Good day, ladies and gentlemen. Welcome to Honeywell's First Quarter Earnings Conference Call. At this time, all participants have been placed in a listen only mode and the floor will be opened for your questions following the presentation. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's call, Mark Michaeluso, Vice President of Investor Relations.
Thanks, Kathy. Good morning and welcome to Honeywell's Q1 2018 earnings conference call. With me here today are President and CEO, Darius Adamczyk Senior Vice President and Chief Financial Officer, Tom Sloczek. 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 business 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 affect our performance in our annual report on Form 10 ks and other SEC filings. For this call, references to earnings per share, free cash flow and effective tax rate exclude impacts from separation costs related to the upcoming spin off of our Homes and Transportation Systems business along with recent tax legislation. This morning, we will review our financial results for the Q1 of 2018, share our guidance for the Q2 and provide an update to our 2018 outlook. As always, we'll leave time for your questions at the end.
So with that, let me turn the call over to President and CEO, Darius Adamczyk.
Thank you, Mark, and good morning, everyone. Honeywell had a very strong start to 2018 with 1st quarter earnings per share of $1.95 up 14% year over year, exceeding the high end of our guidance range by $0.02 Our earnings this quarter were driven by organic sales growth of 5%. The growth was strong across the portfolio, particularly in Aerospace, SPS Warehouse Automation and the PMT Process Automation businesses. We expect this momentum to continue throughout the year. Our long cycle orders were up 35% and our long cycle backlog was up double digits with particular strength in Intelligrated, Aerospace and UOP.
I will touch on our revised full year guidance in a minute. Operational performance was also strong as evidenced by the 40 basis points of margin expansion and nearly 30% growth in free cash flow. We benefited from our continued investments in commercial excellence together with material productivity and volume leverage. The margin expansion will win our guide and in line of our long term target of 30 basis points to 50 basis points expansion per year. Free cash flow in the quarter was about $1,000,000,000 The 30% growth follows an exceptionally strong Q1 of 2017 where free cash flow was up more than 500%, so the cash performance is even more noteworthy.
And yet, we believe there is even more improvement ahead, driven by our company wide initiative on cash and working capital. Finally, on Q1, we continue to aggressively deploy capital, repurchasing nearly $950,000,000 in Honeywell shares. We are also tracking well with the cash repatriation plan we reviewed at our Investor Day in February, which contemplate more than $4,000,000,000 of cash being repatriated in 2018. Today, we're raising our full year 2018 organic sales growth guidance to a new range of 3% to 5%. Our EPS guidance to a new range of $7.85 to $8.05 and our free cash flow guidance by $100,000,000 Compared to prior range, our EPS guidance now $0.10 higher at the low end and $0.05 higher at the high end.
These changes reflect both our exceptional first quarter performance and our confidence in our company's ability to continue outperforming for the remainder of 2018. Our end markets are strong. We are experiencing robust commercial activity. We are executing well as evidenced by our margin and cash performance and we have significant balance sheet capacity to deploy. In summary, an exciting start to what we expect to be a very strong year.
Let's turn to Slide 3 to highlight some of the recent news from our businesses. In Aerospace, we signed 3 contracts with Singapore Airlines Group to provide the latest Honeywell Technologies and Solutions to help improve operational capabilities for Singapore Airlines, SilkAir and Scoot. The agreements include a variety of services and equipment including weather radar, navigation systems, auxiliary power units, predictive maintenance technologies and a 20 fourseven engineering and maintenance support. Additionally, Singapore Airlines Group and Honeywell signed a memorandum of understanding to jointly work to implement Honeywell's connected aircraft technologies to reduce operational risk, improve efficiency and maximize aircraft performance. As a result of the agreement, the family of airlines will receive better and more predictive maintenance services that will reduce mechanical delays and cancellations and through connectivity and analytics, flying will be more efficient and cost effective.
We are seeing significant demand for our customers for connected aircraft offerings and we continue lead the industry when it comes to innovation in this area. In Home and Building Technologies, we launched the Incom E7 thermostat for hotels, a new connected building offering.
This is
the 1st enterprise grade environmental control and energy management solution that incorporates Amazon Alexa voice control for temperature, lighting, drapery and amenity functions. Honeywell's income hospitality solutions are using more than 1,500,000 guestrooms around the world. In Performance Materials and Technologies, we introduced a cloud based simulation tool that use the combination of augmented reality and virtual reality to train plant personnel on critical industrial work activities. With more than 50% of the oil and gas workforce due to retire over the next 5 years, the Honeywell Connected Plant Skills Insight Immersive Conference tool is designed to bring new industrial workers up to speed quickly by enhancing training and delivering it in new and contemporary ways. An upstream oil and gas customer in Europe is already using this solution to improve the productivity and skill set of its employees.
In safety and productivity solutions, we launched the Dolphin CN80 ultra rugged handheld computer for demanding environments, such as distribution centers and parcel delivery. The CN-eighty is the latest device to run on Honeywell's Android Space Mobility Edge platform, which is composed of common software and hardware architecture and a suite of device tools. The scalable architecture allows customers to develop, test and certify applications just once before deploying it to multiple device types across the enterprise, allowing companies to accelerate deployments, optimize device performance and extend the total product lifecycle with the objective of lowering the total cost of ownership. We launched the 1st mobility edge device late last year, the Dolphin City E60 for transportation logistics and direct store delivery. And we will launch 2 additional mobility edge devices for a variety of markets later this year.
