漢威聯合 (HON) 2019 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Honeywell's Second Quarter 2019 Earnings Release 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, April.

Good morning, and welcome to Honeywell's Second Quarter 2019 Earnings Conference Call.

With me here today are Chairman and CEO, Darius Adamczyk; and Senior Vice President and Chief Financial Officer, Greg Lewis.

This call and webcast, including any non-GAAP reconciliations, are available on our website at www.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 we see them today.

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

We identify the principal risks and uncertainties that may affect our performance in our annual report on Form 10-K and other SEC filings.

For this call, references to adjusted earnings per share, adjusted free cash flow and free cash flow conversion and effective tax rate exclude the impacts from separation costs related to the 2 spin-offs of our Homes and Transportation Systems businesses in 2018 as well as 2018 pension mark-to-market adjustment and U.S. tax legislation, except where otherwise noted.

References to 2019 adjusted free cash flow guidance and associated conversion exclude impact from separation costs related to the 2018 spin-offs.

This morning, we will review our financial results for the second quarter of 2019, share our guidance for the third quarter and provide an update to our full year 2019 outlook.

And of course, we'll leave time for your questions at the end.

With that, I'd like to turn the call over to Chairman and CEO, Darius Adamczyk.

Thank you, Mark, and good morning, everyone.

We're excited to be hosting our call this morning from Charlotte, North Carolina, which will officially become our corporate headquarters on August 1. It is an exciting time to be part of the Honeywell team as we continue to transform our business into a premier technology company with Charlotte as our home base.

Let's begin this morning on Slide 2. It was another very strong quarter for Honeywell.

We again delivered on our commitments, generating earnings per share of $2.10, at the high end of our second quarter guidance, up 9%, excluding the impact of spin-offs in 2018.

This strong earnings result was driven by organic sales growth of 5% and 170 basis points of segment margin expansion.

Notably, our segment profit, excluding the spins, on a comparable basis for 2018 was up 9% this quarter and was the largest contributor of EPS growth.

For the first half of 2019, organic sales growth reached 7%, which is a proof point to the investments we've made in our business, in our sales force and new technologies that are winning in the marketplace.

We continue to see the benefits from our strong positions on key platforms in our long-cycle business aviation and the finance portfolios in Aerospace; in our warehouse automation business, which is up over 20% organically year-to-date and now generates approximately $2 billion in annual sales; in our Building Technologies business, which had another great quarter.

Our Process Solutions and UOP businesses, which principally serve the oil and gas industry, also both grew 5% organically this quarter, as we continue to be encouraged by the progress we are making in the Honeywell Connected Enterprise, which drove double-digit organic sales growth of our software in the quarter.

In fact, this quarter, we signed a framework agreement to deliver a Honeywell Forge asset performance management and improve the reliability and performance of over 1,000 industrial assets for a large Middle Eastern refinery.

Segment margin exceeded 21% in the second quarter, up 170 basis points, driven by smart portfolio enhancements we made in 2018, our investments in the commercial organization and the benefits of previously funded restructuring to improve our operations.

Excluding the favorable margin impact from the spin-offs, segment margin expanded 80 basis points, which was 30 basis points above the high end of our guidance.

Building on the progress we have seen for several quarters, we delivered 100% free cash flow conversion, and we remain on path to approximately 100% for the second year in a row.

I am encouraged by our progress in this area, and we remain focused on continuing to drive improvements in working capital.

We also continue to [execute] our capital deployment strategy, repurchasing $1.9 billion shares and closing 4 new Honeywell Ventures investments in the quarter, bring our total to 12 new investments in the first 2 years of the fund.

As a result of our first half performance, we are raising the low end of our full year organic sales guidance by 1point to a new range of 4% to 6% and raising the low end of our full year earnings per share guidance to a new range of $7.95 to $8.15.

We expect to generate approximately $6 billion in free cash flow for the year, so we have narrowed our free cash flow guidance to reflect this.

While we are encouraged by our performance this quarter, we are continuing to plan cautiously for the second half of the year, given the uncertain macro environment in which we operate.

We've seen some slowing in certain short-cycle businesses that has been overcome by the strong performance in the rest of the portfolio.

We think it is prudent to plan conservatively in the event of a broader slowdown, given that nearly 60% of our business is short cycle in nature.

I'm very pleased by our performance in the first half.

We still have substantial work to do to achieve our plan, but I'm confident that the team will continue to execute.

I'll stop there and turn the call over to Greg, who will discuss our second quarter results and updated 2019 guidance in more detail.

Thanks, Darius, and good morning, everyone.

I'd like to begin on Slide 3.

As Darius highlighted, we delivered on our commitments again in the second quarter, building on the strong start we had in Q1.

Organic sales growth and margin expansion performance across the majority of the portfolio was very good.

A few highlights to mention.

Defense & Space grew 20% organically, and the Commercial Aftermarket and Aerospace grew 8% organically with strong demand across both Air Transport and Business Aviation.

Building Technologies grew 5% organically after 9% in the first quarter, and Process Solutions and UOP, which encompass our oil and gas portfolio, both grew 5%.

The impact of the spin-off of Garrett and Resideo, both lower-margin businesses, contributed 90 basis points of segment margin expansion.

The remaining 80 basis points was the result of our strong operational performance, primarily in Aerospace and Performance Materials and Technologies.

We continue to effectively manage the impacts of tariffs through well-executed mitigation efforts and are in the final stages of eliminating all spin-related stranded costs before year-end.

Notwithstanding our strong performance across most of the portfolio, as we messaged in April and again in May, we did experience challenges in Safety and Productivity Solutions and more specifically in the Productivity products business, which drove a sales and segment margin decline this quarter.

I will address that in more detail in a minute.

Consistent with last quarter, the majority of our earnings growth, $0.16, came through segment profit improvement.

We realized a $0.06 benefit from our share repurchase program, which resulted in a weighted average share count of 733 million shares this quarter.

