漢威聯合 (HON) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Honeywell's first-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

And now I would like to introduce your host for today's conference, Elena Doom, Vice President of Investor Relations.

Please go ahead.

Thank you, Tony.

Good morning, and welcome to our first-quarter 2014 earnings conference call.

With me today are Chairman and CEO Dave Cote; and Senior Vice President and CFO Tom Szlosek.

This call and webcast, including any non-GAAP reconciliations, are available on our website at Honeywell.com/investor.

Note the elements of today's presentation do contain forward-looking statements that are based on our best view of the world and of our businesses as we see them today.

Those elements can change, and we would ask that you interpret them in that light.

We do identify the principle risks and uncertainties that affect our performance in our Form 10-K and other SEC filings.

This morning we will review our financial results for the first quarter, share with you our outlook for the second quarter and full year, and finally, we will save time for your questions.

So with that, I'll turn the call over to Dave Cote.

Thanks, Elena.

Good morning, everyone.

I'm sure you've seen by now, Honeywell delivered another good quarter to kick off 2014.

EPS of $1.28 increased 10% year over year when normalizing for tax.

So another quarter of double-digit EPS growth, with earnings coming in above the high-end of our guidance range.

This is driven in a large part by our strong execution and higher sales conversion -- all while maintaining our seed planting investments for the future.

Our enablers and key process initiatives are driving meaningful results throughout the portfolio.

An important driver of our [current] activity continues to be the savings we are seeing from previously funded restructuring actions.

And with that in mind, we have been able to proactively fund restructuring and other actions by fully deploying the approximate $0.10 gain from the sale of B/E Aerospace shares in the first quarter, just like we did in the fourth quarter of last year.

I would also point out the Company funded an incremental $10 million of restructuring actions in the quarter from operations.

So in total, $0.11 of restructuring and other actions.

The projects funded in the first quarter alone are estimated to yield full run-rate savings of about $70 million over the next couple of years.

That's our annual.

We are being proactive about keeping that restructuring pipeline full.

And we think these actions position us well for further margin expansion over the next five years.

Margin EPS and cash flow were all strong in the quarter, in spite of slightly slower top-line growth, primarily related to timing in PMT and lower Defense & Space sales.

Sales in the quarter of $9.7 billion were up 4% reported and 1% organic.

However, if you exclude D&S, where the headwinds are well-known, organic sales for the total Company were up about 3%.

We talk a lot about great positions in good industries and our diversity of opportunity, which once again benefited us in the quarter.

We saw good momentum exiting the quarter in our short-cycle businesses, while our long-cycle businesses maintained healthy backlogs.

We are also seeing pockets of recovery in below-peak end-markets.

Transportation Systems, for example, continues its healthy pace of recovery.

And while weather may have been a factor in some areas, these challenges were mostly offset by weather-related areas of opportunity.

For example, ECC enjoyed strong double-digit sales growth in Combustion and Heating Controls.

The [outer] momentum we are seeing out of our long-cycle businesses and short cycles also positioned us well for our expected acceleration of organic growth in the second quarter and second half of the year.

Geography is also part of our diversity of opportunity.

In the US we continue to see good growth, excluding the D&S headwinds I mentioned.

We are encouraged by continued stabilization in Europe, and even more excited about the growth we saw in China, India and the Middle East.

It is worth noting that each of our SVTs grew double-digits organically in China in the quarter.

So both our short- and long-cycle businesses are delivering on our high-growth region strategies.

Innovation and investments in new products and technologies are also driving value across the portfolio.

We unveiled the Honeywell User Experience, or HUE, back in March, and we couldn't be more excited about what this will mean for Honeywell.

We recently opened a HUE design studio in Shanghai, with other design studios set to open globally.

We are focused on how we can drive significant change and improve the experience for the user, installer and maintainer.

With all that being said, we remain cautiously optimistic on the macro economy.

And with the strength in the first quarter, we are confident in our revised full-year outlook for Proforma EPS, raising the low end by $0.05, making our new range $5.40 to $5.55, up 9% to 12% versus prior year.

Our outlook on free cash flow has also improved based on the strong performance we saw in the first quarter.

As Tom will detail in a moment, we are now reporting free cash flow without adjustments for cash, pension, NARCO payments and one-time items.

So the guidance range remains the same.

But it is reflective of the first-quarter performance and, importantly, without adjustments.

In summary, we've got a lot of momentum across the portfolio, which we highlighted in our March Investor Day, with road maps for future growth and profitability as part of our new five-year targets going out to 2018.

Innovation and execution, our seed planting for the future, great positions in good industries and the power of one Honeywell will continue to differentiate us, allowing us to deliver on these targets and continuing to out perform.

So with that, I'll turn it over to Tom.

Thanks, Dave, and good morning.

On slide 4, let me walk you through the financial results for the first quarter.

Sales of $9.7 billion were up approximately 4% on a reported basis, and up 1% on an organic basis.

The total sales were right in the middle of the range we communicated in early March of $9.6 billion to $9.8 billion.

And the organic growth rate was slightly lower than expectations due to timing in Aerospace and PMT.

As Dave mentioned, excluding Defense & Space, which is expected to stabilize this year, our organic sales were up 3%.

Regionally, organic sales were up 1% in the US and EMEA, with Europe showing continued resilience despite some large customer project ramp downs.

