Good day, ladies and gentlemen, and welcome to Honeywell's First Quarter 2015 Earnings Conference Call. At this time, all participants have been placed in a listen only mode and the floor will be open for your questions following the presentation. As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's conference, Mark Macaluso, Vice President of Investor Relations.
Thank you, Michael. Good morning, and welcome to Honeywell's Q1 2015 earnings conference call. With me here today are Chairman and CEO, Dave Koty Senior Vice President and CFO, 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 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 affect our performance in our Form 10 ks and other SEC filings. This morning, we will review our financial results for the Q1 and share with you our guidance for the Q2 and full year 2015. Finally, as always, we'll leave time for your questions at the end. With that, I'll turn the call over to Chairman and CEO, Dave Cote.
Good morning, everyone. As I'm sure you've seen by now, Honeywell delivered another quarter of double digit earnings growth to kick off 2015, driven by our diverse portfolio and effective execution what continues to be a challenging macro environment. Our earnings per share of $1.41 increased 10% year over year coming in at the high end of our guidance range. The macro environment in the Q1 wasn't easy with headwinds from extreme weather, port shutdowns, declining oil and gas investments and a strengthening U. S.
Dollar. Sales in the quarter of $9,200,000,000 while up 2% on a core organic basis were down 5% reported. Our performance was driven by decent organic growth and strong sales conversion with segment margins expanding 220 basis points 18.7%. And as you'll hear from Tom a bit later, a large portion of the margin expansion came from improving gross margins, something a bit different than the past. It results from our focus on HOS, both direct and indirect material and new products.
Our key process initiatives are driving meaningful results throughout the portfolio. 140 basis points of the segment margin rate improvement was driven by commercial excellence and productivity. The rest of the improvement comes from smart decisions we've made about the portfolio. An important enabler of the productivity continues to be the savings we're seeing from previously funded restructuring actions. We're being proactive about keeping that pipeline full, which we think is critical to supporting our continued margin expansion in 2016 and beyond.
However, while managing our cost is important, we're also focused on supporting sales growth by investing in capacity expansion, new products and technologies and resources in high growth regions. As a result of that strong first quarter performance and our confidence in the remainder of the year, we're raising the low end of our full year guidance by a nickel to a new range of $6 to $6.15 or up 8% to 11% versus the prior year. And we've as we've been saying since December, we want to ensure we're remaining balanced in our planning for 2015, while continuing our seed planning investments for the future. In the quarter, we proactively funded about $40,000,000 of restructuring, building on a healthy pipeline of new projects. And we've continued our transactional and translational hedging into 2016.
The euro is our biggest exposure. In 2015, we've hedged approximately 85% of our euro P and L P and L exposure at an average rate of about $1.24 For 2016, we have again hedged approximately 85% of our euro P and L exposure at plan rate of $1.10 In the current environment, we believe the certainty this provides is prudent and generates the time needed to offset the impact in future years. We also continue to see planning for exciting new Huey based products, technologies and process improvements that will help us to continue to win in the marketplace. On HUS Gold, we are continuing to invest across our gold enterprises to create units that grow faster and are more profitable than our competitors. We want to marry big company cost efficiency, which is real if it's done correctly and technical and functional excellence with small company speed and customer responsiveness accomplishing 2 seemingly conflicting things at the same time.
Each HOS Gold unit is identifying breakthrough strategies and moves into smart new areas and adjacencies. In early May, we'll be kicking off our 2015 Technology Symposium, a forum that brings together approximately 400 Honeywell technology marketing and management representatives from all of the businesses. This annual event which started about 10 years ago provides opportunities for ongoing collaboration and idea generation and is focused on driving breakthrough innovations supported by differentiated processes and technologies, all of which helps enhance our great positions at Good Industries. Process Solutions opened the Honeywell Industrial Cybersecurity Lab in Duluth, Georgia to advance development and testing of new technologies and software to defend industrial facilities and operations like refineries and manufacturing plants from cyber attacks. We also recently inaugurated 3 new research and development labs at the Honeywell Center of Excellence in Brno, Czech Republic and we plan to open another 5 labs within a few months as part of a $10,000,000 investment in the region to support both aerospace and ACS.
In March, we closed the acquisition of Datamax O'Neil, a global manufacturer of fixed and mobile printers. DataMax O'Neil's portfolio of solutions expands Honeywell's ability to deliver enhanced workflow performance and the team is very excited about this acquisition, which builds on existing printing capabilities acquired with Intermec. Scanning and mobility continues to execute very well, delivering another quarter of double digit core organic sales growth in the Q1 driven primarily by volume from key wins most recently the U. S. Postal Service deal signed last year.