There has been significant demand for our Android based products and we expect to see the impact of our new launches in our 2nd quarter results. The final highlight is a new environmental commitment we made in China to reduce China specific greenhouse gas emissions for our facilities by 10% per dollar of revenue from 2016 levels by 2022. We have voluntarily implemented more than 100 energy efficiency projects at our sites in China since 2011. Globally, we have reduced Honeywell's greenhouse gas intensity by more than 65% between 2,0042017. And increased our energy efficiency by 60% in the same timeframe.
By 2019, we'll reduce our global greenhouse gas emissions by an additional 10% per dollar of revenue from our 2013 levels. Since 2010, we've implemented more than 3,600 energy efficiency and water conservation projects. We are proud of our environmental, social and governance track record and are committed to continued excellence in this area. With that, I'd like to turn
the call over to Tom, who'll discuss our results in more detail. Thanks, Darius. Good morning. I'm on Slide 4. As Darius mentioned, we had a very strong start to 2018 reported sales up 9%, organic sales up 5% in the quarter.
The markets we serve generally are strong, but our continued organic sales growth also reflects our strong market positions and the investments we've made in the sales organization and in new product introductions. The difference between reported and organic sales is primarily the impact of foreign currency translation mainly related to the euro. Segment profit was up 12% in the quarter and segment margin expanded by 40 basis points to 19.2%, primarily due to the benefits from material productivity, commercial excellence, volume leverage on higher sales and benefits from previously funded and completed restructuring projects. Earnings per share exceeding the high end of our guidance range by $0.02 This excludes spin related separation costs of about $55,000,000 in the quarter. We'll walk through the details of our EPS performance in a second.
Free cash flow in the quarter of $1,000,000,000 was up 30%, driven by strong operational performance, particularly in HBT and Safety and Productivity Solutions. As Darius mentioned, we're still in the early stages of our working capital initiatives, but we're encouraged by our progress and by the additional opportunities that are emerging from the enterprise wide focus we have in this area. We continue to deploy capital and in the quarter repurchased nearly 950,000,000 dollars worth of Honeywell shares. After growth investments and paying a competitive dividend, our preference is to deploy capital to M and A. But in the absence of immediate opportunities, we'll continue to opportunistically repurchase outstanding shares.
Q1 certainly presented ample opportunities given the pricing level and our general positive outlook on the growth of the company. Overall, we're pleased with the start to the year with robust sales growth and high quality earnings. Slide 5 walks our earnings per share from the Q1 of 2017 to the Q1 of 2018. The preponderance of our earnings growth $0.21 came from segment profit improvement driven by enhanced sales growth across the company, the impacts from our commercial excellence efforts, productivity improvements realized through HOS Gold and savings from previously funded and completed restructuring projects. Below the line items were a $0.03 tailwind this quarter, primarily due to higher pension income reflective of strong performance of the assets in our pension plan and lower discount rates.
As a reminder, our U. S. Pension plan is approximately 110% funded and we announced in February that we modified the asset allocation in our fund, shifting our plan assets to comprise about 50% fixed income type investments, up from 20% previously. This change will not affect 2018 pension income. We do expect a reduction to 2019 pension income, but anticipate being able to overcome the impact due to our profit growth prospects.
Therefore, this is not expected to be an EPS headwind for 2019. Our effective tax rate in the quarter was 23.6% versus 22.7% in the Q1 of 2017. Our estimated rate for the full year remains in the 22% to 23% range and most of the tailwinds coming from the tax reform legislation will be in the second half of twenty eighteen. In February, I spoke about how the recent U. S.
Tax reform would impact Honeywell. The $3,800,000,000 provisional charge we recorded in the Q4 of 2017 is still subject to revision throughout the course of 2018, but there was no adjustment to that amount in the Q1. We still expect to repatriate approximately $7,000,000,000 of overseas cash by the end of 2019 with at least $4,000,000,000 of that coming in 20 18 as Darius said earlier. There continues to be a regular flow of guidance and clarification in this area, which could result in changes to the provisional charge, the effective rate and the timing of the repatriation. We'll continue to update you on any material changes that arise.
To close out the walk, other items including the lower share count from our share repurchase activity and non controlling interest were a $0.02 benefit versus the Q1 of 2017. Let's turn to Slide 6. As you'll recall, we changed the HBT organization structure to segregate the Homes business from the rest of the portfolio that will remain with Honeywell after the spin off. Buildings is roughly a $5,300,000,000 business, so just over half of the HBT portfolio and includes building products like fire controls, commercial security and air and water filtration products. Connected buildings includes our controls and integrated software for commercial HVAC and building management.
Building Solutions includes our integrated hardware, software, installation and service offerings for more complex buildings and structures. Homes is roughly a $4,500,000,000 business that comprises comfort and care including our residential thermostats and HVAC controls. Safety and security which includes the residential components of our former security business and distribution which is the global ADI business. You'll see the sales from the homes and building businesses separately presented in our filings beginning this quarter. Let's turn to Slide 7 to discuss our segment results for the quarter.
Beginning with Aerospace, sales were up 8% on an organic basis led by commercial OE where growth in both air transport and business aviation was nearly double digit, driven by robust deliveries on key platforms, including the A320, Boeing 737 and Bombardier Challenger 350. We're on winning platforms and continue to expand As Tim As Tim mentioned at our Investor Day in February, we're beginning to see the business aviation OE market recover. Our winning positions across engines, APUs and avionics will benefit us in the anticipated upturn. In defense, we achieved close to 20% growth in U. S.
