involved when we look at.
SaaS and Green fuels, we want something like a double digit number of projects in the last call. It six months to nine months as we've been on an incredible run. It's just one example of what we do.
At some point, we're going to give you a bit of a framework, we're not ready to share that yet in terms of exactly what it looks like but it's going to be definitely margin.
Accretive then you should think about it very much like you said is a recurring revenue base based on the catalyst reloads, which are going to be required.
To drive either staff or green fuels in green gasoline.
Great and maybe just a housekeeping question for Craig.
What was going on with minority interest in the quarter.
Has something changed with an ownership position and what would you point us to going forward there.
Minority interest you are probably seeing the full quarter impact of continuum, because if you remember we closed that in December .
And so now we're getting a full quarter of that minority interest we get we get the consolidation of that which you see in the P&L, which is all the opex, but then we get the <unk>.
Offset for.
Our our partners', 46% share going the other way.
So any direction on the go forward or the full year on that item.
We can look at it separately.
Our call later.
I'm not sure I have that right off the top my head.
Alright, alright, thanks, a lot I'll pass it thanks, Jeff.
Our next question comes from Scott Davis with Melius Research your.
Your line is open.
Hi, good morning, guys.
Scott and Ann Alright, yes.
So in your full year guide of 4% to 7%.
On volumes, how much of that is price.
And are you still raising prices you still need to raise price to.
Offset this inflation.
Inflation that doesn't seem to be.
Going away.
Yes.
Our ongoing working our price I mean, we basically are bumping up sort of the benefit of price by one percentage point I think the one thing that Scott I think you picked up I mean essentially in this guide it is a substantial raise to our guide range. I mean, we didn't explicitly say that but it's obvious because we're basically absorbing a 400 million.
Hit due to Russia with Commeasure margin rate of over $100 million. So this is a fairly significant ways to our outlook. The way we can overcome that with that pit is through price and we think now basically projecting an incremental point of price to a range of <unk>.
Yes, we had talked about for in the original guide we now see it as five as you saw from the release I mean, we were up seven 7% in the first quarter.
And because we started doing these pricing.
A bit more aggressively in Q4 and Q1.
Obviously as we get later in the year that starts to lap itself. Although I will tell you that we're going to stay on top of this thing and we're continuing to chase inflation and trying to stay ahead.
Obviously, we have to do more price increases here in Q2 to continue to stay ahead of it.
Again, just simplistically, we lots of points from Russia, we picked up a point on price we kept the overall organic number.
Okay. That's my one question I'll pass it on thank you guys. Thank you. Thanks Scott.
Our next question comes from Nicole <unk> with Deutsche Bank. Your line is open.
Yeah. Thanks, Good morning, guys, Hey, Nick all morning.
Just maybe digging into HP, asking PMT, a little bit more on what youre seeing from an order perspective.
Higher oil prices, reflecting its way through.
More.
Interesting alright advanced customer conversations.
Yes, I mean, I think as you saw in the quarter, we had very good order rates I mean.
Double digit north of 20% order rates in HTS.
<unk> was a little lumpy frankly, our LST business was strong our <unk> was a little bit less so we expect a strong booking quarter in Q2 will be.
Our overall, particularly for <unk>, we see strong orders growth.
As it relates to our natural gas oriented portfolio still think about absorbent gas processing midstream.
LNG terminals and all of that business.
We're big partner with venture global.
Some of the projects that they're completing in their expansion. So overall, we're very bullish in terms of what's going on particularly as it.
Relates to the gas infrastructure Thats currently being built out both in North America, the middle East and Europe .
Thanks Darius.
Thank you.
Our next question is from Andrew <unk> with Bank of America. Your line is open.
I guess good morning so.
Ask sort of a long question. So short part can you just talk about Europe revenue declined despite an easier comp and growing refinery output.
What's the short term explanation I think I missed it and a longer term question.
How do you think about the longer term impact.