We also continue to be excited about the flooring products portfolio where we saw particular strength, up double digits on a core organic basis driven by the ramp up of our Solstice low global warming suite of products. We've seen increasing demand for these products where we now have a lifetime value of signed agreements of about $2,600,000,000 and another $800,000,000 under negotiation. As we look ahead, we're cautious overall in the macro environment like I've been for 5 years. While we continue to expect that the benefit of lower oil prices will eventually play through in the U. S.
And in oil importing nations, this is really yet to be seen. There was weakness in January across the portfolio that we weren't able to fully recover from. But we did see good signs of improvement as the quarter progressed. GDP growth rates globally are weaker than most had expected for the Q1. Now we think weather had some impact early in the quarter in the U.
S, but the slowdown was not unique to the U. S. With all that said, the majority of our businesses exited the quarter with momentum following more robust core organic growth rates in both February March. Nevertheless, we're going to continue to plan conservatively to navigate the current headwinds including oil and gas. And as always, we're not counting on a pickup in the global economy.
We are well positioned to continue performing in this environment. Our portfolio is aligned to favorable macro trends and provides significant runway to grow. We have great positions in good industries. We're investing to grow faster than the markets we serve and we'll stay the course on seed planting and continuous improvement initiatives. We're going to stay flexible and follow the playbook you've come to expect from us, so that we can deliver on this year, next year and beyond.
So with that, I'll turn it over to Tom. Thanks, Dave, and good morning. I'm now on slide 4, which shows the first quarter results. Sales of $9,200,000,000 were up 2% on a core organic basis, but decreased 5% on a reported basis. The absence of friction materials, which you'll recall was still in the portfolio for the first half of twenty fourteen, further strengthening of the U.
S. Dollar and raw materials pricing in resins and chemicals were headwinds driving the negative reported growth this quarter. However, considering the slow start that we got off to in January, we were actually 8% down in January versus 2014 on a core organic basis. So even given that slow start, we feel pretty good about the Q1 core organic growth. Shipment timing in Aerospace, order delays in PMT and unplanned plant outages in resins and chemicals prevented us from fully meeting our sales expectations.
But as you'll see later, we expect the growth rate to improve as the year progresses. And an important note, the 2% core organic sales growth excludes FX, M and A and now the raw material pricing impact in resins and chemicals. Selling prices in resins and chemicals include an element of raw material pass through most notably benzene, which is highly correlated to the price of oil. While the pricing model protects profit dollars, sales can be volatile. So we've modified the definition here to provide further insight into the underlying volume growth of our businesses.
Segment profit increased 8% with segment margin expanding 220 basis points. The most impressive part about the segment margin performance is that most of the improvement came through gross margin rates. HOS Gold is working across Honeywell from our engineering labs to our factories and supply chains to our selling and marketing organizations and even to our back office. Our deployment of Honeywell user experience in product development is yielding better products that our customers are willing to pay for. Our supply chains are becoming even more lean and there is a strong collaboration between our engineers, sourcing organization and supply chain to drive down our material cost.
Our focus on commercial excellence is yielding more focused sales teams and smarter pricing decisions. Operating costs are in check with SG and A also contributing to the segment margin rate improvement. Meanwhile, we continue to devote significant resources to the development of new products and the enhancement of existing ones. As we said in March, HOS Gold is a game changer and will be a differentiator for us as it was in this Q1. We'll provide some additional color on the Q1 margin expansion in a moment.
The items below segment profit came in as we expected. We had an increase year over year in pension income, which was completely offset by restructuring of approximately $40,000,000 Note in the prior period, operating margin included the restructuring and other charges from the BE Aero gain deployment, but excluded the gain itself. So operating margins expanded 3.40 basis points in the Q1 of 2015 compared to the 2 20 basis points expansion in segment margins. Earnings per share was up 1 Earnings per share was $1.41 up 10% year over year and at the high end of our guidance range. We once again achieved double digit earnings growth, driven largely by increases in segment profit.
Year over year share count was flat, so a good start on the P and L despite the environment. Finally, free cash flow in the quarter of $256,000,000 came in down $240,000,000 from 2014, driven primarily by timing including the payment of the Q4 2014 OEM incentives, higher cash taxes and higher working capital requirements particularly in Aerospace. The Q1 has historically proven to be our lowest from a cash perspective and we remain on track to our full year guidance of $4,200,000,000 to $4,300,000,000 of free cash flow. We ended the quarter at approximately 1,300,000,000 dollars negative net cash position. And as we highlighted in March, we expect to be in a positive net cash position approximating $1,000,000,000 to 2,000,000,000 by year end assuming no significant M and A.
Overall, we generated strong results in a relatively slow growth environment. I'm now on slide 5. I talked previously about the nature of our 2 20 basis point segment margin improvement. This slide provides some additional color on the specific drivers of that improvement. The first category is the core organic or operational drivers, which generated 140 of the 220 basis point improvement.