China grew 14% on an organic basis, with double-digit organic growth in each of the businesses.

As we will detail later, we are anticipating organic sales growth to accelerate as the year progresses.

Segment profit increased 6% in the quarter, with margins expanding 30 basis points to 16.5%, or up 50 basis points excluding the dilutive impact of M&A.

We had guided to 30 to 50 basis points improvement in the margin rate, excluding M&A.

So the 50 basis points is on the high-end of our expectations.

We saw margin expansion in three out of the four businesses.

Productivity continues to be a key driver across the portfolio, offsetting inflation and continued investments for growth.

In PMT, we did experience some temporary margin contraction because of the expected headwinds around unfavorable petrochemical catalyst shipment mix and pricing headwinds in R22 in Resins & Chemicals.

Still, PMT, at close to 21% segment margins, was our highest-margin business in the quarter.

And we continue to have a lot of confidence in our ability to expand margins going forward.

Below segment profit, I wanted to comment on two items.

The first is the gains we experienced from the additional B/E Aero shares.

And second, the tax rate.

On B/E Aero, which I'll further detail in a minute, the gain was more than offset by restructuring and other charges, resulting in a $0.01 unfavorable impact on EPS.

The B/E Aero gain is not included in our operating margin, but the restructuring and other charges are.

So operating margins expanded 10 basis points in the quarter, compared to the segment margin expansion of 30 basis points.

The tax rate of 26.6% was in line with expectations and represented a $0.06 headwind compared to 2013.

Earnings per share of $1.28 was $0.01 higher than where we guided, even after we funded an incremental $0.01 of additional restructuring action.

There are a couple of things to mention on free cash flow.

First, it was really strong, up 2.5 times 2013 amounts.

The improvements came equally from better-working capital performance and lower cash contributions to foreign pension plans.

Second, we are simplifying how we define free cash flow, as Dave mentioned.

It's just free cash flow from operations -- or, I'm sorry -- it's just cash flow from operations, less capital expenditures.

No more adjusting for pension or NARCO.

We did this the same way for both 2013 and 2014.

So the numbers are comparable and the growth is real.

Slide 5 provides a more detailed view of the gain deployment actions in the quarter.

As you can see, the $0.10-per-share gain from the 1.5 million B/E Aero shares sold in the first quarter was exceeded by funding of restructuring actions and other proactive environmental remedies.

So in total, an $0.11 headwind to earnings from restructuring activity offset by the B/E Aero gain of $0.10.

So a net $0.01 headwind to earnings.

Repositioning or restructuring represented the majority of the gained deployment.

Just as you heard in January, these actions are intended to proactively realign our businesses for growth and higher-asset efficiency.

And will provide us with meaningful margin and earnings tailwinds in future periods.

We are expecting these projects to yield approximately $70 million of run-rate savings in future years, and each individual project has an excellent ROI.

We will continue to maintain a steady pipeline of future projects to fund should the opportunity arise.

This, as you know, continues to be a key element of the Honeywell play book, as restructuring funds the exit cost requirements from our key process initiatives and integration activity.

A smaller portion of the gain was used to fund incremental environmental charges.

This relates to certain remediation projects where we believe seeking proactive remedies with the regulators will lead to lower expenses and more cost stability over the long-term.

Overall, these actions position the Company well for future earnings growth.

And as a reminder, following the sale of 2.6 million B/E Aero shares in the fourth quarter of last year and the 1.5 million in the first quarter, we still have roughly 1.9 million shares remaining, and continue to have a very favorable view of the Company.

Now let's take a look at the four business segments.

Starting on slide 6, Aerospace sales were down 2%, which is in line with our guidance.

However, excluding the impact of the expected Defense & Space decline, Aero sales were up a solid 3%.

Segment margin was up 30 basis points, which was actually a bit better than our expectations.

From a sales perspective, commercial OE sales were up 1%, reflecting strong air transport and business aircraft shipments.

We had particularly strong 737 and 787 OE growth, and broad strength across the business aircraft portfolio.

Regional jet sales were lower, reflecting lower volume and free-of-charge shipments.

Commercial after-market sales were up 4% in the quarter, with double-digit spares growth in both ATR, and BGA, partially offset by lower R&O revenues, a reflection of fewer maintenance events, and timing.

The 14% spares growth was driven by the recovery in the US and China -- and we highlighted that as a challenge in the first quarter of 2013.

As well, by the continued robust RMU sales in BGA.

RMUs repairs modifications and upgrades.

Defense & Space sales were down 8%, which we expect to be the low point, from a sales perspective, for the year.

Most of the decline was planned, with known program ramp-downs and anticipated lower government services and defense after-market revenue.

On segment profit, the Aero team was able to more than offset the impacts from the lower sales to drive its segment margin up 30 basis points, through commercial excellence, productivity net of inflation and favorable after-market mix.

On page 7, we are looking at ACS prior to the shift of HPS to PMT.

We expect to file an 8-K in the second quarter to reflect this change, and we will update our historical numbers.

However, to be perfectly clear, when we share the guidance for Q2 and the rest of the year -- which I'll review in a few minutes -- we'll do that on the new reporting structure.

So ACS organic sales were up 2%, and reported sales up 8%, both in line with our expectations.