Defense driven by higher sensors and guidance systems and engines demand and sales of engines and avionic spares into Army and Navy programs. Transportation systems grew 7% organically driven by demand for light vehicle gas and commercial vehicle turbos, particularly in North America and in China. Organic growth in commercial aftermarket of 4% was driven primarily by strong R and O demand and another quarter of double digit growth for our JetWave satellite communications hardware, partially offset by delayed spare shipments. For the full year, we expect aftermarket organic sales growth in the low to mid single digits range. Aerospace sales were up 12% on a reported basis with the difference between the organic sales growth resulting from foreign exchange fluctuations, which was a 3 point impact and the adoption of the new revenue recognition accounting standard which was a 1 point impact.
We anticipate that the revenue recognition impact will be immaterial for the full year. Aerospace segment profit was up 12% and segment margin expanded 10 basis points. We continue to see the benefits from the Honeywell initiatives to drive productivity and commercial excellence and we incurred slightly lower customer incentives. But this was largely offset by higher volumes of lower margin OE shipments, inflation and foreign exchange. It's also noteworthy we expanded margins 90 basis points in the Q1 of 2017 generating significant productivity and repositioning benefits on flat organic sales.
We're pleased with the installed base growth in aerospace resulting from the pickup in OEM volumes and expect that margin expansion will improve sequentially throughout the year. In Home and Building Technologies, organic sales growth was 2% for the quarter. Homes grew 6% driven by double digit growth in residential thermal solutions and robust demand for thermostats in North America. Sales grew across all regions in ADI driven by commercial excellence, new product introductions and demand in India and in Europe. In the buildings business, organic sales growth was flat year over year.
The legacy building solutions business grew 4% driven by backlog conversion in the energy vertical and strong demand in high growth regions but was partially offset in buildings products as a result of lower seasonal demand for air and water products in China and some temporary supply chain challenges within the buildings products business. HBT segment margins expanded 50 basis points driven by commercial excellence, the benefits from previously funded and completed restructuring and material productivity. In Performance Materials and Technology, sales were up 3% on an organic basis driven by growth in Process Solutions and in UOP. Sales in HPS were up 4% organically with solid growth globally in thermal solutions and strong demand for gas and electricity meters in EMEA. Short cycle demand was also strong in the HPS aftermarket and field instrumentation businesses.
UOP sales were up 3% driven by robust engineering and catalyst growth in both refining and petrochemicals, the latter being driven by new units in China. In Advanced Materials, continued customer adoption of our broad range of Solstice low global warming products drove growth. The strong orders growth throughout PMT and the UOP long cycle backlog growth is fueling our expectations for continued PMT sales growth. PMT segment margin was flat year over year, benefits from previously funded restructuring, productivity, net of inflation and commercial excellence were offset by unfavorable mix. The timing of catalyst shipments at the end of the quarter in UOP and in foreign exchange.
In Safety and Productivity Solutions, sales were up 6% on an organic basis, primarily driven by double digit sales growth at Intelligrated for major new systems. Orders growth at Intelligrated this quarter was extraordinary and contributed to the long cycle backlog improvement I mentioned earlier. SPS also experienced higher volumes in sensing and scanning products with strong demand in India and China. We were encouraged by the orders momentum stemming from the launch of our first Mobility Edge Android product offering. We expect to see an improvement in mobility sales in subsequent quarters as the remainder of the Mobility Edge products that Darius mentioned earlier are launched.
Similar to the 4th quarter, the robust volume growth and ongoing productivity efforts in SPS enabled 130 basis points of segment margin expansion. Before we get into our Q2 and full year outlook, I wanted to provide some information on how the recently announced tariffs will affect Honeywell, as well as the proactive actions we're taking to address these items. So I'm on Page 8. Regarding the Section 232 steel and aluminum tariffs based on what has been enacted as of today, our exposure is relatively minimal, less than $10,000,000,000 of gross tariff impact. Our direct Tier 1 and indirect Tier 2 spend in these categories across Honeywell is small and the imported portion of that spend is even smaller.
The more significant impact is the secondary effect from the price inflation on non imported steel and aluminum. Here we put in place aggressive mitigation strategies that largely offset any impact to Honeywell. Regarding the China tariffs, this is clearly a fluid situation. We continue to assess our exposure while also actively developing mitigation plans. The proposed tariffs did not take effect until May and the U.
S. And China intend to negotiate in the interim. We suspect the scope of impacted products and tariffs is likely to change, but we'll be prepared either way and update you as we learn more. As Derik mentioned, the impacts of anything that has been enacted as of today, so the Section 232 tariffs has been considered in our full year outlook. I'll cover the expectations for the Q2 on Slide 9.
We exited the Q1 with strong order rates and backlogs which we expect will drive strong organic sales growth in the range of 3% to 4%. In the 2nd quarter, segment margins are expected to expand 30 basis points to 50 basis points driven by increased volumes, commercial excellence and productivity net of inflation leading to earnings per share of $1.97 to $2.03 or growth of 9% to 13%. We expect that our 2nd quarter tax rate will approximate 24% and continue to expect that our full year tax rate will be between 22% 23%. Consistent with our previous communications guidance for the 2nd quarter and the full year excludes costs related to homes and transportation systems spin offs as well as adjustments if any to last year's provisional charge related to the tax reform legislation. In Aerospace, we expect continued strength in commercial aviation original equipment sales.