We're often asked to quantify the impact of HOS Gold. This first category is highly correlated to it. We can't always commit to triple digit margin expansion from HOS Gold, but you can see that the components touch all critical facets of our businesses. We're benefiting from commercial excellence most primarily in Aerospace as well as significant productivity improvement and volume leverage across the portfolio. New product introductions and further penetration in high growth regions, particularly at ACS are also part of it.
We're also seeing savings from previously funded restructuring actions. Additionally, as we indicated, we were able to proactively fund another 40,000,000 restructuring in the Q1 to improve our overall cost position and drive further margin expansion going forward. The remaining three categories on this slide individually look pedestrian, but collectively reflect the benefit that our shareholders are realizing from the strategic decisions we have made and executed on. First, you can see the favorable margin impact from the Friction Materials divestiture, which we closed in July of 2014. This is a permanent improvement in our margin rate from exiting a business that did not meet our portfolio standards.
You can expect to see additional year over year favorability in the Q2 from this divestiture. And we are always assessing our portfolio to ensure all of our businesses continue to constitute great positions in good industries. 2nd, our hedging approach for foreign currency provided a big benefit. As you know, we made a decision last summer to expand our hedging approach from protecting our hundreds of individual P and Ls from foreign currency exposure that is transactional exposure to one now where we are protecting the consolidated Honeywell enterprise so that's transactional plus translational exposure. The hedge strategy is in place to protect our operating results, but not necessarily the top line, thus the margin lift.
Additionally, our emerging markets footprint in our engineering organization, supply chain and back office also protect us from the strengthening U. S. Dollar. These strategies will be worth $0.12 to $0.13 to our share owners in 2015 and help drive the margin improvement you see here. 3rd, in resins and chemicals, we have developed the lowest cost operating position in the world, a competitive position which allows us to run our plants at full capacity.
Material costs are passed through to customers, so when raw raws market conditions are volatile like we're experiencing today, margin rates can be impacted, in this case favorably, when the material pass through and therefore sales is reduced, but margin remains the same. Without that low cost position, our ability to compete for profitable business would be impaired as would the margin rate. Moving to slide 6 and the Aerospace results. You can see here on the comparative sales stacked bars that we are highlighting the impacts of inorganic drivers, namely for Aerospace foreign exchange headwinds and M and A that is the Friction Materials divestiture. We filed a similar convention on the subsequent pages for both ACS and PMT.
Sales for the Q1 were up 1% on an organic basis, but down 6% reported, driven by the Friction Materials divestiture and the unfavorable impact of foreign currency movement, mostly in Turbo. Segment margin was up 2 50 basis points, driven by productivity net of inflation, commercial excellence and the favorable impacts from the Friction divestiture and foreign exchange. So overall, great work by the Aerospace team to drive robust margin expansion. From a sales perspective, commercial OE was up 1% on an organic basis. In air transport and regional, we saw a continued benefit from higher OE build rates at Boeing, Airbus and Embraer partially offset by intentionally slower shipments to certain emerging market customers in order to manage temporary funding delays.
In Business, General and Aviation, there were lower than expected deliveries on certain platforms that are in transition. Engine demand is robust. So we expect to see a pickup in growth in BGA in the Q2. Commercial aircraft sales were up 1% on a core organic basis, driven by strong growth in repair and overhaul activities, but partially offset by lower spare sales, particularly in China and Russia. We believe that this year represents a normal run rate for spare sales in China after a significant restocking by our airlines customers in 2014.
Also similar to the OE side, we intentionally slowed spare shipments to certain emerging market customers as a risk management matter. Overall, we anticipate continued growth in R and O and improvement in spares in the second quarter and into the second half. Defense and Space sales were down 1% on a core organic basis. We had lower deliveries in the U. S.
Due to timing, but still expect that core organic sales will be up for Defense and Space on balance for the rest of the year. Defense and Space backlog increased high single digit year over year. We anticipate some ongoing softness in the U. S, but we're very encouraged by the continued double digit growth of our international defense business, which continues to be a tailwind in defense and space. Finally, transportation systems sales increased 5% on a core organic basis due to strong volume growth in light vehicle gas applications where we continue to see increased global penetration.
Success we have seen in TS continued in this quarter and we expect similar growth throughout 2015. On a reported basis, TS sales declined 23%, reflecting both the Friction Materials divestiture and foreign currency headwinds. So let's turn ACS results on slide 7. ACS sales were up 3% on a core organic basis in the 1st quarter, excluding an approximate 6% headwind from foreign exchange. Across the ACS portfolio, we saw weakness in January, we mentioned at our Investor Day in March, followed by steady core organic growth in February March.