The difference, of course, reflects the growth from M&A -- in particular, Intermec and RAE Systems acquisitions.

Second, margin was up 40 basis points, almost twice our expectations.

ESS sales -- so the products businesses -- were up 2%, with ECC and Life Safety showing particularly strong growth and more than offsetting the expected declines in scanning mobility resulting from the ramp-down of certain programs.

Without this scanning mobility dilution, ESS sales would have been up 5%, with some favorable contributions from weather impacting ECC.

We experienced higher US residential sales, including on the retail side, modest improvements in Asia and Europe.

And continued HGR growth in China and India.

The Intermec acquisition continues to go well.

We are exceeding what were challenging expectations on the pace of integration and on performance.

Also the business continues to win a large number of orders that are expected to result in further 2014 growth.

Process Solution sales were up 3% on an organic basis in the quarter, with continued good growth in high-margin areas like Services and Advanced Solutions more than offsetting the impact of large project completions.

Orders growth also continues to be healthy, and backlog is growing, which Darius and the PMT team will see the benefit of in the future.

Building Solution sales were essentially flat on an organic basis.

We are encouraged by our Building Solutions orders and the project backlog growth, both showing mid single-digit growth on an organic basis.

And we are also experiencing similar growth in the Services backlog.

Not a trend yet, but certainly encouraging developments as we look to the rest of the year.

ACS margins expanded 40 basis points to 14.2% in the quarter, and were up 70 basis points, excluding dilutions from M&A.

ACS continues to benefit from driving commercial excellence, volume leverage and productivity, while at the same time investing for the future.

Moving to page 8, Performance Materials and Technologies.

PMT sales were up 2%, in line with our expectations, and driven by 9% growth in UOP, offset by 4% declines in Advanced Materials.

Although PMT margins contracted 100 basis points, the result was better than our expectations.

And at 20.8%, PMT was again our highest-margin business in the quarter.

On sales, UOP experienced significant growth in catalyst volume and gas processing, offset by an unfavorable mix in catalyst shipments and lower process technology licensing sales, resulting from timing and challenging comps.

As you know, we are in the midst of adding UOP capacity, particularly on the catalyst side, which will help the business to better serve its $2.4 billion backlog.

Advanced Materials sales were down 4%.

We experienced volume increases in most of the Advanced Materials portfolio, despite the tempering effect of the difficult weather.

However, this volume growth was more than offset by unfavorable pricing in Fluorine Products and resins and chemicals.

We do expect the pricing challenges to moderate in the second quarter and throughout the year as we lap prior-year declines.

The decline in segment margin was principally driven by unfavorable catalyst mix in UOP and price raw challenges in Advanced Materials and some temporary spikes in raw material costs due to weather.

Partially offset by productivity net of inflation.

On slide 9, you can see Transportation Systems had a very strong quarter, with sales up 9% -- that is 7% without the benefit of foreign exchange -- and segment margin up 340 basis points.

On the sales side, the increase was principally volume-related.

We experienced strong turbo volume growth in our three biggest regions: Europe, North America and China.

The Europe growth was strong in both light and commercial vehicle segments.

We continued to benefit from improving global industry macros on vehicle production.

Also from regulations and gas penetration.

We continued to benefit from a strong win rate, with turbo unit sales from new product launches doubling since 2013 levels.

As the year progresses and we begin to latch stronger periods from 2013, we do expect some moderation in the growth rates.

The segment margin improvements to 15.5% reflects the strong productivity and volume leverage in turbo, and the benefits from restructuring and other operational improvements.

We continue to work on the Friction Materials divestiture, and expect a closure sometime in the second half of 2014.

I'm now on page 10 with a preview of the second quarter.

We are expecting sales of $10 billion to $10.2 billion, which would be up between 3% and 5% on a reported basis, or approximately 3% on an organic basis.

We are using a euro rate of roughly $1.35 for the second quarter.

Segment margins are expected to be up in the range of 50 to 70 basis points, excluding the dilutive impact of M&A.

EPS of $1.32 to $1.36 will be up 8% to 11% at our normalized 26.5% effective tax rate.

On the segments, Aero sales growth is expected to be in between minus-1% and plus-1% in the quarter, with low single-digit commercial growth offset by moderating Defense & Space declines.

On commercial OE, we are still seeing healthy demand for air transport deliveries, which is helping offset the continued drag from lower regional aircraft sales.

In commercial aircraft -- I'm sorry -- in commercial after-markets, we are expecting ATR spares growth to be about in line with flight hours in the quarter, as well as continued BGA and RMU strength.

As for margins, we expect some headwinds, primarily due to higher mechanical sales in both ATR and BGA, and a higher proportion of ATR revenue in the quarter, resulting in flattish overall margin growth.

For ACS, as I indicated earlier, we are providing guidance based upon the new reporting structure.

Sales are expected to be up between 8% and 10%, or approximately 3% on an organic basis.

The reported sales growth is largely driven by the Intermec acquisition and an acceleration of organic growth in ESS -- particularly security and scanning mobility, and also BSD.

Modest improvements in non resi projects are expected to favorably impact ECC, Life Safety and Security.

And high-growth region sales look to continue their positive trend.

The two consecutive quarters of long-cycle orders and backlog growth in Building Solutions is encouraging and should enable strong organic sales growth in the second half.