Our effective tax rate was 21.5%, largely consistent with the outlook we provided of 22%.

Importantly, we were also able to fund a substantial amount of fast payback repositioning in the quarter, more than $80 million, that will support our continued productivity focus, functional transformation and supply chain initiatives that we discussed at our Investor Day in May.

These proactive measures will be helpful in the event of a slower economy in the coming quarters.

Finally, adjusted free cash flow in the quarter was $1.5 billion with conversion of 100%.

The strong cash generation was most notable in Aerospace and Building Technologies.

We're very pleased with our results and are focused on continuing the strong performance in the second half.

Let's turn to Slide 4 now to briefly discuss the second quarter EPS bridge.

Slide 4 walks our earnings per share from the second quarter of 2018 to the second quarter of 2019.

As Darius mentioned, segment profit growth was the main driver for the quarter.

That acceleration was most prominent in Aerospace and PMT due to a combination of higher organic sales volumes, commercial excellence and our continued focus on productivity.

We also continue to utilize our balance sheet to lower our share count.

We deployed nearly $2 billion towards repurchases of Honeywell shares, consistent with our plan to reduce the share count by at least 1% during the course of this year.

Finally, we had a $0.05 headwind on an adjusted basis from below-the-line expenses, primarily due to the proactive restructuring actions I mentioned earlier and lower pension income year-over-year as a result of the derisking actions we took in 2018.

That was partially offset by benefits from net interest expense and foreign exchange.

Funding a strong pipeline of future repositioning continues to be a key lever for our productivity playbook and will serve us and our shareholders well as we go forward.

The punchline here is we had another high-quality quarter, delivering EPS at the high end of our guidance range.

Now let's turn to Slide 5, and we can discuss our segment performance.

Starting with Aerospace.

Sales were up 11% organically.

This marked the fourth consecutive quarter of double-digit organic growth and capped off an outstanding first half for 2019.

Defense & Space grew 20% organically, led by global demand for guidance and navigation systems as well as increased spares volumes on U.S. DoD programs, including the F-18 and F-22.

The defense business is well positioned.

More than 50% of firm orders with delivery through 2020 are already booked.

In Commercial OE, sales were up 4% organically, driven by continued strength across the business jet platforms, which more than offset declines stemming from the timing of air transport shipments.

Notably, we saw increased deliveries across all Gulfstream platforms and strong avionics deliveries on certain Dassault platforms.

Regarding the Boeing 737 MAX situation, we remain aligned to Boeing's stated production schedule, and we'll continue to monitor the situation closely.

But as we stated previously, we do not anticipate a significant impact to Honeywell's operational results in 2019.

Aftermarket sales were up 8% organically, driven by demand across both Air Transport and Business Aviation, and growth in retrofit, modifications and upgrades, including related to the ADSP safety mandates.

We continue to see good adoption of our Connected Aircraft technologies, which drove strong software sales growth in Aerospace, and continued to gain traction for our JetWave solution across all Aerospace verticals, as demonstrated by the C-17 win we announced in May, our first in the defense business.

Aerospace segment margin expanded 330 basis points, driven by commercial excellence, higher sales volumes and margin accretion from the spin of Transportation Systems.

The spin contributed approximately 60 basis points to Aero's total margin expansion.

The Aero business continues to execute well, investing in future technologies, driving productivity in Commercial Excellence and has a healthy long-cycle backlog heading into the third quarter.

In Honeywell Building Technologies, sales were up 5% organically driven by global demand for commercial fire products.

As Vimal Kapur and his team displayed at our investor conference in May, we are innovating and launching new products in this business at a much faster rate than we had in the past, and we continue to see good acceptance from our customers and strong growth as a result.

We saw good growth across building management software platforms, including [for Tridium], which, as you may remember, is our platform for integrating building management systems and data using open and proprietary communication protocols.

In Building Solutions, we drove growth in global projects across the Americas and in the airport vertical in the Middle East.

HBT's segment margins expanded 390 basis points in the second quarter, driven by the favorable impact from the spin-off of the Homes business.

The team continues to make steady progress on our goal to eliminate the remaining stranded costs by year-end stemming from the Homes spin.

Segment margins, excluding the favorable impact from the spin accretion, were roughly flat this quarter, a big improvement from the first quarter, and we continue to make progress on supply chain optimization post the spin.

Overall, it was another great quarter for the HBT business with double-digit projects backlog growth in Building Solutions, positioning the business well for the second half of 2019.

In Performance Materials and Technologies, sales were up 4% on an organic basis.

Process Solutions sales were up 5% organically, driven by continued strength in our short-cycle businesses, primarily in software, maintenance and migration services and field instrumentation devices.

We also saw growth in Smart Energy, primarily in North America.

The short-cycle backlog of (inaudible) Process Solutions is up over 12%, giving us confidence that the growth in the automation portfolio should continue into the second half.

UOP sales were up 5% organically, driven by growth in licensing and engineering as well as refining catalysts.

We saw particular strength in North America with reinvestment in existing refining infrastructure and select new investments in petrochemicals and strong backlog conversion in the Middle East.

UOP orders and backlog were both up over 10% for the quarter.

Additionally, on a year-to-date basis, UOP orders in China were up double digits, primarily driven by growth in equipment, licensing and catalysts.

Organic sales growth in Advanced Materials of 2% was driven by a demand for our Solstice line of low global-warming refrigerants and blowing agents.

However, this was partially offset by lower pricing due to the impact of illegal HFC imports in Europe.

Enforcement and monitoring of the EU F-Gas Regulation has been an emerging challenge, and we're working diligently in partnership with other producers, EU regulators and EU member countries to address the harmful illegal imports.

Overall, PMT segment margins expanded by 140 basis points in the second quarter, driven by Commercial Excellence across all lines of business, direct material productivity and further improvements in our supply chain.

