漢威聯合 (HON) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to Honeywell's first-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

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

Thanks, Cynthia.

Good morning and welcome to Honeywell's first-quarter 2016 earnings conference call.

With me here today are Chairman and CEO, Dave Cote, and Senior Vice President and Chief Financial Officer, Tom Szlosek.

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

Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and of our businesses as you see them today, so those elements can change and we ask that you interpret them in that light.

We identify the principal 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 and share with you our guidance for the second quarter and full year of 2016 and finally, as always, we will leave time for your questions at the end.

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

Good morning, everyone.

As I'm sure you've seen by now, Honeywell delivered another strong quarter to kickoff 2016.

EPS of $1.53 increased 9% coming in at the high end of our guidance range.

Sales of $9.5 billion were up 1% on a core organic basis, above the high end of our sales guidance.

We outperformed and saw growth accelerate in: Aerospace, Commercial Aftermarket and Transportation Systems; and in our residential and commercial and China businesses within ACS; and in Process Solutions and Fluorine Products in PMT.

Excluding the dilutive impact of M&A segment margin expanded 20 basis points in the quarter to 18.9%.

We generated significant sustainable productivity in the quarter.

The Honeywell user experience is driving new products at higher margins.

Our factories and sourcing organizations continue to mature and we continue to re-engineer our products to make them easier and less expensive to manufacture.

HOS Gold and our key process initiatives that generated their productivity allowed us to overcome previously discussed significant headwinds in segment profit.

These included over $40 million of additional Aerospace OEM incentives, additional depreciation stemming from our ramp-up in high ROI CapEx, the strengthening of the US dollar, and difficult comparisons at UOP and Sensing & Productivity Solutions which Tom will take you through further.

Our segment margin rate was slightly lower than our guidance range, primarily due to a combination of higher-than-expected sales of lower margin products like in BSD and commercial aviation OE and lower sales of higher margin products like in ESS and UOP catalyst.

We still expect to be within our segment margin guidance range for the full year, as sales growth modestly improves in the second half of the year, basically just from the absence of declines in UOP that we encounter in the first half.

We will, of course, continue with our disciplined cost controls, focus on commercial excellence and execution of previously funded restructuring actions.

Our strong start and the momentum we see in parts of the portfolio allow us to raise the low end of our 2016 full-year earnings guidance to a new range of $6.55 to $6.70.

We're up 7% to 10% year over year.

Our planning framework has not changed.

We will support growth wherever we have it to drive out performance.

We will be cautious in our sales planning.

We will continue to plan our costs and spending conservatively, ensuring we remain flexible as a Company.

And we will maintain our seed planting investments for the future, supported by our robust pipeline of funded restructuring projects and continued investments in R&D.

In the second quarter, we expect EPS growth of 7% to 10%, in line with the full-year range.

There's a number of exciting things that are happening across the Company and I'd like to spend a moment on them here.

Earlier this month, we appointed Darius Adamczyk to the newly created role of President and Chief Operating Officer reporting to me.

In this role, he will drive continued profitable growth of our operating businesses through HOS Gold breakthrough strategies and advanced software offerings that complement Honeywell's diverse technology portfolio.

Honeywell remained very active on the capital allocation front in the first quarter.

We opportunistically repurchased over $1 billion of Honeywell shares at a weighted average price of approximately $104 and we deployed another $1 billion to acquisitions.

We announced and closed three deals in ACS: Xtralis and RSI Video Technologies in security and fire, and Movilizer in Sensing & Productivity Solutions.

And as we discussed in January, we acquired the remaining 30% stake in UOP Russell, a global leader in modular gas processing technology and equipment.

Each acquisition brings differentiated technology and a software focus to drive new growth and greater profitability while building on our great positions in good industries.

Our acquisitions across the portfolio last year to bolster our connectivity and software offerings are already paying dividends, with new wins announced by Elster, Aviaso, and COM DEV.

Enexis, one of the largest multi-utility distribution system operators in the Netherlands, selected Honeywell Elster to deliver more than one million smart electricity meters over the next five years as part of the country's efforts to meet the European Union energy efficiency goals.

Aerospace's Aviaso business was selected by Etihad Airways to provide fuel efficiency software and analysis to undercover opportunities for fuel savings and measure the effectiveness of fuel efficiency initiatives already in place.

COM DEV, part of defense and space in Aero, recently announced the launch of our world-leading ferrite technology on the European Space Agency's Sentinel-3A satellite.

Our systems enable fast, reliable connectivity to provide near real-time data from the satellite's measurement systems.

We continue to be excited about the growth opportunities these businesses bring to Honeywell and look forward to telling you more about our progress.

Some of you may have seen last month that Honeywell Green Jet Fuel is now being used by United Airlines to power 12,500 flights from LA to San Francisco as part of its efforts to reduce carbon emissions and support energy diversification.

Honeywell Green Jet Fuel can replace as much as 50% of petroleum-derived jet fuel used in flight without any changes to the aircraft technology while meeting the current ASTM Jet Fuel Specs for flight.

Depending on the bio-feed stock, Honeywell Green Jet Fuel can offer a 65% to 85% reduction in greenhouse gas emissions compared with petroleum-based fuels.

We have lots of exciting new innovations and initiatives driving growth and margin expansion across the portfolio.

Our big wins, capacity expansions, and software and connectivity focus drive significant growth.

We've got a lot of momentum across the portfolio.

Innovation and execution, our seed planting for the future, great positions in good industries, and the power of One Honeywell continue to be differentiators.

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

Thanks, Dave.

Good morning.

I'm on slide 3 which shows the first-quarter results, so sales of $9.5 billion increased 1% on a core organic basis.

Each of the segments exceeded the sales guidance we provided in January, led by Commercial Aviation, Building Solutions & Distribution, and Process Solutions, which I'll talk more about on the business slides.

By region, core organic sales modestly declined in the Americas and increased high single digit in Europe.

In our high-growth regions, India grew double digit while in China, Aero and ACS increased double digit, partially offset by declines in PMT.