On the air transport and regional side, growth will be driven by demand for the Boeing 737 and A318 and A320. We also expect continued growth in business in general aviation as the oversupply of used aircraft continues to subside, OE new platform certifications are attained and mandates continue to come into effect. Within the aftermarket, we expect strong repair and overhaul demand driven by flight hour growth in both ATR and Business Aviation. We anticipate continued double digit growth in the defense business with robust spares volume both in the U. S.
And internationally, F-thirty five demand and growth in sensors and guidance products. Within Transportation Systems, we expect similar dynamics as the Q1 that is strong gas turbo demand in China and the U. S. And continued growth in commercial vehicles. In Home and Building Technologies, we anticipate continued growth in Home's products driven by strong demand for thermostats and residential thermal solutions and continued strength in ADI globally as a result of commercial excellence and high growth region efforts in that business.
On the building side of the business, strong orders exiting the Q1 point to robust demand for building products, particularly commercial fire products and we expect continued momentum in building solutions. In Performance Materials and Technologies, the 2nd quarter dynamics are expected to be similar to those of the Q1. In UOP, we expect growth across all businesses, including strength in licensing and equipment, catalyst demand driven by new units and reloads in China and gas processing and hydrogen backlog conversion. Exiting the Q1, our order rates were up double digit for smart energy and thermal solutions and process solutions, which will drive continued demand for those products in the Q2. In Advanced Materials, we expect continued customer adoption of our Solstice low global warming products for applications like supermarket refrigeration, aerosols and foam insulation in addition to ongoing momentum in Solstice Mobile Air Conditioning.
2nd quarter margin performance in PMT will be driven by similar forces in the Q1 with benefits from productivity, increased volumes and commercial excellence, partially offset by the mix of higher equipment and engineering growth, sales of lower margin catalyst and higher installation services revenue within the gas processing business. Our PMT installed base is large and continues to grow. UOP backlog is up more than 15% putting us in a really great position which will drive strong future profitable growth as these projects enter into our serviceable installed base. In Safety and Productivity Solutions, we anticipate continued double digit growth in Intelligrated building off strong orders and long cycle backlog from the Q1. Safety will also be strong significant demand for gas detection and high risk safety products.
Within the productivity business, we expect continued demand for legacy sensing products building on strong first quarter orders growth in that business. Additionally, our new Android based product launches are starting to drive growth. I'll move to Slide 10 to cover our revised full year guidance. We've updated our full year sales, earnings per share and free cash flow guidance to reflect our stronger than expected performance in the Q1 as well as our confidence in the outlook for the remainder of 2018. Our revised guidance incorporates the impacts of enacted new U.
S. Tariffs for steel and aluminum. As I discussed previously, we expect to fully mitigate the effect of the steel and aluminum tariffs in each business unit. We're also working through plans to address the impact if any from other potential tariffs that have been announced but not enacted. Full year organic sales now expected to be up 3% to 5%.
This is driven by favorable conditions in our end markets, our emphasis on organic growth initiatives like commercial excellence and continued penetration in high growth regions along with robust long cycle orders and backlogs. On a segment level, we now expect Aerospace organic sales to be up 3% to 5% versus a previous range of 1% to 3 driven by an improved commercial OE outlook, particularly in Business Aviation and strong demand within our U. S. Defense business. The organic growth rate and margin outlooks for all other segments are unchanged.
We have updated the reported figures to reflect the anticipated continued tailwind from foreign currency translation. Our second margin estimates for the full year remain unchanged. We raised the low end of our free cash flow guidance by $100,000,000 and continue to target free cash flow growth of more than 20% driven by higher net income, lower CapEx and better working capital performance in all of our businesses. Our estimated full year effective tax rate continues to be between 22% and 23% and our guidance is planned at the higher end of that range. As Darius mentioned, we also raised our full year EPS guidance by $0.10 on the low end and $0.05 on the high end.
The new range of $7.85 to $8.05 represents earnings growth of 10% to 13%. Our guidance reflects a revised weighted average share count of 758,000,000 shares, which is approximately which is down approximately 2% from 2017 and does not reflect additional share repurchases that might occur over the remaining course of 2018. Let me wrap up on Slide 11. The Q1 was an outstanding start to 2018, 5% organic sales growth, 14% earnings growth, 30% free cash flow growth and impactful connected product launches across the portfolio. We expect the momentum to continue.
We've got strong order rates and a growing backlog as we begin the Q2. Our Q2 EPS guide of 1.97 to $2.03 reflects that momentum. We raised our full year guidance to reflect our performance and the positive macro environment in many of our end markets and continue to be well positioned for outperformance in 2018. The preparation for our 2 spin offs, homes and transportation systems continues and we're on track for their timely completion. So with that, Mark, let's move to Q and A.
Thanks, Tom. Darius and Tom are now available to answer your questions. So Kathy, if you could, please open the line for Q and A.
Certainly. Thank you. The floor is now open for questions. Our first question will come from Steve Tusa of JPMorgan.
Good morning, Steve.
Can you just walk through the kind of as you look at the second half, some of the puts and takes in some of the businesses that will either accelerate or decelerate. I mean, I think this quarter was obviously good organic growth. It was a little bit bifurcated with some doing well and some more in
the low single digits.
Maybe if you could talk about some of the sub segments that move around in the back half of the year?
Sure. I can start and then turn it over to Tom. I mean I think overall kind of at the summary notice we're pretty fairly bullish on all the segments. Obviously, aero started off the year very, very strong from top line growth rate. We anticipate that mix to change a bit more between OE and aftermarket.