ACS margins are expected to be up again in the second quarter approximately 50 basis points, or 100 basis points excluding the dilutive impact of M&A.

PMT, including Process Solutions in both years, is expecting sales to increase between 3% and 5% in the second quarter, driven by double-digit increases in UOP, and to low to mid single-digit growth in HPS and Advanced Materials.

In UOP, we foresee another strong quarter of increased catalyst and gas processing sales growth.

While in Advanced Materials, we anticipate broad sales growth across the portfolio, including improved production levels in Resins & Chemicals and our normal seasonal ramp-up in Fluorine Products.

The PMT leadership is encouraged by the momentum and the orders as backlog increases in HPS.

PMT segment margins, however, are expected to be up slightly versus the prior year, based on the mix of shipments within UOP, offset by moderating pricing pressures in Advanced Materials.

In Transportation Systems the strong performance is expected to continue, although tempered slightly from Q1 by the more challenging comps.

Sales look to grow between 5% and 7%, driven by new platform launches, continued turbo gas penetration and flat or slightly better EU light vehicle production rates year over year.

Segment margins will be similar to first-quarter levels and up approximately 200 basis points, primarily driven by higher volumes in turbo and continued productivity gains.

On page 11, we are profiling the organic sales growth for the year.

We are expecting full-year growth of 3% on an organic basis, so there is some modest acceleration from the Q1 growth rate of 1%.

And we want to explain the key drivers.

The page shows the first-half versus second-half organic growth rate for 2013, as well as what we expect for 2014.

The first thing to notice is that the first-half growth for 2014 is stronger than 2013.

We saw that in this first quarter, as the 1% organic growth, although tepid, was greater than the first quarter of 2013, where we saw a decline of 1%.

Second, the slope of the line is similar each year.

In 2013, we went from 0% in the first half to 3% in the second half.

In 2014, we go from 2% in the first half to an expected 4% in the second half.

Thirdly, the notations on the top of the 2014 bars show the expected organic growth rates, excluding Defense & Space, which would be roughly 3% in the first half of 2014, accelerating to approximately 4% in the second half of the year.

That happens because of the factors mentioned on the right side of the page.

In Aero, Defense & Space declines significantly moderate.

Also, commercial OE is expected to improve slightly, largely driven by the absence of the prior year's large fourth-quarter BGA OE payment.

In ACS, we anticipate Scanning & Mobility returning to growth after lapping the program wind-downs I discussed earlier, and also layering on new business wins.

The macro environment is also expected to modestly improve, with continued residential strength and improving nonresidential markets benefiting ESS.

And as highlighted earlier, the last couple quarters have seen a nice lift in Building Solutions backlog, which is expected to result in stronger sales growth rates in the second half.

In PMT the pick-up in the second half is driven primarily by better Process Solutions and Advanced Materials growth, partially offset by tougher comps in UOP.

UOP organic sales grew 17% in the fourth quarter of 2013.

The Process Solutions backlog of projects and services continues to grow nicely, which, like Building Solutions, is expected to result in better second-half sales growth.

And as mentioned earlier, Advanced Materials pricing headwinds are expected to moderate in the second quarter and back half of the year.

And we are also expecting a boost from higher volume and higher [salsa] sales in Fluorine Products.

Finally, in Transportation, while the outlook remains very strong, the comps become gradually more challenging as we progress through the year.

So while we are expecting growth in the second half in TS, it is expected to be at a slower pace than the first.

I'm now on slide 12, where we provide an outlook of segment performance for the year.

Again, this guidance reflects the realignment of our Process Solutions business in the PMT from ACS.

So let me explain the set up here.

The left-hand side of the slide represents the guidance we provided in March and is based on the old reporting structure.

The right-half reflects our current guidance.

On a total Honeywell basis, if you look at the bottom line, the segment guidance for the year has not changed.

However, there are minor changes to the segments that you should be aware of.

Aerospace sales remain roughly in line with the guidance, but reflecting the slower R&O growth in the first quarter and slightly lower margins impacted by volume leverage on that lower sales growth.

ACS & PMT now reflect the shift of Process Solutions for the full year.

Organic sales are expected to improve in the second half of the year for both businesses.

We have also provided updated margin profiles, which show continued expansion in both ACS and PMT.

The Transportation Systems guidance reflects the first-quarter top-line strength and strong margin expansion.

We are now expecting TS margins to approximate 15% or more in 2014.

So small puts and takes, but as I said, no change to the total Honeywell sales or margin outlook.

Moving to slide 13, we have an update on our full-year guidance, which is very similar to what we shared at the March Investor Day, except for two things.

One, we are raising our full-year Proforma EPS guidance at the low end by $0.05, resulting in a new range of $5.40 to $5.55, which is up 9% to 12% versus 2013.

This reflects our first-quarter performance and the confidence we have in our outlook.

Second, we are raising our free cash flow guidance by approximately $300 million to reflect the strength we saw in working capital in the first quarter and lower foreign cash pension contributions.

To be clear, the $3.8 billion and the $4 billion range looks the same as what we showed you previously in March.

But that range was based on the prior definition of free cash flow, which excluded several nonoperating items.

So with those changes, we continue to expect sales in the range of $40.3 billion to $40.7 billion, which is up 3% to 4% on a reported basis, and 3% on an organic basis.