All of the ACS businesses are exiting the quarter with good momentum, giving us confidence going into the Q2. ESS sales were up 3% on a core organic basis in the 1st quarter driven by continued strength in our scanning and mobility, fire safety and security businesses. Scanning and mobility delivered another quarter of double digit core organic sales growth following the double digit increase for the Q4 and full year of 2014. The business continues to perform well, driven by volume from recent program wins such as the U. S.
Postal Service program that Dave mentioned. In addition, we continue to realize integration benefits from Intermec in the combination of the two businesses. As for the rest of ESS, growth continues to be driven by new product introductions and further penetration in high growth regions. In particular, China and India each were up close to 15% in the Q1 with strength across most of the ESS portfolio and we expect this to continue into the 2nd quarter. Building Solutions and Distribution sales were up 3% on a core organic basis in the Q1 with continued strength in America's Fire and Security Distribution Businesses and Growth in Building Solutions.
Within Building Solutions, we continue to see good growth in our higher margin service business. And as was the case with ESS, sales in BSD improved in February March following a slow start in January. ACS margins expanded 180 basis points in the quarter to 15.8%. The business continues to benefit from good conversion on higher volumes and significant productivity improvements net of inflation. While the business has been able to control costs and optimize internal processes, our investments for growth particularly in new product development and in high growth regions continue as we have highlighted previously.
In addition, we continue to realize incremental synergy benefits from the combination of Intermact with scanning mobility. We expect the margin expansion to continue, particularly as the team builds on the connected ACS initiative, which Alex talked about at our Investor Day in March. I'm now on slide 8. And before I review the PMT results, I'd like to provide an update on our oil and gas related businesses similar to what we shared in January. Our upstream portfolio, which resides entirely in our Process Solutions business comprises controls, solutions and remote operations for deepwater offshore facilities.
As we've said, this upstream exploration and production part of the value chain is a small portion of PMT and roughly 1% of Honeywell sales. And here despite a significant scale back in future capital spending plans by international oil companies and national oil companies, which have caused a good deal of volatility in our market, our backlogs have held up and there have been no cancellations to date. In fact, we saw a double digit increase in volume of large order project wins in our Projects and Automation Solutions business in Process Solutions in the Q1 with approximately 1 third of that increase residing in our upstream segment. But discretionary spend both CapEx and OpEx is being cut across the board in this segment and we felt the impact of these actions at HPS in particular. We are seeing softness in our short cycle field instrumentation business tied to both project delays as well as reductions to maintenance repair and operations budgets.
Our orders in the Q2 will be challenged as a result, but we'll continue to leverage our strong cost productivity actions to offset any downturn in 2015. It's also worth mentioning that 45% of HPS is not tied to oil and gas, which further highlights our relatively low exposure to the volatility upstream. Moving to midstream, roughly a third of the UOP business, so the gas processing piece and about a quarter of the HPS business, which comprises gas metering and transfer, safety and security and terminals is considered midstream. So think of oil and gas recovery, upgrading, treating, pipelines and storage. While we saw tremendous growth in our gas processing sales in the Q1, particularly in UOP Russell, which was up double digits on a core organic basis, Our midstream business overall has been impacted by the steep reduction in the U.
S. Gas and oil rig count and we did see one cancellation of approximately $35,000,000 in our gas processing business in the U. S. In this quarter. Orders are expected to continue to be challenged across our midstream business including in HPS where customers are delaying spending decisions and cutting discretionary spend and also delaying conversion of orders and backlog.
However, we also anticipate that international gas processing projects for modular equipment and additional service sales to U. S. Customers will help to mitigate the softness in the U. S. In 2015 2016.
Finally, our Downstream segment primarily includes petrochemical and refining, which comprises about 2 thirds of UOP and that's mostly process technologies, equipment and catalysts and approximately 20% of HPS, which is process controls, field instruments, service and optimization. Here, we are experiencing delays and reductions in countries that are net oil producers like Russia as refining and petrochemical project decisions are deferred. A notable exception is the Middle East where we've seen new wins and an active pipeline of new bids particularly in the UAE and Saudi Arabia and we're encouraged by the expected growth in HPS and UOP in the region. Also 2 thirds of the aforementioned double digit increase in orders growth in the Projects and Automation Solutions business in HPS is in this downstream refining sector. As the infrastructure investments continue to ramp in the Middle East, we anticipate continued positive growth in 2015 and 2016.
In the oil importing countries, mainly China and India, the benefit of the lower cost oil imports is mostly being absorbed by the national government and is not currently being invested in energy projects. However, we do see continued momentum in the catalyst first load and reload activity for methanol to olefin and Olaflex licenses in China and a similar positive level of activity in India, particularly in our short cycle businesses in HPS. We're continuing to see existing projects progress none have been abandoned. However, the initiation of new projects has been extremely slow. Overall, however, we continue to believe that in the mid to long term the impact further downstream will be neutral to in some cases positive despite the delays we have seen thus far.