Finally, in Safety and Productivity Solutions, sales were down 4% on an organic basis in the quarter, and segment margins contracted 420 basis points.

The weakness we saw this quarter was principally in our short-cycle, high-margin productivity products business.

Similar to the first quarter, we saw a combination of continued distributor inventory destocking, fewer large project rollouts in the mobility space and lower channel sell-through.

The second quarter sales mix in SPS negatively impacted our margins as the volume declines we experienced were in more profitable parts of the business.

We continue to see growth in our sensing and IoT business and robust demand for voice solutions and aftermarket maintenance and services and warehouse automation.

As Darius mentioned during last quarter's earnings release, Intelligrated is beginning to face tougher and tougher comps as we get deeper into the year following 5 quarters of approximately 20%-plus growth.

We are seeing timing of new major system rollouts push into the second half of the year.

This effect, coupled with tougher sales comps in the second quarter, drove flattish sales in Intelligrated in 2Q.

The large project order pushouts we saw in Q2 are consistent with our customers' latest planning and not an indication of project losses.

Intelligrated's aftermarket business, which enhances customer outcomes through consultative engagements to improve productivity, was up strong double digits organically, driven by demand for comprehensive life cycle support and service.

The business is benefiting from the large installed base growth in the core Intelligrated portfolio.

The outlook for this business overall remains very strong, and we delivered organic sales growth of over 20% for the first half of 2019, and we continue to expect this to be a growth business long term.

Within the safety business, organic sales growth was 1%.

We saw continued demand for gas detection products, which grew low single digits organically, and retail footwear, which was up high digits -- high single digits organically.

That was largely offset by decreased volumes of general safety and personal protective equipment.

In our key end markets for the safety business, we see solid demand for Portable Gas Detection in the U.S. but slower activity in the industrial sector given distributor inventory levels.

Let's now turn to Slide 6 and discuss our third quarter outlook.

Our planning assumptions are largely consistent with the second quarter dynamics with some further caution on short cycle.

We expect our growth this quarter will be driven by a combination of continued long-cycle strength in Aerospace and Defense, coupled with short-cycle demand in Building Technologies and healthy backlog in UOP and Process Solutions.

The Aerospace business, as I mentioned, has grown 10% or more organically the past 4 quarters, and we expect continued strong performance due to the order growth rates and backlog in Defense.

We've established a significant backlog of new major system awards for Intelligrated over the past year that will drive growth into 2020 and allow for an expansion of our shorter-cycle aftermarket and service businesses.

We are taking a cautious view on the short-cycle growth as many of the macro signals, the China GDP, U.S.-China trade tensions and Brexit, just to name a few, are still clouding the economic outlook.

We think it's prudent to plan conservatively given the uncertainties, and our 3Q and second half guidance reflect that.

As it relates to the sale of weapons to Taiwan by the U.S. government and potential sanctions from China, we see no reason why Honeywell would be potentially sanctioned by the Chinese government, and we have received no official word from the Chinese government that Honeywell is on a sanctioned list of entities.

Now let's discuss our segment outlook.

In Aerospace, we continue to see robust demand in both business aviation and in U.S. and international defense, supported by robust orders growth and firm backlogs for orders with delivery into 2020.

Air Transport shipments should increase sequentially, driven by demand for A350 and A320 aircraft and lower customer incentives.

We will see tougher comparisons in business aviation given the significant organic sales growth in the third quarter of 2018.

Consistent with last quarter, we expect the Commercial Aftermarket activity will be driven by flight hours, airline demand and further tailwinds from the adoption of safety and compliance mandates, principally in business aviation.

In Building Technologies, we expect good growth with strength primarily in commercial fire products in Americas and EMEA and growth in building management software in High Growth Regions and for Tridium .

On the service side, we expect to see Building Solutions growth continue, given the large order funnel and considerable backlog growth in projects and services.

As a reminder, HBT does have significant short-cycle exposure, particularly in the products vertical.

And although we haven't seen order rates slow, we are planning cautiously here in the second half.

In Performance Materials and Technologies, we expect to see short-cycle demand for products and services and Process Solutions and growth in equipment, absorbents and refining catalysts in UOP.

We saw good bookings in equipment and catalysts in the second quarter and growth in the Process Solutions service bank for new contracts and renewals, which we believe sets PMT up for another good quarter in the third quarter.

Finally, given the challenges we experienced in productivity products and our assumption that the inventory destocking continues for the balance of 2019, we are expecting to see continued headwinds in SPS from both a sales and segment margin perspective, but anticipate that will moderate in the fourth quarter.

We expect Intelligrated's third quarter performance to be similar to 2Q with 20-plus percent growth in the aftermarket business, but slower large project growth.

We maintain a robust backlog of project awards from blue-chip customers and see a very strong pipeline of potential awards in the third and the fourth quarters.

The net below-the-line impact, which is the difference between segment profit and income before tax, will be minimal this quarter.

The difference year-on-year is driven primarily by lower pension income, the benefit from spins' indemnification payments, partially offset by higher repositioning funding.

Now let's move to Slide 7 to discuss our revised full year guidance.

As Darius noted, we are raising the low end of our full year organic sales, earnings per share and free cash flow guidance.

Our organic sales guidance moves 1 point on the low end to a new range of 4% to 6% while our segment margin guidance is unchanged.

A revised earnings per share guidance of $7.95 to $8.15 represents earnings growth of 8% to 10% adjusted, excluding the impact from the spins in 2018.

We remain on track to deliver approximately 100% free cash flow conversion.

Our position on tariffs is unchanged.

We expect no significant impact in 2019 given the proactive measures we have taken to mitigate.

We also continue to closely monitor the Brexit situation and are communicating regularly with our customers, partners and suppliers.

As we stated last quarter, we're planning for various potential Brexit outcomes, including a no-deal Brexit scenario, to ensure that as the terms of the U.K.'s departure from the EU are finalized, we are well positioned to continue meeting our customers' needs.