Our sales range reflects euro at $1.30 for the second half of the year, so a little bit of a headwind there.

We also continue to expect segment margins between 16.6% and 16.9%, which would be up 30 to 60 basis points from 2013, or 50 to 80 basis points excluding the M&A impact.

So as Dave said earlier still a very balanced outlook for the year, but taking into account the good start we saw in the first quarter.

On page 14, I have a brief wrap-up.

In markets that continue to be somewhat challenged, we are off to another good start to the year.

We exceeded our expectations on most fronts, including margins, earnings and free cash flow, while at the same time continuing to invest for future growth and productivity.

We raised our earnings and cash guidance to reflect a strong first quarter, as well as our expectations for growth acceleration in the second half.

We intend to continue our out-performance by leveraging our balanced portfolio which, as you know, is strategically in line with the favorable macro trends.

These include energy efficiency, clean energy generation, safety and security, and urbanization, combined with a growing middle class and customer productivity -- all of which remain intact.

So with that Elena, let's go to Q&A

Thanks, Tom.

Tony, we will now open up the lines for our first question.

Thank you.

(Operator instructions)

Jeff Sprague with Vertical Research Partners.

Could we drill in a little bit more on the building-related trends in ACS?

Tom, you gave us some color there.

But just on BSD, I'm curious if there is some geographic color you can shed on what's going on in the firming there, and if there is some color you can shed on energy retrofit versus new construction?

Yes.

I would say the growth in orders in HPS was high single-digits for the quarter on an organic basis.

And that came across very strong in the Americas.

Europe was also very good.

And Asia, which is a little bit smaller for us, was a little bit down.

But in the Americas, we are seeing really good winds in energy.

Smart grid solutions as well, and services.

Our service bank continues to grow.

So across the board, pretty good results there on orders perspective.

And again, as we said, this is the second quarter where we are seeing that momentum.

So hopefully bodes well for the second half.

And then when you look at ESS and what is going on there in particular, and environmental controls, can you elaborate a little bit more on how the quarter played out?

It sounds like it was a pretty strong heating-driven quarter.

Does that then fall off as we get into the second quarter?

No, I think the trend -- the ECC was very strong, Jeff, in the quarter.

Mid to high single-digits on a growth perspective.

Americas was very strong, and combustion as well.

So both [phones] and combustion.

But the trends will probably be mid single-digits growth over the course of the year if the conditions stay where they are.

So we are encouraged by it.

We also have the new products, Jeff, that we have been introducing.

And that is helping.

Right.

Can you elaborate a little bit on the call you are making on the euro?

So you are just expecting a dollar-euro fade here as we get into the back half of the year?

And if that doesn't happen, what kind of hedge that is to your second-half earnings outlook?

Yes.

As we said, we are using $1.35 for the second quarter, and $1.30 for the second half.

I mean, we are closer in, obviously, to the second quarter, and [just have] to feel more confident with that.

We are not trying to be economists or forecasters here.

I think it is just more conservatism that we are including.

The impact on the second half would not be very significant.

Yes, the average in the second half of last year on the euro, Jeff, I think was $1.33, roughly $1.34, in that range in the second half.

So a little bit of a headwind.

But remember that is at the midpoint of our revenue outlook for the second half.

But roughly speaking, a euro spent is an EPS spend on a full-year basis.

Is that about right?

Roughly, yes.

A little less than that, but close.

And that is assuming the euro is isolated.

Right.

Okay, thank you very much.

Thanks, Jeff.

Scott Davis with Barclays.

I don't think you mentioned particularly, Dave -- I don't think you mentioned anything about the management changes.

Pretty substantial really.

Maybe the question really is -- because I don't think we have a half-hour to talk here.

But the question is, what do you expect to get better?

What is the messaging in the sheer volume of changes you've made?

Are there changes in mandates and -- I'll just open it up to that.

Yes, I don't think you are going to get a lot more from me than what we already talked about.

Because we tried to explain it the first time through.

I would say the reason I didn't bring it up is I viewed it as that history, and we already went through that.

But at the end of the day, the whole point is just we have got really good people coming up.

And we need to make sure we provide opportunities for them to grow.

And at the same time, we've got the five-year plan that we have committed to that has some pretty big themes that we want to make sure that we drive.

So M&A, high-growth regions, the software focus, HUE, [HOS] Gold.

And as I look at those, I want to make sure that we develop them as a Company.

And this gives the opportunity with the vice chairs to really make sure that happens, and that we deliver on that five-year plan.

It is really pretty much what I said, Scott, in the announcement we sent out.

Okay, fair enough.

And not to nitpick, but defense down [80] I think was a little bit worse than what we had expected.

Can you give us a sense of how that transitions through the year?

Particularly when it flattens out and becomes a net neutral.

I'm assuming by 1Q of 2015 it is going to be an easy comp.

But how do you thinking about the next three quarters?

Yes, the declines, Scott, we start to see them in the second quarter.

We'll actually probably be flattish in the second half.

So for the year, we are expecting to be in line with low single-digit decline for the year.

And you will recall, Scott, we have an easier comp in the third quarter of this year.

So you are likely to see an actual increase in D&S revenues the third quarter, given the 11% decline in 3Q of 2013.

Okay, perfect.

And then just a quick one on HPS.

Can you give us a sense of the order book in that business?