On a reported basis, total sales increased 3%, as acquisitions more than offset the unfavorable impact of the stronger US dollar and lower pass-through pricing in Resins & Chemicals.

Segment margin was down 60 basis points versus the prior year but up 20 basis points, excluding the dilutive impact of acquisitions.

The businesses are driving benefits from HOS Gold, our focus on commercial excellence, new product development and functional transformation while maintaining our investments for growth.

I'll talk more about the segment margin in a minute.

Earnings per share of $1.53 was up 9%, coming in at the high end of our guidance range.

Items below segment profit were favorable on a year-over-year basis.

Consistent with our long-term framework, we recorded approximately $40 million of new restructuring projects, partially offsetting the benefit from higher pension income.

For the full year, we anticipate that additional restructuring charges will largely offset the incremental pension income, positioning us well for margin expansion.

Non-controlling interest was also favorable year over year, as anticipated, given the purchase of the remaining 30% stake in UOP Russell.

On share count, as Dave mentioned, we repurchased over $1 billion of shares at attractive prices, which brought our weighted average fully diluted share count to approximately 777 million for the quarter.

We have been and will continue to be opportunistic when it comes to share repurchases and deploy capital to opportunities that will create the greatest value for our shareowners.

Free cash flow in the quarter of $63 million was down from the first quarter of 2015, driven primarily by the timing of tax payments and higher capital expenditures, offset by better working capital performance.

Capital expenditures of almost $200 million in the quarter increased 18% year over year.

The first quarter has historically proven to be our lowest from a cash perspective and we will remain on track to our full-year cash guidance of $4.6 billion to $4.8 billion.

Overall, we continue to generate strong results in a relatively low-growth environment.

I'm now on slide 4 to provide more detail on our segment margin expansion.

Our operating initiatives continued to drive segment margin growth, led by the deployment of HOS Gold.

We generated an 80 basis point operational improvement in the quarter, which compares well with 100-plus basis point improvement for the full-year 2015.

We have differentiated technologies on the software focus.

Our supply chains are becoming more lean, our back office continues to get more efficient, and there's strong collaboration across the organizations to drive down our material costs and indirect spend.

The previously funded restructuring as well as new restructuring actions have enabled us to continue improving our overall cost position.

We were encouraged by the outperformance on the top line in Building Solutions & Distribution and in our Commercial Aviation OE businesses this quarter, but that overdrive as well as the lower UOP petrochemical catalyst sales and lower-than-expected products growth in ACS Scanning & Productivity Solutions business constrained the operational margin improvement to the 80 basis points that you see.

Lower raw materials pass-through pricing in Resins & Chemicals added 10 basis points.

The impact from the pricing dynamics in Resins & Chemicals should be minimal for all of 2016.

The other three impacts you see on the slide combined for 150 basis points of margin contraction in the quarter.

First, M&A accounted for 80 basis points primarily due to acquisition accounting and pay-as-you-go costs.

The incremental amortization from the deals will be a margin headwind for the rest of the year, as anticipated.

We're in the midst of integrating eight acquisitions and are happy to report that each one is performing well and is ahead of our deal financial model.

Second as we previewed in our December outlook call, Aerospace OEM incentives increased by approximately $44 million from 2015, reflecting our continued investment in developing and growing our install base on the right platforms in the commercial aviation industry.

Depending on their nature, the incentives are treated as a reduction to revenue or as a cost but either way, they reduce segment profit as they are incurred.

Third, on foreign exchange, as previewed, the strengthening of the US dollar drove down our margins principally in Transportation Systems.

You'll recall that we were able to hedge our euro earnings at approximately $1.24 in 2015 versus our 2016 euro hedge rate of $1.10.

So put it into perspective, these three items accounted for approximately $63 million of headwind in the quarter, or roughly $0.06 of earnings per share.

In that light, the $0.12 of earnings per share growth for the first quarter certainly stands out.

I'm now on slide 5. Summarizing our first-quarter segment margin performance versus guidance.

We are up 30 basis points at the midpoint.

This chart provides some color on that.

Aero and PMT were generally in line with what we guided.

In Aero, we continued to drive strong productivity improvements but we did see some impact from the higher-than-planned Commercial OE content.

In PMT, we hit the high end of the guidance range.

In ACS, we experienced the sales shift, that is lower-than-anticipated ESS sales, including a double-digit decline in Scanning & Productivity Solutions, but higher-than-expected sales in Building Solutions & Distribution.

The adverse margin impact of these sales shifts offsets the continued improvements we're seeing across the ACS portfolio from productivity initiatives, commercial excellence and restructuring.

As you'll see later, we continue to maintain our full-year margin guidance, which includes an acceleration of restructuring benefits in the second half of the year.

This, while absorbing the adverse margin impacts of the M&A accounting, the Aerospace OEM incentives and the strengthening of the US dollar.

Let's turn to slide 6 with a quick update on some of our recent acquisitions.

In 2015, we announced five acquisitions, aggregating over $5.5 billion in purchase price.

These were across all of our SBGs, following our consistent qualitative and quantitative methodologies.

We've continued this into 2016, having already announced and closed the three additional deals highlighted on this page.

Each of these deals allows us to put non-US cash to work and each advances the software content in the Honeywell portfolio.

Starting with Xtralis and RSI Video Technologies, each of these acquisitions has excellent technologies, including video analytics and software that complement and expand our current security and fire offerings.

Xtralis is a pioneer in very early warning smoke detection technology, which enables customers to protect high-value assets, such as museums and historical buildings or facilities where continuity is critical, such as IT data centers and warehouses.

Xtralis is the clear leader in that space.

RSI's advanced motion technology allows our commercial and residential customers to receive intrusion alerts through a live video stream over the cloud, providing visual verification that an intrusion event has indeed occurred.

This verification is legislatively mandated throughout Europe as a means of reducing unnecessary police response to false alarms and we expect this type of legislation will become more prevalent globally.