Russian oil having to find new markets I'm, just sort of thinking about the fact that globally youll need to recalibrate a lot of these refineries right. So take Russian oil and then to take oil that will replace rational in places like Europe . So first one near term.
And second one how do we think about longer term opportunity on refinery upgrades. Thank you Andrew I will take the first one and from a short term perspective.
Two simple things to think about I mean first off the way we had our plans set up was we were going to be completing some projects in <unk> that had already been in flight.
So we're going to have as that.
That wind down we're going to have a year over year comp and.
The equipment business in the early part of the year that will be negative and we see the catalyst business growing throughout the remainder of the year, which is going to support the growth rate.
More beyond that so.
The other aspect of that is back to Russia. As an example, the biggest place we're going to see the impact of Russia is going to be <unk> and so you will be being down I think it was 9% in the quarter roughly seven of that is from the loss of the Russia volume in one Oh Wow.
Yes, yes, youll keep gets disproportionately I talked about a 1% hit for our revenues for the year.
<unk> related and you saw that already in Q1, so thats just to help that brings it up as it relates to your second question I mean, essentially in terms of Russia oil I mean, Simplistically said instead of flowing west we think it's going to start flowing south.
And I think the good news about us that we have a global presence across the.
<unk>.
West and the South and I think that benefits, but obviously a lot of our PMT businesses and as I mentioned earlier kind of the gas infrastructure build out.
In Western Europe .
Which will take place both in Western Europe , but also in the middle East and.
In the U S. We will also have.
Positive benefit to our business. So all in all I mean, I think we're well positioned.
How long do you think it would take you quantified for the industry.
I mean, that's hard to answer right now I think.
We're still kind of weeks into this conflict. So we will see I mean, we're obviously involved in a lot of the discussions of the new projects and so on but and im very very confident that any of that buildup, that's going to take place, particularly our modular design concepts, which really revolutionized LNG.
I'm confident that we're going to be a player in that space.
I figured as much thanks a lot.
Thank you.
Our next question comes from Sheila <unk>.
With Jefferies. Your line is open.
Good morning, guys Scot Thank you.
Good morning, good morning.
I'll bet Mark perfect got it.
In the quarter.
How are you Paul Hudson inflation will comfortable.
Kevin Pemex partner cycle, and some are longer cycle like our third quarter.
Can you quantify that with BOL com segment.
Brian the next bottleneck.
Yes, I mean, let me start I mean, if you think about price price cost with price inflation and think about a 7% and five number and that kind of neighborhood.
So this is really the benefit of Honeywell digital.
We talked a lot about that at Investor day, but now can tell you exactly on the impact of price cost for every over 37 business units and exactly what it's going to look like going forward for the next three quarters I can tell you that in bps.
It's really enabled us to establish an operating system, where we know what we need to do in terms of price and we know what we do in terms of coverage and where that business unit will be in a weekly rhythm that we're on with all the business units as matter of fact, we've got a meeting later on today to talk about that topic and we continue to stay on top of it but.
It's not as simple in some businesses than others I mean, some businesses, we have contractual obligations contractual limitations in terms of what we can pass on and win.
We're finding ways to be.
To do that I mean, everybody knows that inflations with us, it's probably going to continue to be with us going to stay diligent in will be repeatable results and able to stay ahead of.
The.
Price cost.
Equation.
Yes, the only.
To your point, just maybe expanding on your contractual obligations and also protections we have some protections as well so as you could probably guess.
The price equation is.
Greater and an Sps HPT PMT and we're a little bit more constrained, but also a little bit more protected and aerospace where we have more of a longer term contract.
Great. Thank you.
Our next question is from Josh <unk> with Morgan Stanley . Your line is open.
Hey, good morning, guys, Hey, Joe Good morning.
Hey, good morning, just a question on the supply chain side, I mean, I think we're still kind of.