How the forward outlook looks?

Yes, I would say the -- if you look at it from a book to bill ratio, pretty strong.

From a pure growth percentage, we were also mid single-digits for the quarter.

The long-cycle projects, you the bigger projects up a little bit more than that.

More in the high single-digits, Scott.

Okay, that's perfect.

Thank you, guys.

I'll pass it on.

Steven Winoker with Sanford C. Bernstein.

First question, Tom, particularly, what kind of visibility do you have beyond the next BEA sales of that 1.9 million shares to additional one-time gains in the pipeline that can fund restructuring on a continued -- or repositioning on a continued basis?

In other words, you've got a lot of ambitious goals in that five-year plan that is going to require a lot of ongoing repositioning over that five years.

And we are seeing it now.

Do you have a lot of confidence and visibility into the offsets there?

Yes, obviously the BEA for the last couple of years, and some of the other transactions in the last couple of years, have been a nice catalyst for restructuring.

But even without those, we have, through operations, been able to generate sufficient capacity.

And that's funded a lot of what we have done, as well.

So that is what I look to.

And in terms of how we set our plans, we do try to incorporate capacity for that on an ongoing basis.

Now, it is not going to be hundreds of millions of dollars every quarter.

But we are very mindful of it.

And in the same way that you have moved on cash now to reporting on a cleaner basis without the adjustments, is there some thought to doing the same thing on restructuring or any of these other items?

Or not really?

Well, I'm not exactly clear what is not clean about the restructuring.

That's reported in our GAAP earnings, Steve.

Right.

No, I just meant some of your peers choose just to treat the operating earnings all in, that's all.

Well, that is a point I would like you to make much more strongly, Steve, in all your comments.

Because I have always felt -- for 10, 12 years, we've always included everything, and talked about it that way.

And you allow greater license with some others when it comes to what's in and what's out.

We don't do that.

Okay.

I'm sure you are talking about the collective you.

(laughter) And then, finally, on the book to bill, you talked about it just now in HPS.

On the entirety of the long-cycle businesses across Honeywell, could you give us that number?

It has actually been nice.

Aero has been above 1. And as I said, on HPS, also pretty strong.

Okay.

The backlog, Steve, is up just about 1% on a year over year basis in the quarter.

Okay, great.

All right, thanks a lot.

I'll pass it on.

Steve Tusa with JPMorgan.

Can you just give us the -- you talked about the -- can you give us a prior guidance, or at least PMT new guidance on the prior basis?

Is there any change to that up 4%, up 10?

Up 4% in revenues and up 10% in margin -- or up 10 basis points in margin?

For the full year, you are saying?

Or for the second quarter?

For the full year.

Yes, I think in terms of the PMT full-year sales outlook, they would have been roughly $50 million less in terms of revenue.

And margins would have been about 50 basis points less than what we are showing on the current outlook.

Okay.

So the fact that you are kind of tweaking that down, but then moving HPS in there -- HPS margins then must be going up a lot.

Yes.

Yes, there has been an ongoing improvement in HPS.

But I'm getting something -- it's like more than 100 basis points for a -- to have that margin go down like that for PMT but have the combined segment go up 50 basis points, that is a huge increase in HPS.

So limited -- there is not that much volume growth there, right?

It's low to mid single-digits.

But yes, you are right.

It's --

It's certainly better in the second half.

Is that a mix dynamic?

Is that more software coming through or something?

Or just blocking and tackling?

Over the last couple of years, as you know, in HPS, Darius has been focused on driving operational improvements in the business.

The business is up 200 basis points in the last two years through the end of December.

And you are still seeing continued restructuring actions that are directed at that business.

They have also done a nice job of driving growth in services and software side.

So advanced solutions.

So the mix of their revenues has been pretty good as well.

It is a combination of both operational improvements, and the portfolio and what they have been emphasizing.

Okay.

And then on --

At the end of the day, Steve, your premise is right.

If you take a look at overall PMT, that first-quarter struggle continues on a bit during the course of the year.

So we expect it is not going to be as good as what we had said initially.

And one of the offsets to that is going to be Process Solutions performance and what Darius has been able to achieve there.

And it is across the board.

It is better growth, better cost performance, better organization.

I'm really intrigued with what I see going on in that business and where we can take it.

Can you take it more into instrumentation?

I would say you are going to see us continuing to drive our software capability.

Because that is -- a big part of where we differentiate ourselves is just doing a great job on the software side and adding value there.

Okay.

And then Dave, any change in the way you view the Advanced Materials business?

You have combined HPS and UOP now.

Clearly a very attractive play on this whole global petro-chem theme that is out there.

We continue to talk about fluorine pricing as a headwind, things that probably most multi-industry companies don't talk about.

Is there any kind of change on the portfolio view, especially in the context of the liquidity and high evaluations out there -- and quite frankly, a multiple for you guys that remains at a discount.

Any thought around how core that business is over the long-term?

I would say the thought is the same.

And that is, it is still a core.

One of the things that -- getting back to this diversity of opportunity is, I like having a lot of bets out there so that while there is never one thing that really kills me, but there is also never any one thing that really makes the whole thing take off.

I think it just creates more sustainability.

Which means that to have all the moving pieces moving in the same positive direction at the same time -- or negative direction -- is unlikely.