Sales in parts of our resins and chemical business continued to be negatively impacted by the market based pricing whereby selling prices are closely tied to the market price of raw materials, most notably benzene, which is highly correlated to the price of oil as we've discussed since December. While lower raw material costs continue to be a headwind to the top line, the pricing model protects profit dollars even on those lower sales. We now expect this will approximate a $400,000,000 headwind to our reported sales in 2015. In ACS, a small portion of our industrial safety businesses, the portable gas detection and safety products businesses participate in oil and gas related end markets. We have seen minor impacts due to recent workforce reductions mainly in the upstream segment.
While demand for our gas detection and safety products has slowed, we continue to expect lower oil prices to eventually create demand side favorability across the remainder of the ACS portfolio. In terms of operating expenses, we are seeing favorable cost trends across the portfolio including in our freight, utilities and other supply chain costs as well as in our other indirect spend. We expect this will continue to be a nice tailwind for us throughout 2015 and continue to look for ways to drive further productivity and cost savings across the portfolio. In terms of the second derivative impacts, we highlighted in December that we anticipate that the emerging airline profitability from lower oil prices could drive further activity with that customer segment. In addition, the lower prices at the pump, improvements in employment and overall positive consumer sentiment have driven greater demand for autos where we are benefiting from increased demand for turbocharger technologies.
The impact to our short cycle business on the whole thus far has been neutral, but we expect an increase in demand across the portfolio as lower oil prices persist. On balance, the headwinds we are seeing in our oil and gas business will continue to present challenges in the near to midterm and we continue to plan conservatively to mitigate the impacts in this area. We do expect to eventually see some positive impacts from lower oil prices, which will benefit our short cycle businesses, particularly in ACS, as the benefit makes its way further downstream to consumers. We're also encouraged by the benefit to our own cost structure, which will continue to provide a nice tailwind in 2015 2016. I'm moving to slide 9 for PMT first quarter results.
PMT sales in the quarter of $2,300,000,000 were up 3% on a core organic basis and down 5% on a reported basis. The reported decline was driven by foreign exchange headwinds and the impact of lower oil prices on resins and chemicals as we have spoken about before. Starting with UOP, sales were up 9% on a core organic basis, driven primarily by higher gas processing sales, particularly at UOP Russell. As a reminder, UOP grew 9% on a core organic basis in the Q1 of 2014 as well, so exceptional growth even against the difficult year over year comp. Orders were roughly flat in the quarter with strong growth in the product technologies and equipment business offsetting declines in gas processing, which are mostly timing related.
As you know, we are in the midst of adding UOP capacity, particularly on the catalyst side, which will help the business better service its backlog, which continues to hold firm. In Process Solutions, sales were below our expectations. Core organic sales down 3% and reported sales down 11%. Obviously, foreign exchange headwinds impacted our reported sales. Orders overall were slightly down in the quarter as we experienced some order delays, particularly in March as we approach the quarter end.
While we're not seeing order cancellations in HPS, some customers are delaying project start ups and in some cases future capital spending decisions. Still on balance, our projects business had a strong orders quarter, up strong double digits, primarily driven by the Middle East where we see infrastructure investments continuing. Discretionary spend is under pressure, which primarily impacted our orders and sales growth in our field products business. Our service backlog is holding up well with low single digit sales growth, a reflection of our comprehensive offerings to our strong installed base. Process Solutions backlog increased high single digit year over year, which gives us confidence that the sales growth rates will eventually improve.
Advanced Materials sales were up 2% on a core organic basis and decreased 12% reported, again primarily driven by foreign exchange headwinds and the impact of lower oil prices on resin and chemicals. In addition, we had unplanned outages in our resins and chemicals plants that had a negative impact on production volumes and segment margin in the quarter. The rest of Advanced Materials saw positive core organic growth in the quarter, particularly in flooring products, which again grew double digit as demand for solstice products continues to grow. PMT margins were up 230 basis points to 21.5 percent, which exceeded our guidance driven by commercial excellence, significant productivity actions, net of inflation and higher UOP and flooring products volumes as we've discussed. This was partially offset by the resins and chemicals unplanned plant outages we highlighted and continued investments for growth across PMT.
So in summary, despite less sales growth than expected, the business continues to deliver on results. Also PMT is aggressively pursuing cost reduction opportunities in anticipation of potential further top line pressure. I'm now on slide 10 with a preview of the Q2. For total Honeywell, we are expecting sales of $9,600,000,000 to $9,800,000,000 up 2% to 3% on a core organic basis, but down 4% to 6% reported. We think we're being prudent in our planning approach given the slow start to the top line we saw in the Q1.