Movilizer allows us to expand our offerings for the connected worker in Sensing & Productivity Solutions.

Movilizer's cloud platform plugs seamlessly into our customers' ERP systems and enables them to develop, deploy and manage their work flow and field-service operations through the Movilizer app.

Each of these 2016 acquisitions are being integrated into Honeywell right now and each is tracking ahead of our financial deal model.

Let's move to slide 7 and discuss the Aerospace results.

Sales were up 3% on a core organic basis and above our expectations, driven by better-than-expected growth in the Commercial Aviation business.

Aerospace recently created one unified commercial strategic business unit named Commercial Aviation.

This organization combines our Business and General Aviation and our Air Transport and Regional business units to provide the consistent and world class support required to win and grow our OEM and Aftermarket business.

Commercial Aviation OE sales increased by 4% on a core organic basis, driven by continued strong engine shipments and increased JetWave Satcom sales in Business and General Aviation, and higher sales to OEMs and Air Transport and Regional, partially offset by a 6 point headwind from the higher OEM incentives that I previously mentioned.

As we mentioned in January, the growth in BGA OE is driven by our HTF7000 series engine, which has won four of the five super mid-size business jet platforms.

Commercial Aviation Aftermarket sales were up 6% on a core organic basis driven by better-than-expected ATR flight hours and double-digit growth in repair and overhaul activities.

On the spare side, we saw an increase in airline spares, partially offset by lower spare sales in other parts of BGA through the timing of channel provisioning.

In China, both spares and R&O sales increased double digit on strong flight hours.

Defense & Space sales declined 2% on a core organic basis, driven by program delays and project timing in our US service businesses.

International business, in particular, faced a difficult prior comparison as larger projects were completed.

And as a reminder, the international defense business grew north of 20% in the first quarter of 2015.

Additionally, we closed the COM DEV acquisition, that's the satellite communications business we bought in February, and that integration is progressing nicely.

Transportation Systems sales increased 6% on a core organic basis due to new platform launches and continued volume growth in both gas and diesel light-vehicle applications.

On the gas side, we saw double-digit growth in both Europe and China.

On a reported basis, TS sales increased 3%, reflecting the stronger US dollar.

Aerospace segment margin expanded 70 basis points or 90 basis points, excluding a dilutive impact of acquisitions.

This was driven by productivity net of inflation and commercial excellence, partially offset by continued investments for growth, including the higher OEM incentives.

Let's turn to the ACS results on slide 8. ACS sales were up 4% on a core organic basis in the first quarter, above the high end of our guidance.

ACS continues to outperform in high-growth regions.

Sales in both China and India grew double digit in the quarter, driven by our connected ACS strategy and the benefits from our ongoing investments for growth.

Sales in Energy, Safety & Security so the products businesses were flat on a core organic basis in the first quarter and include a negative 3 point impact from the 2015 completion of the US Postal Services contract in Sensing & Productivity Solutions.

Excluding Sensing & Productivity Solutions, the other three business units within ESS were up this quarter on an average of 3%.

The momentum continued in security and fire globally, with the strong growth rates in both residential and commercial markets, coupled with the benefit from new product introductions and further penetration in high-growth regions.

We expect S&PS to return to growth in the fourth quarter.

Building Solutions & Distribution sales were up 11% on a core organic basis outpacing our expectations.

We continue to see strength in the Americas Distribution business, where sales increased over 15% on both the residential and commercial sides and growth has improved sequentially every quarter since the beginning of 2015.

In Building Solutions, sales grew mid single digit, reflecting strength in both project installation and service businesses.

Orders growth was also healthy, approaching 20%, with particular strength in the services and energy retrofit businesses.

We're encouraged by the solid improvement we have seen in our energy portfolio in HBS this quarter.

Our selections, so where we have chosen in an RFP but have not yet booked the order, those selections stand at nearly $500 million and have been growing steadily over the past 18 months.

In the past, I've described the slow pace of the conversion of this selection pool into orders.

Well, we are starting to see some of the acceleration of that conversion.

Energy orders were up over 350% in the first quarter and we expect orders growth north of 25% in the second quarter and for the full year, energy orders should nearly double.

This has been driven by sales, excellence and a differentiated offering that is leading to multiple awards in an industry that is expected to grow at strong, mid single digits over the next five years.

We're also seeing traction in the service business in HBS, driven by focused investments in NPI.

Overall, the HBS backlog increased mid single digit on an organic basis, driven primarily by growth in Europe and Asia Pacific, and the conversion of backlog is improving.

We converted on a number of larger projections in high-growth regions, particularly in India.

The ACS margin rate contracted 140 basis points in the quarter but was up 10 basis points, excluding the dilutive impact of acquisitions.

As I mentioned earlier, the margin expansion was below our expectations, primarily driven by higher project installation and distribution sales which carry lower margins.

ACS continues to benefit from commercial excellence, productivity initiatives, and the impacts from restructuring.

We continue to invest for growth in our connected product offerings and in high-growth region sales, marketing and engineering resources.

As an example, we've received great feedback thus far on our second generation of Lyric products, including our Water Leak and Freeze Detector products, following our launch in April.

I'm now on slide 9 with the PMT results.

Sales in the quarter were better than expected, primarily driven by strength in Process Solutions and Business that continues to outperform its peers in a challenging environment.

Process Solutions sales grew 9% on a core organic basis, driven by double-digit growth in our Process businesses and by higher services sales.

Conversion of the Global Mega Project wins in backlog, where we serve as the main contractor, providing Control and Safety solutions for large installations, picked up in the first quarter and we expect this trend to continue throughout 2016.

Orders were down low single digits on a core organic basis, but improved in our higher margin software and service businesses.

In particular, we see increased demand for our Assurance 360 service partnership offering, which is a multi-year agreement to maintain, support and optimize the performance of Honeywell process control systems.

And UOP sales were down, as expected, driven by lower gas processing, catalyst and equipment sales.

Gas processing faced tough prior-year comparisons in the first quarter and while the domestic gas processing environment remains muted, international activity continues to be encouraging.