Our guidance continues to reflect a weighted average share count of 731 million shares and an effective tax rate of approximately 22%.

Our net below-the-line expenses are now expected to be approximately $120 million in 2019.

This reflects slightly higher reposition expense charges, partially offset by greater interest income.

We continue to be confident in our ability to execute and in our outlook.

We're sticking to the playbook around short-cycle caution, given the macro uncertainties that remain in the second half of the year.

With that, I'd like to turn the call back over to Darius, who will wrap it up on Slide 8.

Thanks, Greg.

We are encouraged by the performance from our businesses thus far in 2019.

We continue to execute on our commitments to share owners by generating strong organic growth in many end markets and have multiple levers to enable further margin expansion.

Our operational performance is generating strong free cash flows and conversion while investing in the business to ensure we are well positioned for the future.

I'm also encouraged by our progress with the business transformation initiatives we've discussed at our Investor Day, particularly given the -- because of the significant opportunity I see in these areas and the future of Honeywell.

Let's be clear.

We have a lot of work to do to execute these initiatives, but I continue to be excited by the energy enthusiasm I see across the employee population to move the ball forward and truly differentiate Honeywell from our competitors.

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

Thanks, Darius.

Darius and Greg are now available to answer your questions.

April, if you could, please open the line for Q&A.

(Operator Instructions) Our first question is coming from Joe Ritchie from Goldman Sachs.

So look, nice quarter.

I guess, the -- obviously, there's going to be a lot of questions around the short-cycle commentary.

I heard you guys say cautious a few times during the prepared comments.

I guess maybe as I think about your business today and the Safety and Productivity Solutions side, maybe talk a little bit more why you expect the destock to last, and what's really driving that through the fourth quarter?

And then secondarily, in that business, the commentary around new major system rollouts being pushed out, I'm just curious whether you guys are seeing any saturation in that market.

Well, let's maybe take that kind of 2 segments.

So number one is we anticipated some level of destocking to occur.

I mean, obviously, the distributor levels weren't supported by the level of business.

So what we've projected for Q3 and Q4 is some level of moderation, but certainly a continuation of the trend in terms of softness in that end market as the destocking continues.

Well, obviously, our plans are a bit better than that, but what I don't want to do is, in the short-cycle business, I don't want to be forecasting too aggressively and then end up disappointing.

So that's kind of what we have baked in, particularly into the Q3 outlook, which is still negative and moderating a bit more into the Q4.

Because one of the things we're trying to really assess -- and how much of this is market and how much of this is us.

I mean, that's still unclear.

Some of the early indications we had that the market is getting softer.

But again, until we see all the data points and several competitors' reports and put all that -- piece all that together, we're really not sure.

For now, we're going to assume it's us because I think I don't want to just say, "Well, it's the market.

So we don't need to do anything." We -- I can tell you we have a very aggressive commercial program to address some of these challenges and to drive business at the end-user level.

The good news here on productivity products is this is not a technology issue.

We actually have very good technologies.

They've been successfully launched most recently in Q2 around our warehouse business and our [TLC], which is our strongest segment.

So I'm very encouraged by that.

So that's really the story on SPS, I should say, on productivity products.

In terms of Intelligrated, it's a very different story.

Intelligrated has been growing by strong double digits like think well north of 20% on average for the last several quarters.

And what's happening there is simply some of the orders that we expected in Q2 got pushed out a little bit.

They're still out there.

We expect to book them in Q3, Q4.

We didn't lose them.

I know that for a fact, and the business is going to continue to grow.

And we're very bullish on the business, so there isn't a greater or different story here.

The business is gaining share.

It's performing extraordinarily well.

We see a little bit of a blip in delay in terms of the order bookings, and that's what we accounted for in our outlook.

Yes, and I would also just add that the aftermarket business, which, as you know, capturing the installed base and then going and mining the aftermarket, is a big part of that whole thesis, is doing terrific.

We're up over 20% on the [LSS] business and have been for multi quarters.

And as you know, that also carries a higher-margin profile.

So I think that part of the playbook is working nicely.

That's helpful to hear.

And obviously, we prefer for you guys to be prudent as your planning assumptions go for the second half of the year, I guess.

I guess, on -- in that vein, right, like you started the year off with roughly 7% organic growth above where your organic guide is for the year, long-cycle backlog still plus 10%, I guess what is then the embedded planning assumption for the short-cycle businesses?

It seems like you're planning for very, very low growth, if any growth, in short cycle in the second half of the year, and maybe what are some of the puts and takes you've got there?

Well, again, Joe, the productivity products one is a big contributor to that, but you're right.

For the remainder of the short-cycle businesses, I would say outside of maybe the Aerospace aftermarket, we're planning for low single digits.

And again, as we've seen that can turn very quickly, so we don't want to get too far out ahead of our skis there.

Yes.

I mean, I think you have it right, Joe.

I mean, it's, I think, LST for short-cycle, think MST to maybe even a touch higher for the longer cycle, depending upon those segments, but that's sort of the rough math.

So the punchline is we are planning somewhat cautiously for the second half because the geopolitical and the economic movements are pretty volatile right now, and what we try to do is we try to guide that somewhat cautiously based on what we're seeing today, and the short cycle is somewhat unpredictable and can turn very quickly.

And our next question is coming from John Inch with Gordon Haskett.

I think, Greg, you had mentioned that you are taking proactive steps for Brexit.

What exactly -- in case there's a hard Brexit, what exactly does that mean?

Does it mean you're sort of...

Yes.

It's really about certifications, John.

Yes, it's really about certifications and making sure that certified bodies in the EU are going to allow the product flow to continue.

So we've been basically recertifying our products with other EU bodies as opposed to the U.K. bodies that we had many of our certifications through.

And that's been an ongoing effort.