So that might temper the growth rate at top level, but nevertheless should improve margin performance. In terms of PMT, we see acceleration clearly in the second half of the year, particularly in HPS and UOP, especially given the kind of order rates that we've seen and also a much more favorable mix going forward. HPT, a very solid quarter. We expect that one to kind of remain steady for the year. We don't see sort of any major changes versus the kind of run rates we've seen.
And then SPS, I think that one, the growth rates there we anticipate to be similar if not higher going forward. Certainly even more upsides from Intelligrated further recovery from the productivity products business and safety. So overall kind of flat to down. So that's sort of at a higher level. Tom, if you want to just go ahead and
answer that. Yes. No, I mean the only thing I'd add is that's a good summary. The strong performance in the Q1 across the board, I think aerospace in particular was the one that gave us more lift than we had anticipated and that's the reason we're principally raising the guide for sales growth for the rest of the year. Most of the other three businesses, the growth guidance is the same.
And then margin guidance for each of the business relatively similar to what we had guided previously.
And aero is the commercial aero OE drivers, is that was that large commercial or was that beginning to see some of the bizjet pick up?
It's both. We've got close to double digit growth in both of the segments.
Okay. And then one last one, Darius, acquisition pipeline, any change in your view there? There was some buzz about perhaps a big catalyst deal. How do you view the catalyst space? It's not obviously a software related asset, but is it something that obviously you guys continue to find attractive or is it would you rather focus your acquisition dollars on more software specific assets, connected assets?
Yes.
I would say the pipeline continues to be robust. I wouldn't believe everything you read, Steve. But I think overall, as we look at our UOP business, that's one of our that's one
of the best businesses we have
in the portfolio and anything can do to complement and augment it, it's probably something that would certainly deserve a look. But overall, I mean, I think you saw we deployed capital in Q1. I thought the stock was a deal at $165 a share in the low 140s it becomes an absolute no brainer. So we did deploy capital bit more aggressively in Q1 than we anticipated given the opportunistic market that presented itself. But I will tell you that we're very aggressively looking at potential M and A and we expect something to happen here hopefully in the next quarter or 2.
Our next question will come from Ghansham Khanna of Cowen and Company.
Yes. Thank you, guys. Just to follow-up on that last question. I was hoping you could expand upon what types of maybe acquisition sizes you're seeing out there? What would be a reasonable expectation this year in terms of how much capital you may deploy for acquisitions?
I know it's hard to tell, but
any more color on the pipeline? I think there's so many factors involved here that it's to say this kind of size and this kind of size, it's all depends what the opportunities are. I think I've stated before and I'll stay consistent that our preference is for bolt on acquisitions. So roughly in that $3,000,000,000 or less zip code purchase price that's sort of a rough figure, but that's kind of what I'd expect and based on the pipeline and based on what we see in there, I'm still fairly confident that figure. So that's kind of my expectations.
I don't anticipate any sort of mega deals out there. I don't see that happening. So kind of expect something $3,000,000,000 or less in that kind of range.
And one follow-up. Darius, in the past you've talked about how portfolio review is going to be kind of an iterative process. You obviously have the spins. I'm just curious, I mean, are there other things in the portfolio that as you learn more about maybe don't fit or I'm just curious how evolutionary is this process or do you basically have what you need?
No, no, no, it's definitely no, it's going to we look at that a couple of times a year, at least a couple of times a year, if not more. So we're continuously looking at the deep dive of our portfolio. Our internal strategic planning period is in July. So as you can imagine, it's going to be another full review and we do that 2, 3 times a year. So as I mentioned last year, the portfolio is always going to be evolving.
We're always going to be making it better and kind of adding to the top, subtracting from the bottom businesses that we don't classify as Honeywell businesses that may be fantastic businesses in their own right, but frankly don't fit the Honeywell portfolio. So I expect that kind of a top grading process and a fit what is a Honeywell business to continue. Not by the way, not that there's anything imminent, but you should expect us to continue to review our portfolio.
Thank you, guys. Appreciate it.
Thank you.
We will now move to Julian Mitchell of Barclays.
Thank you very much. My first question really around the segment margin guide. So Q1 was up about 40 bps. I think the top end of the 2nd quarter margin guide is up 50 bps. And you've got the full year at the top end up around 60 bps.
So I guess aviation or aerospace, I can understand you've got the mix headwinds maybe abating as you go through the year in terms of OE versus aftermarket. But I just wondered if there was anything else you'd call out either within Aerospace or other segments like inflation or currency impacts on margin that you think will reverse?
No, I don't think there is any major changes from what we talked about in the original guide. I mean, we are seeing a little bit more inflation, but I think we're able to offset that through our productivity initiatives. And mix wise, it isn't really much of a different dynamic except as I said for Aerospace. We've got a bit heavier on the OE side and within the Defense business we've got a different mix on platforms. But other than that we're pretty much in line with what we had guided.
Understood. And the cadence on productivity savings and so on is fairly smooth through the year?
Yes, pretty much. It is.
I think I would the other thing I
would just point out, Julien, is that this kind of a revenue beat, we still came in right dead center over a range on margin expansion. That's not that easy to do, right? When you beat revenue, generally there is you take some hit in terms of margin expansion. And we did both. We beat revenue and stayed very much bull's eye on exactly what we said we're going to do on margin expansion.
So I think that that's a good set of facts.
Understood. And then my follow-up would just be around process. I think you called out good short cycle demand, areas Process Solutions in Process Solutions in terms of orders and quoting activity at customers?