Catalyst demand, overall, remains strong but it's not unusual to see variations from quarter to quarter as we've highlighted in the past.

The first-quarter declines were consistent with this trend, following strong catalyst shipments in 2015.

UOP's backlog was up low single digits, driven by our catalyst business.

Advanced materials sales were up 11% on a core organic basis, driven by demand for our Solstice global warming products as well as higher volume in Resins & Chemicals.

The Solstice growth is accelerating even more than we had expected and we continue to build out our capacity to meet the increasing global customer demand.

In Resins & Chemicals, the volume favorability was offset somewhat by challenging market conditions.

PMT segment margins were down 90 basis points to 20.6%, or down 70 basis points, excluding the dilutive impact of acquisitions.

The decline was primarily due to lower UOP petrochemical catalyst sales, partially offset by strong improvements in margin rates in HPS and Advanced Materials.

PMT benefited from commercial excellence, the favorable impact of raw materials pass-through in Resins & Chemicals and the impact from previous restructuring actions.

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

For Honeywell total, we're conservatively planning for sales of $10 billion to $10.2 billion, up 2% to 4% reported or down 2% to flat on a core organic basis.

Segment margins are expected to be up 40 to 60 basis points, excluding M&A, or down 10 to up 10 basis points on a reported basis.

We see credible drivers to improving sales and margin expansion for the rest of the year, including: higher catalyst sales in UOP; higher product sales in ESS; and improving segment profit from acquisitions, as one-time M&A-related charges taper off.

We expect the tax rate to be 26.5%, EPS is expected to be $1.61 to $1.66, up 7 % to 10% versus 2015.

Starting with Aerospace, sales are expected to be flat to up 1% on a reported and core organic basis.

In Commercial Aviation OE, we're expecting sales to be down mid single digit, driven by the impact of Aerospace OEM incentives.

Excluding the OEM incentives, Commercial Aviation OE is expected to be up low single digit, with a ramp-up on key platforms and Air Transport and Regional, partially offset by declines in BGA following significant double-digit growth in the second quarter of 2015, driven by strong engine shipments.

Commercial Aviation Aftermarket sales are expected to grow mid single digit, again, with an increase in airline spare sales improvement in BGA RMU sales and higher repair and overall activity.

ATR flight hours continue to be strong and we're also delivering higher Satcom and other software upgrades to enhance our growth.

We're seeing good traction from customers on our JetWave onboard connectivity terminal which is currently undergoing certification testing for 26 different aircraft models.

Defense & Space sales are expected to be roughly flat with higher product sales to the US government, offset by a tough prior-year comparisons in the international business, as larger projects are completed and by continued softness in the US services business.

In Transportation Systems, sales are expected to be up low single digit, with continued strong growth in light vehicle gas applications, partially offset by slower growth in diesel, based on the timing of new launches.

As for the Aerospace margin rates, we expect a reported increase of 60 to 80 basis points, in line with the first-quarter performance and an increase of 80 to 100 basis points, excluding the dilutive impact of M&A.

ACS sales are expected to be down 1% to up 1% on a core organic basis, or up 9% to 11% reported, driven by the addition of Elster and the three acquisitions we announced and closed in the first quarter.

We expect ESS sales growth to be similar in the first quarter on a core organic basis, as continued momentum in our Security and Fire businesses and in our key high-growth regions is more than offset by the declines we highlighted in S&PS.

S&PS is expected to return to growth in the fourth quarter when we lap the comparisons to periods containing the completed US Postal Service contract.

In Building Solutions & Distribution, we're expecting low single digit core organic growth, driven primarily by continued strength in the Americas Distribution business and in the recent improvements in the HBS orders and backlog.

Excluding a dilutive impact from M&A, the ACS margin rate is expected to improve 50 to 70 basis points, driven by commercial excellence, continued productivity and the benefits of restructuring.

ACS's reported segment margin rate in the second quarter is expected to be down 20 basis points to flat.

In PMT, sales are expected to be down 3% to 4%, on both the reported and core organic basis.

UOP sales are expected to improve sequentially in the quarter but will still be down double digit on a year-over-year basis, driven primarily by continued declines in gas processing, particularly in the US and the timing of catalyst shipments.

Based on our stable UOP backlog and strong anticipated second-quarter orders, we expect the catalyst business growth rates to improve in the second half of the year.

HBS sales are expected to be up low single digit on a core organic basis, driven by continued conversion of Global Mega Projects and higher software and services sales, partially offset by declines in sales of field instrumentation products.

Advanced material sales are expected to be up low single digit, driven by strength in Fluorine Products, Solstice sales and improving specialty products volumes, partially offset by the aforementioned pricing conditions in Resins & Chemicals.

The PMT reported segment margin rate is expected to be down 10 to 30 basis points and down 20 basis points to flat, excluding the dilutive impact of M&A and this is driven by strong productivity, net of inflation, and the favorable margin rate impact of the raw materials pass-through pricing in Resins & Chemicals.

Let's move to slide 11 to discuss what to expect for the rest of 2016.

Our planning framework for 2016 contemplates a second half, core organic sales guide of approximately 2% and our full-year guidance remains at up 1% to 2%.

There are a few drivers which we expect will contribute to this modest second half, core organic sales growth acceleration.

We expect Aero and ACS growth rates in the second half to be similar to the first half, so in Aerospace, we're expecting similar strong growth in Aftermarket sales and for modest pick-ups in our Defense & Space, and TS businesses to offset modest declines in the Commercial OE business.

We'll see tougher comps in second half of this year across Commercial Aviation OE, which as you'll recall, grew high single digit on a core organic basis in the second half of 2015.

In ACS, we expect S&PS business to return to growth in the fourth quarter as we lap the tough comps stemming from the completion of the US Postal Service contract.

We also continue to see traction on our new product investments, including the award winning Water Leak Detector, part of the Lyric 2.0 suite of products.

This, together with ACS's continued strong performance in high-growth regions, particularly China and India, will support continued modest second-half growth.