Segment margins are expected to be up approximately 130 to 150 basis points versus 2014. We expect our segment margin rate to again benefit from the factors that drove the significant first quarter margin expansion, especially operational excellence and execution. We do anticipate higher engineering, sales and marketing investments in the Q2 as well as a less favorable sales mix and lower margin rate benefit from the friction materials, foreign currency and raw resins and chemicals raw materials pricing drivers I explained earlier. Given these factors and our conservative planning, the segment margin expansion may not be as robust as Q1, but will still be well into the triple digit range. With that said, 2nd quarter EPS is expected to be in the range of $1.46 to $1.51 up 7% to 10% versus 2014 on a basis normalized for tax at 26.5% in both years.
Moving to the businesses. Aerospace sales are expected to be up 1% to 2% on a core organic basis or down 5% to 7% on a reported basis, reflecting the year over year absence of friction material sales as well as anticipated foreign currency headwinds in the quarter. In commercial OE, we expect core organic sales will be up low single digit, driven primarily by continued healthy demand in mid to large cabin business aircraft, where we have significant new content, partially offset by the timing of ATROE build rates. In commercial aftermarket, we expect core organic sales to be up lowtomidsingledigit with continued repair and overhaul and ATR spares growth, partially offset by slower BGA spares growth. Defense and Space sales are expected to be approximately flat on a core organic basis, driven by continued strength in the international business offset by a decline in the U.
S. As we've highlighted. In Transportation Systems, sales are expected to be up mid single digit on a core organic basis, but down significantly on a reported basis. Similar to the Q1, the growth in TS on a core organic basis is primarily driven by new launches and strong light vehicle gas turbo volume globally. As for Aerospace margins, we expect an increase of 140 to 160 basis points in the Q2 driven by commercial excellence, significant productivity improvements across the portfolio and favorable impacts of the Friction Materials divestiture.
ACS sales are expected to be up 4% to 5% on a core organic basis or down 1% to 3% on a reported basis with mid single digit core organic growth in ESS and continued growth in BSD. The difference between the reported and organic core growth rates reflects the foreign currency headwinds in the quarter. The trends in the end markets where we primarily participate residential, commercial and industrial continue to be consistent with what we highlighted in December. We continue to benefit from new product introductions and high growth region penetration as we saw in China and India in the Q1. ACS margins are expected to be up 80 to 100 basis points driven by good conversion on higher volumes, commercial excellence and continued productivity net of inflation, while maintaining the investments for growth I spoke about earlier.
In PMT, sales are expected to be down 1% to approximately flat on a core organic basis and down approximately 7% to 9% reported, driven by foreign currency headwinds and the continued impact of lower oil prices on resins and chemicals. We're expecting UOP to be down mid single digit on a core organic basis, primarily driven by difficult year over year comps in our catalyst business, partially offset by continued growth in gas processing. You'll remember we experienced double digit sales growth in the catalyst business in the Q2 of 2014. In HPS, we're expecting core organic sales to be approximately flat. We continue to see delays in the conversion of orders and backlog, particularly in the large projects business offset by software and services growth in our large installed base.
On the Advanced Materials side, we're expecting mid single digit growth on a core organic basis, principally driven by continued strength in flooring products. Overall, PMT segment margins in the quarter 240 to 260 basis points versus 2014, driven by productivity net of inflation, commercial excellence and the favorable margin rate impact of the market based pricing model in resins and chemicals. The second quarter will be challenging for PMT, however the Q2 will be challenging for PMT. However, the conservative cost actions we've taken give us confidence in our ability to deliver our forecast. Let me move to slide 11 for an update on our full year guidance.
You can see revised sales and margin targets for 2015. The reported sales growth is expected to be lower than the core organic growth principally due to foreign currency headwinds, the impact of the Friction Materials divestiture and raw materials pricing in resins and chemicals. Our end markets are generally holding up with commercial and industrial momentum, largely offsetting the headwind in oil and gas. And I'll get into more detail on this in a moment. Our new sales guidance reflects the further strengthening of the U.
S. Dollar since we provided our initial outlook back in December. For example, we're now playing for a euro exchange rate of approximately $1.10 for the remainder of the year and have similar revisions for other currencies and now expect an approximate $1,700,000,000 headwind to the top line from foreign currency for the full year. To remind you, our operating profits are protected from further U. S.
Dollar strengthening by our hedging approach, even though the top line is adversely impacted. For example, with the euro, our operating profits are protected at a rate of about $1.24 And as Dave indicated, for 2016, we're taking a similar approach. We put hedges in place to cover approximately 85% of our 2016 euro P and L exposure at the planning rate of approximately 1.10 dollars On a core organic basis, our sales growth for 2015 is now approximately 3%. This reflects the slow start we had in the Q1 and the risk associated with order delays we've been able we've seen to date primarily in Aerospace and PMT. In ACS there are some minor But overall, the outlook for the rest of the year remains intact and we continue to expect good core organic growth particularly in our short cycle businesses.