So what we are seeing right now in, particularly Resins & Chemicals and in fluorine, is a couple of unique aspects that are causing them to not perform as well as we might like.

But at the same time, I know those things are going to be changing.

So if I take Resins & Chemicals, when I take a look at the competitive positioning, it is still the lowest cost-producer in the world.

And that includes being able to land product in China cheaper than the Chinese can manufacture it domestically.

So we've got an advantage there.

And I think what you'll probably see is capacity elsewhere in the industry coming out over time, and moving our pricing dynamic up.

If I take a look at fluorine, it is largely driven by patents.

And when you have stuff that comes off patents, well, pricing tends to get the [essence] that you are seeing now.

However, we have new patents coming in for the HFO stuff, and that is gearing up now.

As a result of that, we are going to see some really nice performance out of the fluorines business over the next few years.

So I would liken it more to: we've got this unusual dynamic going on in both of these businesses.

It is going to be turning over the next year or so, and we'll benefit from it.

So they are still good businesses.

It's just, you can't have every business performing at the same time.

It just doesn't work.

Right.

Okay, thanks.

Nigel Coe with Morgan Stanley.

Just wanted to dig into the ACS-PMT potential synergies there.

We have been talking about the go-to-market potential there for a while.

Now we have the [representation].

I'm wondering, Dave, should we expect there to be more integration between these two businesses going forward?

Or is it basically the same as before, it's just they now happen to be in the same segments?

Probably somewhere in between.

Got to wait for Darius to finish his work there on what he thinks.

But at the end of the day, there is stuff that is common.

And you say the 60% of the customers that HPS has are the same that UOP has.

If you take a look at who they deal with, should be about the same.

The technology -- there should be even greater overlap than there is, because UOP is developing processes, and HPS is developing the controls that manage the process.

While we have done some of that already, there should be more opportunity there.

On the other side, you have UOP, which is more obviously the chemical business, and some on the mechanical side when it comes to how to run those chemicals.

And you've got HPS, which is largely a software business.

And that is not going to change.

I have a tough time seeing the chemical guys running the software engineering, or vice-versa.

That is why I say I think it is going to be somewhere in between, and I'm waiting for Darius to finish his review on what he thinks makes the most sense here.

Okay.

No, that makes sense.

And then, switching to TS, 15.5% OM I think is the best you have ever done in the quarter, given that how business changes in the portfolio over that timeframe.

But 15.5% [risa] that's me.

And within that number, is friction still losing money?

Or is it back to breakeven?

It is nearing breakeven.

It was probably a third of the overall margin improvement for the quarter for Transportation Systems.

Okay, so one-third.

And then another quick one.

The free cash flow guidance -- just to clarify, that includes the cash taxes on the [B-tail]?

Yes, it does.

Okay, great.

Thank you much.

Howard Rubel with Jefferies.

I have one ACS question, and then one on another item.

First on ACS, we have been seeing --

By the way, Howard, hi.

Hello, Dave.

And in fact, you know, this new management structure eliminates confusion between you and the CFO now.

(laughter) So I appreciate that.

I'm sure there is more to that story.

In any event, Dave, good morning.

Thank you.

Thank you, Howard.

Good morning to you, too.

With respect to US housing, it's been a little sloppy on the starts.

And I know that's small, relative to your business.

Have you seen anything there that's an indication of pent-up demand or some change in the overall market?

Yes, I don't think -- when you look at our revenues in ACS, Howard --

Yes.

We don't have a precise way of determining where every product ends up, whether it is in a commercial setting or residential setting.

But with that said, there are very strong verticals within ACS in the last couple quarters.

I point to the retail sales, in particular, for ECC that have been a strong indication that consumers are, in fact, very interested in energy-related product -- thermostats and other things that go into their homes.

And then to follow up on another subject.

You've used a lot of the discretionary gains to go after environmental so that you are reducing the long-term obligations there.

Could you just address for a moment, Dave, what you have done so that the entire process of the enterprise has gone after eliminating legacy liabilities, so that the result is that you don't have to find -- well, use gains to fund prior liabilities?

But in fact can use them to -- I'll call it advance the enterprise?

Well, I look at both as advancing the enterprise.

But to your point, one of them is eliminating a negative as opposed to accentuating a positive.

And as you know, I started this effort 12 years ago now, and thinking that, boy -- my question was, given that if you take a look at all of our products and all the stuff we do around the world, we are basically on the side of the angels with everything we do.

Whether it is energy efficiency, clean energy generation, safety, security -- all those macro trends are good things for the world.

Yet we had this legacy liability that was just uncomfortable and very inconsistent with our message.

I also felt that all this stuff cost you more over time, and that our previous strategy of just waiting until we lost in court was not a good one.

And we prefer to do this proactively.

Well, we are at a point now where we can actually see the end of the road on this.

To the extent we can accelerate meeting that end of the road, well, I'm all in favor of it.

And I would say we are not too far away now, Howard, from being at that point where we have been able to accelerate a lot of these issues, make it less expensive to get done.

Because either our remediation is a quicker, more effective, or we are able to resolve it faster.

And I can see that within our five-year plan horizon, which is a nice place to be.

Is there any way to quantify it?

It could be $50 million, $100 million a year in potential cost avoidance down the road.

My view is it is more on the -- [on balance] I will try not to be too bullish yet until I actually know.