Hit or Miss in terms of companies out there seeing improvement into <unk> and over the balance of the year. It seems like particularly in <unk> and maybe some in Sps.
A bit more kind of sequential improvement through the year, maybe others have seen.
Finding more suppliers is it kind of an overall commentary that you guys have seen out of all the base.
Kind of surprised that the China lockdowns have an impact, but could you speak to sort of how youre, how youre getting that improvement.
Yes.
Yes, there is a lot of variables here, let me try to unpack that a little bit I mean, HPT in Fps hold of the supply chain is complex due to a variety of installed base of our products.
It is somewhat contained primarily to the semiconductors, and we think about semiconductors youre talking about the 5% to 10 core suppliers that we're modeling so it's actually a little bit easier for us to get our arms around the situation and know when things will come in when they won't come in and we're cautiously optimistic about an improving.
Supply source coming through for Q2, Q3 and Q4.
And frankly.
Looking into Q2 from the beginning these are the Q1 or Q4, we actually looked a little bit better than we did in the other quarters. So we have reason to be cautiously optimistic provided we don't get decommit on semiconductors now when you get into the Aero segment, it actually becomes a bit more challenged and to give you.
Some very specific numbers, our level of <unk>, which is sort of last minute cancellations.
<unk> was at a level of 22% I mean, that's what makes it so difficult. It was actually worse in Q4 was about 19%.
Turning on some improvement in Q2, and Q3 and Q4, but now youre not talking about less than 10 suppliers are talking about tens if not hundreds of suppliers and trying to really figure out exactly how well they are going to deliver and when it becomes more challenging obviously we've deployed.
Our own people resources to that supply base to help them through some dirt capacity challenges got a program around it but it is challenging I can't tell you that we have.
So exactly whats going to happen.
We're working through it and as you can see we certainly have the backlog.
To support more than to support the business and we're not just watching we're actually doing and we've got a substantial force of people just works the aero supply chain.
The detail I appreciate it.
Thank you.
Our next question comes from Nigel Coe with Wolfe Research Your line is open.
Good morning, everyone.
Thanks for the questions.
Before we get this Mike My question is with Steven just to clarify the comments on China did you say early may may in terms of the.
The Shanghai Lockdowns.
Motivating yes.
Target keeps moving but we think.
Certainly in the first half of May you expect some ease.
In terms of that Shanghai law, Thats, what were built into our guidance.
Okay, great. Thanks, Thanks Derek.
Just to follow on with the supply chain constraints, particularly in Aero.
The commercial aftermarket up 20%.
Not too shabby, but.
As that grows that ramped up that recovery has been constrained by supply chain.
It's not just OE and defense. It's also off the market and then within the aftermarket recovery or are we seeing yet the wide body.
Sort of ramp coming through yet or is that still on the come. So so it absolutely is going to be a constraint on.
The aftermarket.
Part of the business I mean, certainly our MSP.
Power by the hour is going to be a Rev. Rec just based on.
Flight hours, but.
A bit of that Thats tied to spares and repairs is going to have a physical constraint for sure and that's also by the way exactly what creates a little bit of our margin pressure as well because we've got firm commitments to our OEM and so that creates a bit of.
Squeezed between.
Sure.
Where they where the products will go in the chain and what the profitability around that is so.
That is for sure and as you are we seeing some return to wide body travel we are I wouldn't I wouldn't call. It dramatic at this point in Q1, but we are seeing a little bit of a sequential move there, but we've said all along and that is really going to be tied very much to you.
Travel.
Ross the globe as opposed to domestically and so.
When it, particularly with China walking down in that Curtails of course anything in and out of China even longer.
B.
Just a couple of openings I mean, yes, I mean, as Greg pointed out wide body travel has been so constrained and limited and that's still upside to go for us given particularly our installed based on on those those aircraft but.
The fact is if you look at our backlog position, we're in tremendous shape in aerospace and probably the biggest issues, we see in defence defence and space, where we have a growing past due backlog at a faster rate than even some of the other segments.