And we're substantially complete at this stage, which is very good, and then we're just also setting up additional triage in terms of actual movement of goods in the event we need to do anything special or different in terms of airfreight or premium freight in that sense to get product to flow.

So those are really the 2 things that the teams have been working most closely on.

And you could imagine, too, when you think about that even from our own internal wiring, there's systems changes and so on that need to allow those things to be true for us internally as well.

So that's what the teams have been furiously preparing for, so that we're ready no matter which way this goes.

And then how did Europe and China do as regions?

I remember China was down a little bit last quarter, obviously, given sort of some of the shorter-cycle stuff going on there.

I think Europe was more resilient.

Was -- any sort of real change and change in terms of China and the kind of regional impact like the Malaysia sort of Middle East impact?

Is there anything else that you would call out there?

Yes.

I'll take that one, John.

I mean, I think overall, we were kind of pleased.

I mean, I'll highlight a couple of things.

For example, our PMT bookings in China were around 20% in Q2.

So I mean, some real strengths.

We had some tough comps, think flattish to slightly up for China for Q2, but that's driven by particularly some of the tough comps that we had in PMT.

So I -- overall, I mean, I -- obviously, there's some level of concern for the China economy, but, overall, given the bookings we saw in PMT, that was strong.

Europe stayed strong, think low to mid-single-digit for us, sort of some spotty in places.

Germany was strong, Italy not so much, but overall fairly good growth rate for us.

Middle East was very, very strong.

We're very encouraged by that.

India was up double digit, very strong growth there, LatAm doing well.

So for the most part, we're still seeing pretty good growth around -- across the globe granted China maybe wasn't what it was last year but also not a complete meltdown and move downward.

So overall, we're still encouraged by what we're seeing out there.

Darius, do you feel that the backlog of restructuring projects that you have would be more than sufficient if sort of the cadence of the global economy continues to soften a little bit?

Or would you actually be looking to do more projects?

Obviously, you guys are pretty aggressive in terms of your playbooks historically.

I'm just...

Yes.

Well, I think -- John, I think that's the highlight -- that's maybe one of the highlights of the quarter.

I think we really invested in our future this quarter.

We had some very, very attractive restructuring projects, and we wanted to make sure we fund them because we probably could have delivered even higher EPS result in Q2 if we didn't fund those.

But we thought it was prudent, particularly in this level of economic uncertainty to fund those restructuring projects now, particularly given the kind of paybacks we saw in those.

But the real answer to your question is, I guess, it all depends upon how much of an economic hit we would take.

We're kind of protected to the levels we're forecasting.

If those economic cycles are deeper than that, then obviously we'd have to do more.

So it's a bit of a wild ride as you can see right now with sort of new news items coming every day.

But we do what we do all the time, which is we plan cautiously (technical difficulty) work productivity.

And if the environment is worse than we anticipate, then we're going to take another round of cost actions to offset those.

Yes.

And I mean, just so you know, the repositioning pipeline is a process just like a sales pipeline or an R&D pipeline.

We're working that at all times, so that we are ready when the opportunities present themselves from a funding perspective and obviously as the economic environment moves.

So that's absolutely part of our routine all times.

Our next question comes from Deane Dray with RBC Capital Markets.

Maybe we can follow up on some of Joe's beginning questions on the push-outs that you're seeing.

And so for Intelligrated, the push-outs, are they attributed to anything in particular?

Is it macro uncertainty?

Do you just have any sense of what's driving the delay in capital commitment?

And then similarly, one of your competitors in process has been talking about seeing big project push-outs out of the second quarter into the third and fourth quarter.

I'd be interested if you're seeing some of those dynamics as well.

Yes.

I'm sure -- let's start with Intelligrated.

I'm not sure there's a single cause for that.

Some of these projects are fairly substantial from a capital perspective.

And there's timing around Board meetings and so on, but we have an indication from our customers that these projects will happen.

So I don't anticipate that will result in cancellations.

The timing is always unpredictable on large projects.

We expect some of those to land in Q3.

It wouldn't shock me if they land in Q4, but they're not disappearing, and they're not being canceled.

In terms of the large projects, I mean, PMT had pretty good booking quarters overall.

It was stronger in UOP than it was in HPS.

We're seeing something somewhat similar on the large projects per se.

Those are getting -- sliding to the right a little bit.

But we saw some other strong bookings, particularly on the shorter cycle, some of our services build business, our advanced solutions, our software businesses.

So it's been a bit of a mixed story when it comes to larger projects.

Maybe perhaps those are sliding a little bit to the right, but our backlog grew.

Our bookings were good in PMT, and we anticipate pretty strong second half of the year.

And then across the shorter-cycle portfolio and the softness that you're seeing, are you seeing any competitors beginning to use price as a weapon here to drive some volume?

And take us through the portfolio on where pricing may have seen some of that pressure.

Well, I think all short cycle isn't the same.

I mean, as we look at HBT, I think our short cycles actually stayed fairly strong.

I mean, I think the results speak for themselves.

It's been a really good first half for our HBT business, and we actually are expecting that to continue into Q3.

The business is doing very, very well.

On SPS, it's the productivity products issue that we talked about earlier.

I can't really necessarily point to price.

I mean, as the market is softer, pricing becomes more of a challenge.

Some of that is definitely true, but I don't want to point at competition that this is necessarily any kind of a pricing thing.

I mean, yes, there's greater level of competition when markets get softer, that's true.

We've had -- I mean, we're getting price, and we're getting growth still in the short cycle currently, again, with the exception of the productivity products story.

Yes.

And then as we mentioned in the prepared remarks in the HFC business, that's one place where we're seeing a very specific competitive move going on with some of the illegal imports coming in into Europe.

So that's really the only place that I would highlight as something really visible that we can see competitively.

Yes.

yes.

And we'll take our next question from Scott Davis with Melius Research.