The majority of the improvement in the second-half growth is expected to be driven by PMT.

Our UOP business was down significantly in the first quarter, as we discussed.

We expect a substantial improvement in catalyst sales, as shipments accelerate on robust demand in the refining and petrochemical segments.

We also expect improvement in the other UOP businesses.

UOP backlog is healthy, up 2% at the end of the first quarter, driven by the nearly $1 billion in fourth-quarter orders in 2015 and we're expecting a robust orders performance again in the second quarter.

So with that, let's move to our full-year 2016 guidance summary on slide 12.

As Dave mentioned earlier, we're raising the low end of the full-year EPS guide by $0.10, with a new range of $6.55 to $6.70, up 7% to 10% over the prior year.

There is some minor puts and takes among the segments from the guidance we provided in March but overall, another very strong year expected for Honeywell in 2016.

So if we look at Honeywell in total, we expect 1% to 2% core organic sales growth and total sales are now expected to be between $40.3 billion and $40.9 billion, up 4% to 6% on a reported basis.

This increase in the reported sales reflects the incremental sales from the three new acquisitions and an update to our foreign currency assumptions.

From a sales perspective, we're now planning the euro at approximately $1.10 for the remainder of 2016, roughly in line with the prior year and up from our previous assumption of the euro at parity with the US dollar.

This change in assumption, of course, does not impact the expected core organic growth rate.

Segment margin expansion is expected to be up 10 to 50 basis points, or 80 to 110 basis points, excluding the dilutive impact of M&A, driven by commercial excellence, restructuring benefits and a continued proactive cost management.

Below segment profit, our restructuring and other expenses remain stable and in line with our previous guidance and we still expect a full-year tax rate to be 26.5%.

Our pension and OPEB income is expected to be approximately $100 million higher than we anticipated in December, due to lower service and interest costs as a result of our adoption of the spot rate methodology for our pension plans in the US and the UK.

We continue to expect our share count for the full year to be approximately 774 million shares, or approximately 2% lower than the 2015 weighted average share count of 789 million shares.

We plan to offset any incremental dilution from new exercises over the course of the year to keep the share count at roughly 774 million.

We've already spent over $1 billion in share repurchases in the quarter and while our strategy to keep our share count flat over the long term remains, we will continue to be opportunistic in our approach as the market allows.

As I mentioned earlier, we expect free cash flow to be in a range of $4.6 billion to $4.8 billion, up 5% to 10% from 2015 with CapEx investments roughly flat to 2015 at approximately $1.1 billion.

This will drive free cash flow conversion of approximately 90% for the full year.

And as I said, as a result of our strong first-quarter performance and the benefit from lower share count we are raising low end of our 2016 earnings guidance by $0.10 at this time.

Let's move to slide 16 for a quick summary before turning it back to Mark for Q&A.

Once again, we've demonstrated we can deliver on our earnings commitments, hitting the high end of our guidance range, even in a slow growth environment, a big reminder of the value of our diversified and balanced portfolio and the strength of the Honeywell Operating System.

Sales growth was better than anticipated in the quarter and we continued to invest for future growth in new products and technologies, high ROI CapEx, and our presence in high-growth regions.

We're also continuing to invest in and execute on process improvements and restructuring and we, again, put to work a sizeable amount of shareowner capital which will pave the way for future earnings and cash growth.

We have confidence in our full-year guidance based on the tenets of supporting growth, being cautious on sales, planning cost and spending conservatively, and continued seed planting.

So while 2016 isn't the easiest economic environment, we are confident we will continue outperforming our peers and performing well for our shareowners.

As always, we are also thinking about what's beyond 2016.

Each of our HOS Goals Enterprise are hard at work focusing on breakthrough goals and profitable growth that we expect will drive earnings outperformance through our five-year plan and beyond.

We look forward to sharing more over the course of the year.

With that, Mark, let's move to Q&A.

Thanks, Tom.

Cindy, if you could please open the line up for questioning?

(Operator Instructions)

Our first question is coming from Scott Davis from Barclays.

Hi.

Good morning, guys.

Hi Scott.

Well, lots here but I just wanted to get a sense, Dave, and I know you're going to hate this question but what's the signaling, if there is any, of making Darius COO now?

I mean, I'll just leave it at that.

What are you telling us?

Are you telling us you might be thinking about retirement and this is the transition or are you telling us that you needed -- you need this role, you need a COO-type role.

Well, I'd say that -- what I'm saying is that I think Darius is a good guy and I don't want to lose him if I didn't promote him.

Who knows where he would have gone?

I wish my boss would say that but (laughter) -- I'll move on.

This -- I ask this question a lot because I don't kind of get it.

What happens with the UOP catalyst business when it goes down this much.

Do you get a snap-back?

I mean, I look back at history and I couldn't find any real trends.

How long does it take to convert orders to revenues because it seems like your backlog is there but do things snap back or is this a multi-quarter grind its way back?

Well, let me address it a bit and then I'll ask Darius, who used to run that business, to weigh in a bit here.

The -- it ends up being pretty lumpy as you know, like a lot of the stuff in UOP, and we generally can tell what's going to happen because you don't get the order right away and ship it out like two weeks later so you do have some idea but it still ends up being pretty lumpy overall.

And that's why we said that this first quarter was going to be tough for us on both the growth and margins because we knew that was coming and that was the case here.

But that being said, we have a pretty good sense for the year and what happens in the second half versus first half when it comes to catalyst and that's what allows us to be able to be confident in what we're saying for the rest of the year, so Darius, anything you want to add?

I think it's right, Dave.

What we saw in Q1 of 2015 was a very strong shipment quarter in terms of our catalyst portfolio and even within that catalyst portfolio, there's variability and what's very, I'll say, margin accretive set of catalyst that we shipped back in Q1 2015, and in terms of being able to convert it, we can generally convert it relatively fast, certainly within a quarter or at most quarter or two.

So as Dave pointed out it can be lumpy.