Really we don't we're not that worried about the commercial inbound in.
We start just an incredible order rate strong double digit order rate in Q1.
All of our focus is really on output into supply chain, yes.
We get that going I think it is going to be very good very very quickly because and just just again to put some numbers behind it we talked about our past due backlog going up a half a billion dollars in the quarter about 200 of that was an arrow about half of that was in defense and space, but the other half was in commercial so there is clearly.
There's clearly an impact in both areas, but as Derek said.
Is that is that unlocks then.
The volume and the leverage that will come along with that are really attractive.
That's great color. Thank you.
<unk>.
Our next question comes from Deane Dray with RBC capital markets. Your line is open.
Good morning, everyone.
Good morning, I'd like to stay in Aero.
Look at the segment outlook.
Defense and space being flat surprises me a bit.
At the analyst meeting Darius you said, you would not be surprised to see that.
Be it high single digits. This year, given the uptick in international defense budgets is it the fact that the U S. Defense budget is flat offsets that but why is that aero not pointing higher.
Because we're really not seeing a lot of new orders yet to some of the geopolitical conflicts to replenish the inventories.
I think and by the way checking with some of the.
Other oes, that's not necessarily unusual so that could be an uptick when we talked about at Investor day. There was some built in the optimism around that coming in and I still think it will happen I'm, just not going to call. It yet until we actually see the orders coming through having said that we did see double digit orders grew.
In defence and space in Q1, just naturally about the addition of pump plus up in the.
Defense budgets, so I think.
It could still be at that level I'm, just not going to call that until we actually see it more pronounced in our orders right.
And I'm still optimistic that it will happen.
Great. Thank you.
Shannon we have time for one more question.
Our last question is from Andy Kaplowitz with Citigroup. Your line is open.
Good morning, everyone. Thanks for taking me in.
Good morning, Darren 9% is the highest backlog growth honeywell's recorded this cycle. Despite macro uncertainty do you think the higher backlog is just a reflection of the hand offs in your businesses from short to long cycle demand or is this maybe a function of the fact that if we go back to what you said during the heart of the pandemic than anyone's portfolio wasn't really setup.
Well independently maybe the opposite is happening now and would you expect your orders and backlog trajectory to stay at these elevated levels for a while.
You just nailed it Mandy.
Yes, that's exactly you got it exactly right which is.
Yes.
As we look at it because we look at short cycle longer cycle, and you see now a little bit of a transition from slow short cycle is still very good for us, but now we are starting to slowly see that long cycle coming through you see it in the <unk>.
And our backlog you see it in our order rates and now it's the time of the cycle, where the long cycle businesses.
We will start to have a bit more traction and.
A lot of people are saying there may or may not be a recession in the next six to 12 to 18 months, but.
I certainly hope it doesn't happen, but if it does I actually think that Honeywell can weather the storm quite well given the kind of backlog position in the markets, we're in which is energy and.
Aerospace, which frankly.
I've been hurt disproportionately hard during the pandemic and now are starting to come back strong so.
I am very very optimistic about kind of the position to backlog were in and and.
And I think you said it exactly right, we're seeing kind of a transition occurring slowly, but surely and it's not because our short cycle is weak but.
The long cycle smell starting to slowly pick up.
I appreciate it.
Yes.
Andy.
Thank you I would now like to turn the conference back over to Gary <unk> for closing remarks.
I want to thank our shareholders for your ongoing support we delivered strong first quarter results in a typical honeywell fashion.
And have and will continue to navigate the numerous uncertainties.
The operational rigor and agility in order to drive superior shareholder returns. Thank you all for listening and please stay safe and healthy.
This concludes today's conference call. Thank you for participating you may now disconnect.
[music].
Alright.
Yes.
Okay.
[music].
Yes.
Thanks.
Thanks.
Yes.
Okay.
Okay.
Okay.