You guys are putting up pretty predictable numbers each quarter.

And it just begs the question, you spent a good chunk of the Investor Day talking about Forge and connectivity and all these interesting things you're working on and also the supply chain stuff.

Is there any way to measure kind of your progress in these areas?

Like, for example, the big margin gains you had this quarter, could you ascribe any of that to supply chain?

Or is that still kind of out there on the come?

Yes, yes.

I think let me start taking this.

I think in terms of a lot of our ISC transformation, I can't -- we are in the -- we're not even in the top of the first.

We're -- I mean, we're just kind of -- we're grabbing the bat at this juncture.

So that's something that you're going to see a lot more pronounced really in 2020 and beyond.

We're just getting started.

So I'm not going to tell you there's a lot attributed to the ISC transformation.

You probably shouldn't expect much until 2020 and beyond.

In terms of Forge and our software play, I think really the best way to measure that business is growth.

That's sort of the single biggest metric I use.

And is it profitable growth?

And I was very pleased with what we're seeing, double digits software growth, margin that's accretive to Honeywell, margin that's very attractive, and we're gaining traction.

We're winning jobs.

We pointed to the large Middle East win that we had, which is very large in scope.

And our customers trust us, so I'm very pleased with the strategic progress we're making.

But our measures are typically financial in nature because you can make yourself feel good by looking at actions, we look at financials.

And especially for Forge and Connected Enterprise, ultimately, we look at the growth rates.

And they've been double digit, which is good, which is around expected.

Yes.

And the other thing, I guess, I would highlight is, internally, we're looking, obviously, at recurring revenue streams and trying to continue to enhance our recurring revenue streams.

So that's something that as we measure the progress in the Connected, that will be one that we watch as well pretty closely.

Okay, makes sense.

And I just have kind of a question about Intelligrated in the sales cycle.

I mean, when you install -- when you do the big project, presumably, there's some sort of warranty period.

I mean, when do you start getting aftermarket from those installs?

It's after the completion and turning over the project over to the user.

Because a lot of times, we'll get the service contract as soon as the job's completed.

I mean, yes, and granted there's some things that are on warranty, but we're trying to have the same approach with the Intelligrated business as we do with our HPS business, where we have these longer cycle, the assurance 360 type of contracts.

And we've had great traction in that, over 20% growth in Q2.

And this -- by the way, this I'm not indicating any kind of a slowdown in this business.

I don't think we can expect the 20-plus percent growth rates that we've seen, but we think that this is going to be a high single digit to double digit growth kind of business.

But what we've seen that although the push-outs of the orders, although disappointing, the good news in the -- and the fact that our strategy is working is this, which is our services business was up over 20%, enabled that, that business to have an accretive margin to what it had last year.

And the strategy we're trying to execute is working.

Unfortunately, we can't control the timing of when these orders land, but I can tell you that they're not due to losses.

Yes.

I mean, just a quick follow-up on that.

I mean, at what point does aftermarket become a bigger piece than the install revenues?

Is it 2 years out, 5 years out?

To be honest, Scott, I hope not for a while, right?

Because that means that our project cycle is slowing.

But it's a bit of a function.

Still the projects business is the predominant component in that business.

So what would have to occur is the services business, they're already growing at over 20%.

The projects business slowed a little bit this past quarter.

I actually hope that we get more of the project, and I think that will happen.

I don't think that this is now the sign of the warehouse automation segment is slowing.

I think that this could be a blip for a quarter or 2. And it will resume, but that's really kind of how things will work is ultimately the projects business will slow down.

I don't think that's necessarily now.

And the [LSS] is going to become a bigger growth component of the business.

We kind of saw a little bit of a preview of that in Q2, but I don't think that's a long-term trend yet.

Our next question is coming from Steve Tusa with JPMorgan.

Just so we're all on the same page here on the SPS thing.

How should we think about kind of absolute profits for the third quarter?

And then I know you guided to something like $1.1 billion or something like that for the year.

Are we kind of just south of $1 billion for the year now when it comes to profitability?

And then just as a follow-up, pretty big miss.

You guys were out that EPG, not too late, but late May.

Did something change significantly in June?

Or was this something that you knew about, but there was enough offset in the rest of the portfolio that you didn't feel the need to call it out?

Yes.

Well, I think, Steve, let me kind of maybe start the second comment, and then I'll turn it over to Greg.

In terms of SPS and more specifically productivity products, I think we called that out both in our Q1 earnings report, and John talked about it at our Investor Day.

I think that we were pretty clear that this is going to be another quarter where we're going to see destocking and some challenges on sort of commercial.

So I think that -- was this a little bit greater than we anticipated?

Yes.

Was -- did we signal it?

I think we did.

And we maybe specifically didn't talked about it at EPG, but we certainly did at our Q1 earnings call, and John talked about it specifically at Investor Day.

So I'm not sure that we're shocked by what we saw.

It's like I said, a little bit more pronounced than we anticipated, but not totally out of whack with our expectations.

Yes.

Then on the profitability front, Steve, I think given the mix of sales that we're seeing in the second quarter, I think it's going to look fairly similar in Q3.

So I would expect margin rates to be in that same range of 11%, 12% type margins in the third quarter.

Fourth quarter should get a little bit better, but that's how we're thinking about it as we exit the second half.

Okay.

So like $225 million to $250 million in the fourth quarter, something to that extent on segment profit?

Yes.

The margin rates are going to be in that, again, similar range.

Okay.

One last quick one.

Just when you guys talk about short cycle, I mean, to me, when I kind of look at the results, commercial aftermarket and some of the shorter-cycle stuff in PMT, -- Building Technologies is perfectly fine.

I mean, you're really -- you're not necessarily talking about like all short cycle.

It seems like it's a kind of an SPS type of dynamic.

And how bad was the kind of scanning and mobility side, the stuff that you compete with Zebra on?

I mean, how negative kind of was that in the quarter?