We had a very strong Q1 2015 shipment and I would say at some very favorable margin rates which we expect to get those orders back in the second half of the year.

The other thing to keep in mind here is the -- this is our downstream business.

It's serving refineries and petrochemical plants, the demand for the output from those units is very strong and a lot of our catalyst activity has to be scheduled with customer service intervals as well so that comes into play and overall, I think you're right, Scott.

The backlog, I think, speaks for itself.

Okay.

I'll pass it on.

Thank you, guys.

Our next question comes from Steve Tusa from JPMorgan.

Hi guys.

Good morning.

Hi, Steve.

Congratulations Darius.

Thank you.

Just on the ACS margins, could you just give us a -- definitely, we can expect that -- and you talked about the mix.

Could you maybe just give us a little bit of more color on that bridge more precisely on what you were expecting?

Where it ultimately came in?

And then maybe just give us a little bit of color on the one-time related deal stuff that kind of goes away, either in the second quarter or over the course of the year, because you didn't change your margin guidance for the year.

And it just looks like a heck of a ramp to ultimately get there.

Yes, I'll talk a little bit and then turn it over to Tom.

The -- in terms of the ramp, it's no different than what we were saying back at Investor Day or back in December because this is pretty much what we expected.

It was down a little bit from what we thought on guidance, largely because of the mix difference, as you look at what happened in the Building Systems division which, after it felt like six or seven quarters of saying the orders are there, it's going to come.

It finally did, which was nice.

It was a good thing to see so this is pretty much consistent with what we've been planning for all along and as you take a look at second half growth for the total Company, as I said, it's largely driven by the absence of negatives than it is by any big thing that we're counting on; so, Tom?

Yes, maybe just looking at a little bit closer to the details, Steve, the dilutive impact from margins was from Elster and Data Max only a little bit.

But that was -- it was 150 basis points or so and that contains probably around 40 million of one-time kinds of things but when you -- and that's like the upfront inventory write-off and deal costs and so forth.

So you're right, those will not be with us for the rest of the year but that was already contemplated in our organic guidance that we had given you so if you look at it on that basis for the first quarter, we certainly did have the productivity impacts that we felt we were going to have.

But we had good material cost productivity, good performance on indirect, and we actually had good performance on the commercial side.

The issue was what Dave highlighted.

We had more sales than distribution, more sales of Building Solution products, I mean, 17% up in our Distribution business, 7% up in Building Solution.

And we also had in S&PS, a little bit of unfavorability beyond the Postal Service contract that we talked about, a little bit of channel softness and inventory shifts.

We are keeping our eye on that as well.

So those are the puts and takes.

As we said second quarter, we expect to snap back to 50 to 70 basis points of expansion and we'll get the productivity.

I don't think the sales -- we're not planning for the -- as market of sales growth in BSD as we had in the first quarter and we get more restructuring benefit as we move along.

That's the way I'd characterize it.

Okay.

And the S&PS thing being down, that should have been -- that's kind of visible right?

That's something you probably knew about earlier because it's a tough comp as opposed to a change in the business environment?

We certainly knew about the US Postal contract completion, but when you look at --

And what else?

But it's a short cycle business and we go through indirect channels and your visibility out on those is not much more than a few weeks, couple weeks.

And what happened on that, to Tom's point, there were two drivers.

One we knew and planned for USPS.

The second one was distributor inventory levels which declined in the quarter.

And we expect will probably decline again in the second quarter before leveling out and that one is one that we had not anticipated; it just kind of happened but we think is, once, as you know, the level gets to where they want it then you get back to growth -- you get back to the end market growth again.

Is there something -- is there an industry there that you're seeing?

Is it something having -- it seemed like a lot of the macro inventory-related stuff has stabilized.

Anything more specific than that?

No, we don't think so from an end market perspective.

It looks more like just distributors trying to be a little more cautious.

Okay and then one last question, just on the below the line stuff.

You mentioned you're keeping your share count guidance the same but then you said you're raising partly because of share count dynamics.

Could you just maybe clarify below the line, what's changed?

Whether it's pension, restructuring, share count?

What has helped you on the guide because it doesn't seem like the core profit guidance has changed very much.

No, that's right.

The big changes are the spot rate method on the pension side, which as we said, we fully expect to offset that impact with additional restructuring.

We have eight acquisitions that we're integrating and when we start to carry out our cost synergy plans, we'll really need to lean on that restructuring funding so that's the -- those are the major movements.

The raise to the guidance is a reflection of the strong first quarter as well as the share count that we mentioned.

Okay, thanks.

Thanks, Steve.

Our next question comes from Steve Winoker from Bernstein.

Thanks and good morning, all.

Dave, I think a skeptic maybe look at some of the segment margins over time now and this quarter, for example, even ex-M&A and say look, after more than a decade of almost a 1,000 basis points of segment margin expansion and well past prior peak in all cases, what are -- that's just getting harder and harder and bumpier, for whatever reason, mix, et cetera?

What would you say?

What is the one or two things you'd point to say, no, that's wrong, very explainable as you just went through ACS, and here is why that's wrong?

Gee, an analyst skeptic; isn't that an oxymoron?

(laughter) Paid to be skeptics, not cynics, Dave.

(laughter)

Yes, well, first of all, we forecasted this was going to happen in the first quarter and yes, okay, we didn't beat it by 10 basis points but we're certainly within the realm or reasonability and if you take a look at the total years, quarters are a little more difficult, I'd say have things move always perfectly smoothly because you have things like UOP that just cause things not to be perfectly smooth.

On a total year basis, there's -- this is going to continue and it's not so much where you're coming from and the 1,000 basis points, yes, that's quite nice, but there's at least another 300 or 400 basis points left to go if we take a look versus our high-margin rate peers and we look at the industries that we're in and how others do in that industry.

So this is going to keep going.

It's not going to change.

At some point, we will have to say yes, we are the highest in the industry and we can't keep talking about our margin rate growth story, but it's going to keep going.