Yes. We're actually bullish on the second half, especially as we look at our order pipeline and some of the mega deals that we haven't seen in a while. It's actually the order pipeline looks very robust and we actually expect an improvement in terms of some of the potential larger deals in the second half of this year. So we remain very much remain bullish on the process business with continued growth and we anticipate securing some of those larger mega deals in the second half of this year.
The other thing I'd mention, Julien, is the when you look at process, you see the impact of the growth in the installed base because the service bank continues to grow nicely for us. And it's pushing double digits in terms of the backlog of ServiceBank. So we're really encouraged by continued investments in projects that build out that installed base and give us that momentum going forward.
Thank you very much.
Thanks, Julien. Thank you.
Our next question will come from Jeffrey Sprague Vertical Research Partners.
Thank you. Good morning, everybody.
Hey, Jeff. Good morning, Jeff.
Hey. Just a couple of
things on my mind. First, just
on the cost and on the tariff situation.
Was there a particular reason you called out UOP as it risks the Chinese retaliation,
why that and not possibly other areas of Honeywell in China?
Yes, I mean, when you look at the well, first of all, on the aluminum and steel, I mean, we're not a heavy metal company. It's we're not we're technology, so not a lot of steel and aluminum. But when you look at the tariffs that are country specific, those don't tend to distinguish between commodities. And in our case, there's a fair amount of activity in UOP around catalyst technology and equipment that flows between the two countries. And that's one we're watching closely.
We've got some fairly good contingency plans that we're developing and are in place. So we're not counting on this just evaporating going away. Some involve changes to the supply chain, some involve acceleration, some involve working with our customers on different outcomes. But rest assured Rajeev and Rebecca, Darius all very much focused on how to deal with the impacts.
Yes. And I think the other thing, Jeffrey, just to point out is that a lot of this stuff has not actually been enacted yet.
But nevertheless, we want to make
sure we're prepared. So through a combination of shifting of the supply chains, alternative supply chains, value capture, all those elements. We want to make sure that we're prepared and also offering comment to a lot of the proposed tariffs. So we're kind of working this one on many, many fronts to make sure that we don't get caught flat footed.
And then just a couple other quick ones. Just on cash flow, Tom, I think you said you're driving towards 20 plus obviously your range is I think 7 to 20. So it sounds like you've got some confidence or visibility in that. What needs to happen to get to the upper end of the cash flow range?
I think we need to do more of what we did in the Q1. Actually, the what was really nice about the Q1 was that our working capital was about when you look at our statement cash flows, you'll see the amounts we put in the working capital were identical year over year despite the significant growth that we had on the top line. So we're managing that well. And I think if we can continue to do that, we'll be in good shape. The other thing that, of course, is helping us is we've moderated our CapEx spend.
I think our CapEx spend in the quarter was down probably $30,000,000 or so year over year. So between those two factors and the good volume, I think we are on that trajectory that you referred to. And then just quickly,
I understand all the mix effects going on
to narrow, but I was
a little surprised you said you
see aftermarket only growing low to mid singles this year. The RPMs
and other data would suggest it should be better than that. Is there anything unusual going on there for you? And I'll pass the floor. Thanks.
No, Jeff, I don't think so. I mean for us the there certainly is a fair amount of new installed base getting built out and you have some of the older models that would drive good service bank and good service business coming out of service actually. So and while the new installed base is under warranty, you tend to see a little bit lower revenues on the service side. But overall the bolt on spares and R and O O, the demand is pretty healthy. And hopefully we'll continue to drive an accelerated growth over the 4% that we had in the Q1.
And yet one other maybe fact to point out Jeff is that we're also driving much more service contracts rather than break fix events. And we just feel that that's the right way to operate with our customers. So we probably will have a little bit less cyclicality than some of the others, because we want to drive a much more consistent revenue stream rather than kind of a break and fix approach. And I think it's one that we've done in a lot of our other businesses, which really aligns our objectives, which is greater durability, better reliability of those of the customers rather than the opposite. So that's also a factor here.
And Tim and his team are driving a lot of service contracts, both around the connected aircraft as well as the service agreements.
Thank you.
And our next question will come from Andrew Kaplowitz of Citi.
Hey, good morning, guys.
Hey, good morning, Andrew.
Darius or Tom, Aero Service, you just mentioned, obviously, a little slower, but Aerospace organic growth has been accelerating every quarter for over a year now, as you know. And Business Jets and U. S. Defense spending both look like they could further accelerate. So what really is holding you back from recording mid to even high single digit organic growth for the year?
Is it just more difficult second half comparisons, maybe still a little in your forecast?
Well, I mean, I think obviously we did bump it up this quarter. Overall, we bumped up the guide on the revenue for the year after 1 quarter. And we're going to see how it goes, provided we continue to see these kinds of booking rates, these kinds of growth rates, there may be further opportunity in the second half of the year. It's 1 quarter in and although I'm extraordinarily optimistic both on the aerospace prospects as well as the broader Honeywell, I also have to note is 1 quarter. So as we continue to see the business progress, potentially there could be more upside in the second half of the year, but we'll see.
Dares, you mentioned long cycle backlog of the company was up double digits, which is really good to see. It doesn't seem like you've had any recent erosion in your short cycle business, but maybe could you address that? Have you seen anything in March April with the sort of increase in rhetoric around protectionism or has it just been steady as you go for the company here?