Yes, I mean -- yes, I think that's right, Steve, this story is really about productivity products.

That was the -- yes, we -- that was what we signaled.

It was a little bit worse than we thought.

It wasn't a good outcome, and it was down for the quarter . So it was a little bit down that -- more down than we thought.

Some of that is my guess, although I want to emphasize I don't know yet because I always assume it's our issue, not a market issue.

I think there was obviously some issues in the market and the market slowing.

We've had some early data points which would indicate that and some commercial execution things that we need to fix as well as really the destocking thing was the biggest factor is, frankly, the inventory levels really exiting 2018 are unsupported by the business levels.

And some of our distributors are taking actions to do that.

So that's really -- it's really kind of the negative story.

It's not -- you're right.

It's not widespread.

It's predominantly limited to one business, which didn't have a great Q2.

Yes.

And that's why you guys planned conservatively for the second half?

That's right, yes.

Yes.

Our next question is coming from Gautam Khanna with Cowen and Company.

(technical difficulty) $1.9 billion of stock in the Q, I think that's a multiyear record or close to it.

Are you still thinking $4 billion repo in the year?

And then also another -- a second question is if you could please just like speak about the M&A pipeline and whether or not you're seeing anything attractive.

I'm sorry.

This is Mark.

Can you restate the question?

We missed the first part of it.

You got cut off in the beginning.

I'm sorry about that.

So my question was related to the stock repurchase.

You bought $1.9 billion in the quarter.

Are you still thinking around $4 billion for the year?

And the second question was if you could just kind of give some color about the M&A pipeline and whether you're seeing anything attractive.

Sure.

So you're right.

$1.9 billion was a fairly healthy amount of repo in the quarter.

I think we're about $2.6 billion on a year-to-date basis, and all of that is still aiming at getting the 1% reduction from year-to-year.

So $4 billion for the year is probably in the right neighborhood of where we'll land.

Obviously, some of that depends on the share price performance for the remainder of the year, but I think that's a reasonable assessment of what the end of the year will look like.

And then as it relates to the M&A pipeline, I mean, we continue to be active.

I wouldn't say we had other quarters we've come in and talked about having things that were right at the 1-yard line that didn't happen.

I don't think we had anything that was quite that close in this particular quarter, but we continue to be very active across all 4 of the businesses.

And then as we've talked about, we're ramping up the activity, particularly in HBT, given the fact that that business is now in a much, much firmer footing.

Okay.

And if I can squeeze one more in here.

What are your -- what are the demand [transact] expectations for PMT in the second half?

Kind of what sort of growth are you looking at for those, for UOP, HBS and Advanced Materials?

I think about that as mid-single digits.

Again, with the backlogs that we have entering the back half of the year, we think mid-single digits is a very reasonable spot for PMT.

And our next question is coming from Jeffrey Sprague with Vertical Research Partners.

So we spent a lot of time on SPS for good reason, but let's talk Aero for a moment.

The margins were extraordinarily strong there, stronger than I might have guessed given the mix.

I know you've got some commercial-like margins in part of your Defense & Space business, but can you give us a little bit more color on what really played out in the margins in the quarter, and how you see the rest of the year playing out there?

Yes.

I mean, I think that's -- that margin growth is really a testament to the execution prowess of the Aerospace team.

And a lot of our strategies are working.

I think sometimes we forget that our software business isn't just in Honeywell Connected Enterprise, it's also in our avionics franchise.

And that group has done a tremendous job in really shifting its focus through RMUs and upgrades, enhancements.

And we saw the benefits in that because it obviously has accretive margin rates.

They've done a great job of driving productivity in the business.

So although this is that ultimate combination, we also want to see which is you drive productivity while getting good growth.

And you really expand the margins.

Obviously, focus on the Connected Enterprise and Connected Aircraft is helping margins as well, good growth on spares.

The BGA market is very, very strong right now, both in terms of OE and aftermarket.

It's a testament to a lot of the great wins we've had on the platforms, but also in supporting our customers on flight.

So overall, and then lastly, but surely importantly, Defense & Space has just been on fire.

And just about any segment you want to look we've been there.

Whether it's helos, whether it's the U.S. international defense, all those segments are doing well.

And I think this is really an important fact, Jeff, that as we look from now through the end of 2020, end of 2020, we have more than 50% of the business already booked.

So we're really in a really nice shape as we look into the future.

Right.

Just back to this China question, I fully understand your position and statement this week as it relates to this.

I wonder if you have seen or how you would kind of keep an eye out for maybe more subtle pressures, not only on you, but, obviously, your -- you would see it in your own business.

But any indication that U.S. or Western companies are just kind of getting a little bit of the cold shoulder around the edges or any other kind of behavioral change in the business that you picked up?

I mean, no, I don't.

And I think as Greg pointed out in his -- I mean, I don't -- and I know we received some interesting press on this subject, but we have seen no indication from the China authorities that there are any sanctions coming our way.

We have received no sanction.

I think I'll point to a couple of things.

Number one is we received our first JetWave order in China, and which is very promising.

I mentioned that PMT bookings in China were very, very strong in Q2.

China is an important market for us.

We play it locally.

We have a lot of manufacturing, a lot of R&D facilities in China.

It's a market that we take great pride in serving local for local, and we expect that to continue.

Our next question is coming from Julian Mitchell with Barclays.

Maybe just a first question around overall cadence of demand in recent months.

Your organic sales growth was 8% in Q1.

It's guided at the midpoint of 3% in Q3.

So a pretty severe slowdown with comps that are not that different.

Aside from what you've talked about in SPS, have you seen any changes in demand in recent months?

Several companies talked about June being materially worse than the rest of Q2.

Just wondered what you've seen recently in that respect.

Yes.

Julian, this is Greg.

We haven't seen any really clear pattern like that across the portfolio that would cause us to say that June is the beginning of a huge slowdown.