HOS Gold hasn't finished the whole idea of being able to grow sales and hold fixed costs constant.

Those are still very real and there's still a lot of juice left for functional transformation; there's still a lot left there.

If I could add the -- the other thing I'd point to, Steve is the unspent restructuring that we have.

It's well over $300 million and that will continue to replenish itself.

We have requests for way more than we can fund every quarter and we think that will help it.

And the other thing is these acquisitions, I said we're integrating eight acquisitions and when you look at the weighted average margin rate of those acquisitions for the first quarter, it's less than 10% so that's diluting down a portfolio so as we continue to integrate those and bring those in, that's going to be a big driver for us as well.

Very helpful.

Thanks and Dave, what are you currently thinking in terms of M&A again and I know you get this question all the time, in size and I guess also, just given a lot of investor discussions, are there any circumstances under which you'd actually revisit your UTX bid?

Well, starting with the second one first, no.

It's done, it's past.

It had its time and that time is gone and on the first one, while it's the same question, it's also the same answer.

(laughter) It depends.

We work an active pipeline.

You never know when stuff is going to hit and sometimes, we've been really fortunate this past six, nine months with a bunch of things that we were able to bring to fruition.

Who knows?

The rest of the year, there could be another 10% or it could be zero and we're just going to continue to be smart about it.

I still do the integration reviews like we've talked about in the past.

We are just as disciplined as we ever were; if something makes sense, we'll do it.

If we can't find stuff that makes sense, we won't.

I don't mind being out of the market for awhile and seeing what develops.

We're seeing to stay sharp.

I'm sure you have a lot of folks in the queue, so I'll pass it along.

Thanks.

Our next question comes from Andrew Obin from Banc of America.

Yes, good morning.

Hi, Andrew.

Just more a general question a lot of conversations was investors about sort of global PMIs bottoming and bouncing off the bottom.

What are you seeing?

Is the world truly reaccelerating as you look at your business and when are we going to start seeing it in numbers?

Thank you.

Well, I'm hopeful that there's a global economic rebound but we're certainly not going to count on it.

If there was any region that surprised me in this past quarter, it was Europe did a lot better than I expected.

I don't know if this is just a one-time bounce or something that's going to stay consistent, but I was quite encouraged by seeing that.

It was a nice surprise.

We will see how much that turns into something, but right now, we're going to stay with this whole idea that this is a slow growth global environment and it's just the smart way to plan and you see that reflected in how we are forecasting the second quarter and how we are forecasting the total year.

I just don't think there's any percentage right now on being bullish about it.

If it happens, great.

I think there's a greater chance it happens than there is that it doesn't but that being said, I don't see any percentage in being bullish about it.

Just a follow-up question.

The dollar has been going up for years and at the end, a lot of companies, you included, set up the hedging structure.

And as the dollar trade is unwinding, A, how are you thinking about hedging in outer years?

And B, other than hedging a weaker dollar, how does it impact your strategy?

It doesn't really impact our strategy all that much because we have never really changed the way we did it.

We have always tried to match cost and revenue as best we can so I want to be producing in the markets we're selling and as a result of that, I think it's put us in a pretty good position where we don't get out of whack with any competitor because of a currency mismatch.

When it comes to the translation question, that's a separate one.

We might consider taking some exposure off the table this year and next as we contemplate what could happen, especially as you look at practice and the possibilities there but, by and large, I don't feel as negative as I did about currency as I did, say, a year or two ago.

Thank you very much.

Our next question comes from Jeffrey Sprague from Vertical Research Partners.

Thank you.

Good morning everyone.

Hi, Jeff.

Hi.

A couple, maybe actually one for Darius since he's on the line.

I just see this morning that Grace is buying a BASS catalyst business today.

Just wondered if you could speak to whether that was on your radar screen and maybe more generally, do you see M&A opportunities in that space for UOP or kind of related assets in that area?

Well, obviously, as usual, I'm not going to comment on specific targets so quick learning from Dave, (laughter) but obviously, the catalyst space is interesting to us.

It's something that, obviously, is core to what UOP does and I would just say that's an area that it's something that we're -- we've been looking at both organically and if the right opportunity presents itself, it's probably something that we'd be open to as well but it's clearly, a space that's of interest to us.

Great and then Tom, just on tax.

Honeywell, for years, has had a very sophisticated tax planning effort, solving to 26.5% almost precisely year after year.

Is there anything in what the Treasury said a couple weeks ago when they were aiming at inversion that kind of spills over and increases the risk to your tax planning strategies?

Well first of all, my tax director is going to be thrilled you referred to him as sophisticated.

That's going to be a new one, but --

Of course.

Just kidding.

The -- well, I mean, Jeff, (laughter) -- of course, we're not an inverted Company, Jeff, you know, but the new rules do apply to US multinationals as well and there's specific criteria that inter-company loans are required to meet in order to be treated as debt as opposed to equity.

We're currently assessing all of our inter-company loans against these criteria.

We'll likely be required to have more extensive documentation placed on our loans and it may have an impact on our ability to pool our cash globally as well.

We're currently assessing that, But otherwise, we aren't expecting immaterial impact, including in our ability to do M&A and including our foreign operations.

Thank you.

Just one more quick one, if I could.

We're all just trying to kind of get all of the I's dotted on margins, as you can see on this call.

Just the OEM payments for the year, if you gave that previously, I don't recall.

Could you share that with us just so we have that dialed in?

Yes, it's roughly 200 -- a little bit over $200 million for the year.

Year on year.

Year on year, $200 million?

Right.

Thanks guys.

You're welcome.

Our next question comes from Gautam Khanna from Cowen & Company.

Yes, thank you.

I was wondering if you've seen any change in customer buying behavior in the ATR Aero Aftermarkets.

We hear a lot about pooling of parts and part-outs; wondering if you're seeing any of that because the numbers don't suggest it.

Well, yes, those phenomena, both of those are real and you're seeing consolidation more in China, I'd say, than any place else and the parting-out is real.