It's been a bit steady as we go. I mean March was actually a very, very strong month for us. January was a little bit slower on the short cycle business. So it's a little bit difficult for me to develop a trend here. And most of the tariff and trade protectionism announcements have been March April.
So impact if any is not yet to be felt. We're April seems pretty reasonable based on what we see so far. So we're not seeing major impact yet. But I also think it's really important as I pointed out Jeff that we're prepared and we take appropriate actions to mitigate any potential enactment of the tariffs. So, so far so good, but we don't know what we don't know.
And clearly, the geopolitical environment today is different than it was 3 months ago. And probably we don't know more today than 3 months ago.
And as of now China is quite resilient right growth high single digits, low double digits something like that?
Yes. No, China growth over in Q1 was north of 20%. So, I was actually a little bit more worried about China for this year, but based on Q1 and that's coupled in Q1 with not a particularly great air and water quarter. And even our the kind of positions that we enjoy in China and certainly the kind of growth that we continue to experience.
Thanks, Darrin.
Thank you. Thank you.
And we will now go to Scott Davis of Melius Research.
Hi, good morning, guys.
Good morning, Chuck.
You just talked about China, but can we walk around the rest
of the world a little
bit more on both the current quarter and what your outlook is?
Yes. Sure, Scott. So I think in general, our overall high growth regions was high single digit. So right about where we were planning. I would tell you China was a highlight growing north of 20%.
India was a little bit slower think mid single digit. That was a bit of a surprise. We expect that to recover in the rest of the year. Middle East, we're seeing some uptick in activity, think about mid single digit there as well. In terms of probably some of our challenges and it continues to be a little bit of a challenge is Latin America, namely Brazil, that we don't see much of a recovery.
The election later this year and hopefully continue to see some stability, but I would say that's a challenge. Solid growth both in North America and Europe, so that good level of growth continues there. And overall, fairly steady and consistent growth profile with the exception of Brazil, which continues to be a challenge.
And just on India, Darius mentioned it was a little disappointing, but 3 of the 4 businesses were actually double digits. PMT had some timing on some projects that will push out into the second quarter, Q3, Q4. So I think I would expect that India overall composite growth number to improve sequentially over the course of the rest of the year.
Okay, helpful. And just back to there has been 2 questions now on M and A and I just I wanted to just dig into one thing. I mean, when you think about the Analyst Day, there was a lot of, I think, Darius, since you took over big commerce or big focus on connected products. And when we hear the rumors out there, potential deals and such, what how important is doing or building a portfolio from here that has that thematically and some component at least of IoT?
Yes, I think it's important. But if you really take a look at the criteria of what's the Honeywell business and what I look for, nowhere does it say it has to be connected, it has to have an IoT component. That's actually not one of the criteria. What about the only thing I do say is that I like less cyclical rather than more cyclical. But I don't think that that's a requirement, obviously something that we would clearly look at.
But if we take a look at businesses that are less susceptible to disruption, where we see good growth vectors, which are well aligned to megatrends, tougher to disrupt, steady growing rather than highly cyclical. They don't necessarily have to be IIoT related for us to have an interest. So clearly those have an interest, but so do technology businesses that don't necessarily have an IIoT orientation.
Okay. Good clarification. Thanks guys. Good luck.
Thanks guys. Thanks guys. Thanks guys.
And we now have a question from Peter Arment of Baird.
Thanks. Good morning, Dara, Tom. Good morning, Peter. Hey, Tom. A quick one on just bizjet activity because it's been a while before we've seen this kind of, I guess, more upbeat around the biz jets.
And I know you've got some new launches this year, so I would expect the OE to be up. But what are you seeing on just the kind of the aftermarket side? And is this really, I think, a new upturn that we're finally seeing?
Well, on the OE you mean on the OE side, Peter, or the
Yes, on the OE, but I mean also just what you're seeing also on the aftermarket?
No, I think the I mean you can read all the stuff that we read about used jet inventory and the prices and so forth. That clearly is a favorable factor for us. But I think the biggest thing is the new launches that are coming out and we've talked a lot about in the last couple of years about our winning positions on the various platforms. And whether it's Cessna, Gulfstream and so forth. They've got all they've got certifications coming out in 2018 and that's going to be a nice factor for us.
The other thing is the mandates. You continue to see some of these mandates coming into effect up and through 2020, 2021. I mean that's going to drive growth as well. So as I said, for the Q1, we approached double digit growth in the OE on both ATR and BGA. And knock on wood, we're encouraged by the momentum.
Okay.
And just a clarification on your air transport aftermarket number, you're up 4% in the quarter, but is this I mean, you had some very strong numbers last year. Is this more, I think, a normalization or tougher comps when we think about 2018?
I think it's kind of what I was saying earlier. I mean overall the level of activity has been robust. You are seeing a different mix in the installed base of newer aircraft that are under warranty, have less maintenance, you see older aircraft coming out. But beyond that, the level of both repair and overhaul activity and spares has been solid.
Okay, great. Thanks.
Okay. Thank you.
We will now move next to Joseph Ritchie of Goldman Sachs.
Thanks. Good morning, guys.
Good morning, Gavin.
Tom, if I heard you correctly, you mentioned the impact from tax reform is likely to be felt a little bit more in the second half of the year. And so like look, the organic growth rate has been great the last few quarters. Maybe talk a little bit about how customer conversations are evolving in the parts of your portfolio that you would expect to benefit the most, if you do start to see an increase in CapEx investing as the year progresses?