So just across the portfolio, I would say the answer is no.

But as Darius mentioned earlier, the portfolio is not one thing.

And so I expect and -- that we're going to see different dynamics across the different parts of the portfolio and across different parts of the globe.

Darius talked about the strength in Europe earlier, and there's a lot of strength there because the Aerospace business is doing particularly well.

And as long as flight hours stay strong, we expect to see Europe continuing to do well there.

The dynamics in China, as we mentioned, are strong on the long-cycle side with the UOP orders.

So we've got very strong backlog in PMT and their short-cycle businesses.

So, so far, the answer, no real pattern down, but it's something we absolutely watch, as you would expect.

Yes.

And just to maybe to add to that, actually, if you look at June, it's -- on a year-over-year organic growth basis, it was our best month.

Now granted you saw some softness in SPS, which was pronounced, and that's why we have a bit more of a cautious guide for Q3.

That's really the reason, is we're not expecting a miraculous turnaround in SPS in Q3.

We -- with some of the softness we saw in June, we actually anticipate may continue, and that's why you see our guide.

But overall, if you look at total Honeywell organic, June, on a year-over-year basis, was actually our best month of the quarter.

Great.

And maybe just picking up on your last point, Darius.

Within SPS, the warehouse and Workflow Solutions piece, revenue growth there was 7% in Q2 after sort of 50% growth in Q1.

What should we expect in the second half in terms of warehouse and Workflow Solutions sales trends specifically?

Do you expect to pick up from Q2 as some of those orders get realized or you're leaving it as a sort of single-digit growth assumption for now?

Yes.

I mean, if you're referring to productivity products, which I think there's kind of 2 different components, we don't expect a major turnaround here in Q3.

Like we said, we still expect that to be negative for Q3 and some level of moderation in Q4.

As it -- when it comes to Intelligrated, we're still expecting high single digit, double digit growth for the year.

Q3 is a little bit dependent upon exactly when we land some of the orders, but think about we're now getting into the tougher and tougher comps, so we're thinking about single digit kind of growth rate for the second half.

But again, just to be clear, that's depending upon when those orders come because we're ready to execute those, and we have every indication that they'll land.

Obviously, getting those sooner in Q3 would be better.

Getting them later or pushed out [to Q4] would be worse.

And that's a little bit tough to predict, but I'm very bullish on our ability to secure those orders when they do land.

That I'm not that concerned about.

The final question is from Josh Pokrzywinski from Morgan Stanley.

Just a couple of, I guess, more cleanups than anything else.

I think we've beaten SPS to death, so hopefully John can take the rest of the day off.

On Aerospace specifically, clearly commercial aero aftermarket doing very well, I want to make sure that there's nothing unsustainable there, particularly as it pertains to the MAX grounding maybe with some of these other older aircraft filling the schedule that aftermarket gets a little bit of boost, and we shouldn't expect all of that to continue.

I know the trend line is good.

I just didn't know if there was a little extra that you got out of the quarter.

Yes.

I would say this.

There's probably a little bit of that of where you had more sort of older aircraft flying vis-à-vis, so -- but that's not going to have the kind of dramatic impact on our results.

So I wouldn't say that that's really the cause and effect.

I think as long as the air miles stay strong, as long as the economy stays in reasonable shape, and people continue to fly business aircraft and buy business aircraft, Defense & Space business, like I said, we're already more than half booked for the next 18 months.

Things can always change.

But overall, we're not -- this is not an area where we're concerned.

And we should have very good visibility to Q3 and Q4.

Obviously, this is a long-cycle business.

Short cycle continues to look strong.

So overall, I don't think that this is some kind of a blip or unusual event here in Q2.

I think this is evidence that our strategies are working and that the aero team is executing.

Got it.

That's helpful.

And then just back on the topic of inventory.

I know that that's clearly driving some of the activity in SPS.

But as you look back on maybe the second half of '18, are there any businesses, that now with the benefit of hindsight, you can say maybe we saw distributors take on more inventory than perhaps they were selling through, and it's something where we're watching a channel here and there that you can share with us or we should keep in mind as we go into the second half?

Yes.

Like you said, hindsight's always 2020.

I mean, I think they have the distributors, to some extent, play the same role we do, is they want to be prepared for good markets and they want to be prepared to sell out products.

So could you say that they took on a bit more inventory than they should have?

Well, yes.

I mean, in hindsight, that's sort of -- that's clearly the case.

And yes, and you're right, we are watching days of inventory.

We are bringing that down.

It came out in Q1.

It came down in Q2.

We're planning to -- begin to come down in Q3 and get it to a much more lower level.

That's really kind of if we want to kind of focus around the punch -- negative punchline of the quarter.

And overall, I think this was a very strong quarter for Honeywell.

But if we want to focus on the negative, which is fair, that's really the punch line, is we've got to get those inventory levels moderated to levels that our distributors are comfortable with.

And we planned that for the first half, got a little bit more to do in Q3, and we'll see around Q4.

Obviously, the variable, we don't know is sales out because if that goes up, then we have less of a problem.

It goes down, well, we'll have more work to do.

So that's sort of -- so short answer is, yes, we're monitoring it, and we're going to have to be very closely watching it here for, well, forever, but certainly for the second half of this year.

And that concludes today's question-and-answer session.

At this time, I would like to turn the conference back to Mr. Darius Adamczyk for any additional closing remarks.

I want to thank our share owners for their trust and support of Honeywell.

We have made great strides in 2019, but we still have a long runway to continue our progress.

We are focused on continuing to outperform for our share owners, our customers and our employees.

This quarter marks the start of a new era for Honeywell in Charlotte, North Carolina, and I could not be more excited about what lies ahead for this company.

Thank you all for listening, and have a wonderful, relaxing and safe rest of the summer.

Take care.

Thank you.

Thank you.

This does conclude today's teleconference.

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