We're raising our segment margin targets in all businesses due to favorable drivers previously discussed including commercial excellence, HOS, restructuring and a continued focus on managing our costs as well as the impact of the foreign currency hedges and the market based pricing model in resins and chemicals. In addition, as Dave mentioned, we're raising the low end of our EPS guidance ex pension mark to market by $0.05 to $6 to $6.15 per share representing 8% to 11% growth versus 2014 and providing the framework for another year of strong earnings growth in what continues to be a challenging global economy. This range continues to be based on a full year income tax rate assumption of 26 0.5% and share count held roughly flat to 2014 levels. We continue to expect free cash flow in the range of $4,200,000,000 to 4,300,000,000 dollars up 8% to 10% from 2014 with CapEx investments peaking this year at roughly 2 times depreciation. At a more normalized rate of CapEx investment approximately 1.25 times depreciation, we would expect free cash flow conversion to be approximately 100 percent and we expect to be at those levels again by 2017.
So overall, still a very balanced outlook for the year. Let me move on to slide 12. With the Q1 in the books, we thought it'd be helpful to provide an update on how we see things in our key end markets and how they are impacting our planning for the remainder of 2015. Starting with Aerospace, the outlook on the commercial side is largely the same as we outlined in March as OE build rates and flight hours remain strong. On the commercial OE side, we still expect to benefit from build rate schedules and a ramp up in new platforms including Airbus A350 and ATR and the Bombardier Challenger 350 and Embraer Legacy 500 in BGA.
Flight hours for ATR are expected to grow approximately 4% in 2015 similar to 2014. And on the business jet side, we expect the flight hours for large cabin aircraft will continue to grow in 2015, up mid single digit, reflecting the continued healthy demand in the cabin size sector we are more represented. In Defense and Space, we're seeing strong international demand as defense budgets continue to grow. This is supported by the 20% plus core organic growth we saw in our international business in the Q1 and a very strong backlog. We expect the U.
S. Portion of the business to stabilize consistent with the U. S. DoD budgets despite the timing delays we encountered in the Q1. In the automotive market, we're seeing the market improving as turbo adoption continues in the light vehicle gas segment globally and as light vehicle production picks up.
This should bode well for us going forward as we expect to outpace the industry in gasoline turbo wins. Moving to ACS. Residential markets continue to grow at a steady pace as urbanization in high growth regions progresses. We continue to accelerate our investments in the connected home space where we have a strong installed base and market channel and where we expect to benefit from new product introductions in both ECC and Security. On the non res side, we continue to expect acceleration in commercial construction spending and our positive outlook for the full year remains intact despite a slower than anticipated start.
As I mentioned earlier, we saw strong growth in our short cycle businesses in Fire and Security and expect that positive end market trends will continue to drive growth in these businesses. As for Building Solutions, the strong backlog from our projects business and service bank continue to support an improvement for the remainder of 2015. On the industrial side, we continue to benefit from increasing safety standards across the globe as activity picks up in both the U. S. And in our high growth regions.
So overall, very similar to where we were in March and good momentum as we head into the Q2. We've touched a lot on PMT already, but to summarize the impacts from oil and gas are become clear are becoming clearer and more pronounced than we initially anticipated. However, we continue to proactively address PMT's cost position and are confident in how we're managing our exposure to the sector. In Advanced Materials, we continue to see robust demand for our low global warming solstice products, supporting the significant investments we've made in this business heading into 2015 2016. We once again saw double digit core organic growth in flooring products in the quarter.
Let's now move to our updated full year segment guidance on page 13. Let me explain the setup here. The left hand side of the slide represents the guidance as of our December outlook and an estimate of the core organic sales growth under those assumptions. The 5% growth we show here on a core organic basis is on the same basis as the 4% organic growth we previously articulated. We simply restated the 5% to reflect the adjustment for the resins and chemicals price impact.
The right half reflects our current guidance including the Q1 results and latest outlook by business on a core organic basis. We won't get in all details again, but just want to highlight that our core organic growth expectations in Arrow and ACS are down slightly given the slow start and PMT has been adversely impacted as previously explained. However, we continue to expect good margin improvement across the businesses for the reasons I discussed earlier. We continue to take a conservative approach to the rest of the year. We're committed to our EPS outlook raising the low end, while continuing to invest for the future in seed planning and additional restructuring.
This confidence is derived from the good visibility we have on new products and technologies, our penetration of high growth regions, our conservative cost planning and the deployment of our key process initiatives as part of HOS Gold. Let's turn to slide 14 for a brief wrap up we move on to Q and A. This was another quarter where the Honeywell business model and HOS enabled us to set and exceed challenging performance expectations. The quarter started slow and not all of the markets we participate in were giving us help. But we picked up momentum and exited on a strong note with significant outperformance in both segment margin and EPS.