Yes.
Sure.
Okay.
Yes.
<unk>.
Yes.
Okay.
Okay.
Yes.
Sure.
Okay.
Yes.
Okay.
Yes.
Okay.
[music].
Yes.
Yes.
Okay.
Okay.
Yes.
[music].
Okay.
Yes.
Yes.
<unk>.
Okay.
Okay.
Sure.
Okay.
Okay.
Okay.
Thank you.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Thanks.
Yes.
Okay.
Okay.
[music].
Okay.
Yeah.
[music].
Okay.
Yes.
Okay.
Yes.
Sure.
Yes.
Sure.
[music].
Yes.
Yes.
Yes.
Okay.
Okay.
Okay.
Yes.
Okay.
Sure.
Okay.
[music].
Sure.
Yes.
Okay.
Yes.
Yes.
[music].
Okay.
Sure.
Sure.
Yes.
Yes.
<unk>.
Okay.
Yes.
Okay.
Yes.
Sure.
Yes.
Okay.
Yes.
Okay.
Yes.
Okay.
Okay.
Yes.
Yes.
Yes.
Sure.
[music].
Okay.
Sure.
Yes.
Okay.
Okay.
Yes.
Okay.
Yes.
Yes.
Yes.
Sure.
Yes.
[music].
Okay.
Yes.
Okay.
[music].
Okay.
[music].
Yes.
<unk>.
Yes.
Yes.
Yes.
Yes.
Okay.
Yes.
Okay.
Yes.
[music].
Yes.
Okay.
Sure.
Okay.
Sure.
<unk>.
Great.
Yes.
Okay.
Okay.
Okay.
Yes.
Yes.
Sure.
Okay.
Yes.
Okay.
Yes.
Okay.
Okay.
Sure.
Yes.
Okay.
Okay.
[music].
Yes.
Yes.
Okay.
Okay.
Yes.
Okay.
Yes.
Yes.
Okay.
Sure.
Sure.
Okay.
Yes.
Yes.
Okay.
Sure.
Sure.
Okay.
Sure.
Sure.
Yes.
Sure.
Okay.
Thank you.
Okay.
Sure.
Yes.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
Yes.
Okay.
Okay.
Sure.
Yes.
Thanks.
Okay.
Yeah.
Sure.
Yes.
Sure.
Okay.
Okay.
Sure.
Okay.
<unk>.
Yes.
Yes.
Yes.
Okay.
Yes.
Thanks.
Okay.
Yes.
Yes.
Yes.
Okay.
Yes.
Sure.
Okay.
Yes.
Yes.
Yes.
Yes.
Sure.
Okay.
Yes.
Okay.
Okay.
Yes.
Sure.
Yes.
Thank you.
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
Yes.
Okay.
Yes.
Yes.
Sure.
Okay.
Okay.
Sure.
Okay.
Yes.
Yes.
Okay.
Okay.
Sure.
Okay.
Yes.
Okay.
Yes.
[music].
Yes.
Okay.
Okay.
Yes.
Yes.
Yes.
Okay.
Yes.
Thanks.
Okay.
Yes.
Yes.
Yes.
Okay.
Sure.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Sure.
Yes.
Okay.
Okay.
Yes.
Okay.
Sure.
Okay.
Thanks.
Okay.
Yes.
Yes.
Okay.
Yes.
Yes.
Yes.
Yes.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Yes.
Okay.
Sure.
Okay.
Yes.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Hi.
Okay.
Yes.
Yes.
Yes.
Okay.
Okay.
Sure.
Okay.
Okay.
Sure.
Yes.
Yes.
Yes.
Okay.
Yes.
Okay.
Okay.
Yes.
Sure.
Yes.
Yes.
Okay.
Yes.
Okay.
Okay.
Okay.
Tom.
Yes.
Sure.
Okay.
Okay.
Yes.
Yes.
Yes.
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Yes.
Thanks.