But I think that is the right kind of range to think about it, Howard.

Thank you, Dave.

You are welcome.

Peter Arment with Sterne, Agee.

My question is really on the comparing your first-half guidance in Aerospace versus the second half.

I'm surprised the second half isn't showing up stronger, given the overlay with 2% growth you are showing.

You've got OE growth -- after market, I think it's [slight hours] growth.

So that is at least mid single-digits.

I'm just wondering, given the Defense is probably going to be closer to flat in the second half -- at least that is what it seems like, given you are 8% down this quarter.

What am I missing?

Is it just conservatism at this point, given Defense?

Or is there something else?

No, I don't think you are missing anything.

On the Defense side, as Elena said, we'll get a nice bump in the third quarter because of the comps that we had last year.

Overall, the second half will be what you see there.

But for the year, we are still going to be down in Defense.

In terms of first half to second half, the R&O timing that we saw in the first quarter, we are going to start seeing that subsiding.

So that is going to help us quite a bit in the second half.

I mentioned the BGAs.

So I think the 2% that we are showing for the full year is a full reflection of all the put and takes that we've got.

Peter, I want to add, we also have some launch contributions factored into the second half outlook for BGA OE.

It's just not significant.

But obviously, that does impact the -- it's [currently a fee] scheduled for the third quarter, which would be obviously a drag on revenues.

Okay, that's helpful.

And then just quickly on the after-market trends in general.

Are you seeing any differences from a geography standpoint?

It seems China was up 14%, but that seems to be a very volatile number.

I can remember a few years ago, it was up 40% one quarter.

So what are you seeing in general there?

In terms of the after-market?

Yes, just from a geography standpoint, any differences that you can call out?

Yes, well, you'll recall in the fourth quarter, the US saw in the high double-digit [fair of] growth.

We continued to see that in the first quarter of this year in terms of the ATR spares.

Europe -- call it relatively muted growth.

In China, obviously it's a big pop, but -- versus an easier comp in the first quarter of last year.

And I think, Peter, I have dropped (technical difficulty) you in the past showing flight hours versus how spares orders go.

I'm sorry, Dave.

Could you repeat that?

I think I have drawn my little chart for you in the past showing how flight hours grow at a relatively stable rate, but spares ordering around those flight hours vary significantly.

Yes, you have.

Correct.

And I say, if I take a look at China, that is more of what you are seeing.

That 40% a few years ago was a pre-buy, given the tightening.

What you saw after that was a tightening.

Now what you are seeing is a catch-up.

So at some point, it reconnects.

Great.

Thank you very much.

You are welcome.

Shannon O'Callaghan with Nomura.

Just a follow-up on that commercial Aero piece.

In terms of the OE sales growth in the quarter, can you give us the split AT, regional, BGA, and how that flows as you are talking about this second-half OE acceleration?

So Shannon, on the AGR OE component of it -- and this is consistent with what we talked about in the December outlook call and again in the fourth-quarter earnings release.

But you are seeing very strong growth on the air transport side, offset by declines in regional jet sales.

And also we have some free-of-charge shipments that, again, we are expensing or recognizing as we are incurring them.

And those continue -- that is the outlook, really, for the duration of this year.

So the fundamentals don't change or inflect.

That's slower growth than maybe you would likely expect if you were just plugging in the air transport component of it.

But the regional piece is obviously putting a drag on our overall sales.

I would add on the BGA side, the first-quarter growth you saw will continue throughout the course of the year.

So a mid single-digits growth on BGA for the year.

And when does the regional pressure ease?

Well, we are hoping that, that certainly gets better in 2015.

But largely dependent upon the overall market.

Okay.

Just on free cash flow, definitely applaud the change in definition, so thanks for that.

I was just wondering if you have the kind of updated numbers for this year in what you have built in for NARCO pension and the cash taxes.

In the appendix you have them for what they were in 2013.

Do you have the numbers of what you have baked in for 2014?

In terms of the big bucket, Shannon, I'll just walk through a few of them.

On cash pension, we are now expecting zero in 2014.

And that is versus the previous estimate of about $100 million for foreign contributions.

On the NARCO component of it, we were previously excluding the establishment payments for NARCO, which were roughly -- call it $200 million, pretax.

And we are still -- that is still the expectation.

But we have just now embedded that into our free cash flow forecast.

And obviously you have to wait until the available -- well, no, you would know the cash taxes, right?

So what about the available for sale piece?

What is that?

You are talking about on the B shares?

Yes, because you are baking that in now too, right?

Yes, the first-quarter impact was included in the Q1 free cash flow.

Okay.

So that is already baked in, and there is no more?

Already baked in.

Yes.

Okay, all right.

Thanks a lot.

All right, Tony, we will now conclude today's call.

I want to turn it over to Dave Cote for any final remarks.

All right.

Thanks, guys.

Well, we have had a nice start to the year.

And as a result, we feel confident for raising total year guidance for both earnings per share and cash flow.

Outperforming in the short-term while seed planting for the long-term continues to be an important dynamic for us.

We intend to not just outperform this year, but also over the next five years.

So thank you for listening.

And I hope all of you have a marvelous Easter weekend.

See you.

Thank you.

This does conclude today's teleconference.

Please disconnect your lines at this time, and have a wonderful day.