Yeah, I mean,
I would point to our long cycle businesses, I think. I mean, we just got done talking about business jet. That could be a factor that's contributing to the that OE momentum that I referenced. I think on the oil and gas side, I mean, it's I think it's more to do with stability on the pricing and the confidence that it's giving the industry where you're going to see more CapEx or return to not return to previous peak levels, but certainly an improvement from the declines we've seen in the last couple of years. So those are the, I think, two places that I would say we see it the most.
Okay. And then maybe following on Peter's question first the second, I didn't hear you guys mention anything on the commercial halo market. I'd be curious to hear any commentary there just given this uptick we've seen in oil and gas recently?
Yes, I think commercial at HeLa is probably not a highlight yet. We don't see sort of major robust level of activity there yet. But I think we're more than enthused based on what we're seeing on the our air transport and now uptick in activity in business jets. So I guess there always has to be one little bit of a low light and I would say there's not stronger recoveries as we would have hoped on commercial helo, but nevertheless the rest of the aerospace business is very strong.
And it's not that it's negative. I mean internationally as an example, we are seeing very modest growth on the HELO side. But it's not what we were experiencing a year ago or 2 years ago in terms of the pressures.
Got it. And maybe if I could sneak in one last one. On PMT, the margin trajectory, so it sounds like the first half of the year, you're kind of calling for kind of flattish type margins in PMT. As we progress through the year, mix gets a little bit better. Is that do
you already have a lot
of that mix in your backlog today? Or do you need to see something out of orders in order to see kind of like the margin improvement in the second half?
Yes. I mean, Joe, as you know, PMT is a tough business to judge based on 1 quarter because as you know the catalyst makeup and what we ship and the mix particularly when you will peak and dramatically change the results. So both based on the backlog that we see based on the short cycle activity in HPS and so on, when we get to the end of the year, we're very comfortable that the margin expansion is going to look very much in line with what we're projecting and continue to be very, very bullish on the PMT business.
Okay. Sounds good. Thanks guys.
Thanks, John.
And we have time for one last question and that will come from Steven Weiniger of UBS. Thanks
for fitting me in guys. Appreciate it. Hey, Darius, I can't help but go back to one of your first comments, which was the fact that the stock is a no brainer in the one $40,000,000 You did spend $950,000,000 on the share repo this quarter. That's a good number. But if you're only looking for these acquisitions in the $3,000,000,000 less range, you got cash continuing to come in, why not step in even more aggressively?
Or how are you kind of thinking about that? Is it just to keep the powder dry and be more methodical? Or are you really trying to be more opportunistic, in which case it might be larger?
Yes. Well, I think obviously this is what we bought back in Q1 is higher than what we normally do. If you look back about our buyback trends, this level of buyback in Q1 is actually relatively aggressive because I just like I said, I thought it was a deal at 165 in the 140s. It just it was absolutely compelling. Now having said that, you're right.
I mean, I do want to keep the powder dry. We indicated both at our Investor Day and our Q1 or our Q4 call that we have a slight preference for M and A. As we kind of see the year evolve, we'll see how things change. As I mentioned prior in the call, we do have a fairly robust M and A pipeline. I do hope that 1 or 2 deals materialize here in the next quarter or 2 and we'll see how it goes.
So it's I know kind of deploying everything all at once and without having further optionality, I don't think it's ever a great idea. So that's kind of how we're thinking about it. But I think the value is of the stock currently is compelling at the same time. So it's the constant trade off that we go through.
And one other one on Arrow, which is, there's a lot still being discussed about the large airframers partnering for success, etcetera, and kind of continuing to apply pressure and thinking about how to change the business models in the industry. Are you seeing any other kind of early developments on that front? Are you what gives you confidence, conviction that your business model will be able to sustain itself in light of that attempted vertical integration?
Yes. I mean, I think both well, a couple of things. Number 1 is our relationship with Boeing remains strong and we expect that to continue. Number 2, I think as you look at our services that I referred to earlier, as you think about the value story around the connected aircraft, that's compelling to our end customers. And that's reflected in the service rates, the order rates that we're seeing, the interest.
I talked about the deal with Singapore and you think about Singapore is clearly one of the market leaders in terms of their thinking and their approach to aviation. So I remain very, very bullish in our approach. And given the kind of set of offerings that we have in the aerospace segment, both in mechanical and avionics, we're uniquely positioned to be a key player in the connected aircraft and that's being reflected in the kind of relationships we're able to formulate and the business we're enjoying. And I think it's only going to accelerate. I think the technology
Okay, great.
I was just going to say the technology that we have invested in, the number of engineers that we have supporting all of the different product platforms and the verticals that we serve puts us in a very unique position in terms of developing offerings that get us on platforms. As you've seen over the last few years for us to continue to win more than our fair share. So it's that and it's those investments in keeping those fresh and alive are what can enable us to compete robustly.
Okay, great. Talk to you soon. Thanks a lot. Bye.
Thank you.
And with that, ladies and gentlemen, that does conclude today's question and answer session. I would like to turn the conference back to Mr. Darius Domcek for any additional closing remarks.
We delivered exceptional results in the Q1 of 2018 and have strong order rates and a growing backlog as we begin the Q2. I am confident in our ability to deliver outstanding results for our customers, our share owners and our employees. One last note, in a few weeks we will be hosting an investor showcase to highlight our safety and productivity solutions business, particularly our technologies for the connected warehouse and the connected supply chain. John Waldron and his team are looking forward to showing you why we're so excited about the growth opportunities in that business. Enjoy the rest of your day and we'll talk with you soon.
Thank you.
Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.