And we referenced that ourselves in previous announcements.

That being said, those are a couple headwinds but they are also tail winds and that's flight hours, for example, where people are continuing to fly and that's always good and they have more than offset the impact from those other items.

And then China, your spares were up quite a bit.

Is there any -- what do you think is actually driving that?

Is it a restock?

Is there -- what's going on there?

I think it comes back to flight hours again.

They fly a lot and that's really the -- I've said many times, the biggest Aerospace driver we have is flight hours.

It's not tied to OEM schedules or airline profitability or any of that generally.

The long-term trend is going to be driven by flight hours.

If they are flying -- if everything ends up working out, whatever short-term disruptions or benefits, whatever you're seeing over time, flight hours ends up being the driver.

Flight hours continue to climb and that's a good phenomenon for us.

I'd also add that when you look back at the first quarter 2015, we -- there was an usually low aftermarket sales, I think because some of the factors you had mentioned, Gautam.

I think we'll continue to see the impact of that, as Dave said, but overall for the full year, the flight hours are what's going to be what drives our aftermarket in China.

And just to follow-up on Jeff's question on the OEM pre-production payments, do you have any preliminary sense for what they might be in 2017?

I think the level will be similar in total to 2016, so flat year over year.

And then it should recede in the years after that.

Okay and last one.

Can you quantify the USPS headwind for us quarter over quarter what the decline has been?

In general, that's not the kind of specifics we would share.

We would say that, as I said, we knew about some of it.

We did not know about the distributor side of it so that was a surprise but that will, like any other inventory reduction, that corrects itself over time.

Right.

Thank you very much.

You're welcome.

Our next question will come from Nigel Coe from Morgan Stanley.

Yes, thanks for running a bit late here as well.

Darius, congratulations on the role.

Fantastic.

Thank you.

We've spent a lot of time talking about catalyst and I apologize for another question here, but it is a big swing between first half and second half.

Typically, how much visibility do you have an catalyst bed reloads?

Is it three months?

Is it six months?

I mean, and how much variabilities do you have once you have a job in the backlog?

How much -- typically how much variability is there in the timing of that.

I can't imagine it's much but if you maybe just comment on that, please.

Well, it's a mixture.

There's stuff that we know about a long time ahead because some customers place orders a long time ahead; others don't, but Darius, you know better than --

I think when it comes to the second part of your question, which is once it's in the backlog, we can produce it fairly quickly, typically within three months.

So I think the cycle, the conversion cycle time from booking to revenue is relatively short.

In terms of visibilities to when the orders come in, frankly, the visibility isn't great.

It's a bit of a random function and Tom referred to this earlier, but one of the fundamental things that's going on, this is actually pretty good time for refiners so with what we're seeing is that refiners are actually putting off their turnarounds which they are going to have to incur at some point.

When that's going to happen, that's not really certain, but I would say, overall, the catalyst booking pattern is somewhat unpredictable.

Okay so the second half view is best assets, but not locked in by any stress of measures.

Okay.

And then obviously, you're getting beaten up a little bit on margin this quarter.

Obviously, there's a lot of moving parts with the OE and full payments and the FX hedge.

I guess the average margin strength, given those two headwinds is pretty extraordinary but just Tom, maybe just comment on the hedge, the Euro hedge and if, by some miracle, the Euro did go to $1.24 by year end, that's still a benefit to your guide net-net but obviously, that will tax your margins somewhat; is that the right way to think about it?

No, if you'll recall, Nigel, at the beginning of -- towards the tail end of last year, we basically hedged the Euro.

Our Euro-based profit is the way to think about it, so they're hedged at about $1.10, at the income level.

Right.

The profits are.

The movement in our guidance was on reported sales so we've never hedged it at the sales line level, so we do see the variability if the US dollar goes to -- if we go to $1.24 in your scenario, then yes, we would have more sales but our margins would be the same so that would have an impact on the margin rate.

It's why we take out the difference between operational and all of the other items on the margin rate curve.

Okay and just a quick one on inventories.

The Building inventories, is that driven by the Aero build cycle?

Yes, you've got a couple things going on in inventories.

That's -- I'd say the biggest thing is continuing to ramp up for foreign products.

We've got significant pick-up in, as we said, in second half there and the other thing is the M&A.

More than half of it is of the inventory increase is from the acquisitions that we've done.

Of course, yes.

Okay, thanks guys.

Thanks.

Our next question comes from Andrew Kaplowitz from Citi.

Hi.

Good morning, guys.

Hi.

Dave, the TS business seemed to pick up in 1Q.

Can you talk about the improvement a little bit more?

How did commercial vehicles do in the quarter, is it just easier comparisons there, being in take-hold, and can you sustain the mid-single digit growth that you've seen going forward?

Well, Commercial is still tough on the TS side; what you're seeing more with -- were the benefits of the wins in the passenger vehicle side.

Okay, that's easy and then Dave, just -- I know the answer to this but I'm asking anyway.

Can you talk about your organic growth guidance in 2Q or is the 1% growth you had in 1Q, is it getting worse in portfolio in Aero and ACS that leads to lower growth or is it just conservatism and you're not forecasting BSD accelerated growth that you saw in the quarter?

I would say that it's more a case where we want to stay careful, but there's nothing that says that there's a disaster coming in the second quarter or anything like that.

We just want to make sure we stay conservative and hopefully, the first-quarter performance continues on organic growth but we'd hate to count on it, not have it happen and I'd rather have it be the other way around.

Appreciate it.

You're welcome.

That is all the time we have for today's question-and-answer session.

Mr. Cote, at this time, I'll turn the conference back to you for any additional or closing remarks.

Well, we're quite pleased to outperform again this quarter.

And what we accomplished on organic sales growth, beating our commitments and the productivity generated to offset the known headwinds, gives us the confidence to raise the low end of our EPS guidance by $0.10.

We're encouraged by what we're accomplishing this year and next and of course, we all hope that you feel the same way.

Thanks.

Thank you.

This does conclude today's teleconference.

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