Our shareholders are benefiting from a diverse portfolio with great technologies and long and short cycle exposure, one that continues to drive significant benefits from comprehensive globalization and one that will further benefit from the significant firepower that we have on our balance sheet. With a little more help from the economy, we are well positioned to continue outperformance throughout 2015, all the while seeding and feeding our growth initiatives. Like all of you, we are also thinking about what's beyond 2015. Each of our HOS Gold Enterprises are hard at work on their 5 year strategic plan, which Dave and his staff will dive into before our next earnings call. And if you've already heard, some of our early actions we've taken for 20 16 including additional restructuring and hedging of our foreign currency exposures.
We look forward to sharing more over the course of 2015. With that, let's move on to the Q and A segment.
Michael, please open the line for Q and A.
We will go first to Scott Davis with Barclays.
Hi. Good morning, guys. Hey, Scott. Hey, John.
Guys, what happened in January? Is there any kind of general theme to why January started so weak for
you? I wish there was. Interestingly, at least from the talking that I did around the HAWN, we weren't alone. I mean, this was kind of a phenomenon that some even saw in the banking community. It was just something about January that caused everything to be a slowdown.
And I'd have to say I was a little nervous as we were in January. And then things turned in February and turned bigger in March. So I can't explain it. It just happened. And it was pervasive Scott across the almost every one of our business units everywhere.
Yes. That's amazing. Okay, good. And then I struggle sometimes I mean your margins are exceptional and continue to be on the right path. But what does HOS really mean to margins?
Can you quantify it at all? I remember when you went from nothing to bronze, it was a pretty meaningful step up. Is gold is meaningful to step up when you come up from silver?
Yes. Well it is pretty meaningful I'd say being able to get there. We don't have that many units that are actually there at Gold yet. That's one of the things that that's why we think there's a lot more improvement left in the company. It's tough to quantify exactly what the dollar amount is or the rate amount that comes from HOS, But it's going to continue to grow, because as we've tried to show in the past, it doesn't just kind of raise your overall level, but it raises your improvement rate per year also.
So think of it as it's not just the first derivative improvement, it's a second derivative improvement also. So I'm actually quite encouraged about what this is going to continue to be able to do for us. Yes. And I would add that the way we're defining HOS Gold as we talked about at the Investor Day cuts across the entire business and enterprise. Whereas once it was focused on factories and the supply chain, it now extends to engineering and product development, commercial excellence dealing with our customers and the like.
So all of those things were contributors as I tried to articulate when I explained that 140 basis points expansion in the Q1.
And last just quickly on M and A, is it are the gating factors really price or is it availability of assets or both?
I'd say it's more price now than anything else. Prices are just high. This is we're going to continue to be disciplined and be smart about this. But prices are high right now. And you haven't heard me say that much in the past, but this time they are.
Yes. I'll hear that from everyone. So great. Thanks guys. I'll pass it on.
All right. See you, Scott.
We will go next to Jeff Sprague with Vertical Research.
Thank you. Good morning, everyone.
Hey, Jeff.
Hey. Can we just get a little more color on UOP? I may have missed it, Tom, when you went through all that detail. But what were UOP orders actually like in the quarter? And if we think about the capacity that you have coming on, is it still fully sold?
And how firm is the backlog in that business?
Yes. Well, the orders were roughly flat in the quarter for UOP, but it was kind of a tale of 2 cities. The gas businesses are being impacted by delays. We think there was a significant amount of orders that were pushed out into the Q2 and Q3 on the international side. So we're expecting those to come back in.
But on the other hand, the Technologies and Equipment business, Performance Technology and Equipment had an outstanding orders growth strong, strong double digits growth. Catalysts were essentially flat to the year. So overall, those were the contributors to UOP. Good activity and the backlog as well down a little bit, but overall in pretty good shape. And on the expansion and to answer the question on expansion that demand is still there.
I was actually at the Zhangxigan factory in the Q1. And it will be it is starting to run at full capacity. So really excited about those investments that we're making. And the capital spending plans are all on schedule and we're going to hit the targets and get the market benefit. On the expansions, Jeff, I'm more worried about making sure we hit the start up date than anything else because the demand for the product is there.
Okay, great. And just on the hedging, is the hedge only on the euro? Or are you hedging other currencies where you can at that rate at that kind of 85% coverage?
Yes. It's not just the euro, Scott or Jeff. It's all the currencies where we have explored. We take a comprehensive look at our long the currencies where we're long, the currencies where we're short, the currencies where we manufacture versus the currencies where we only sell, it's a comprehensive model. But in the end, we end up doing comprehensive hedging in a number of different currencies, euro, GBP, Australian dollar others.
And we get some natural benefit from currencies that we aren't currently locking in. So on balance, it's not just the euro.
And then given kind of the peculiarity of January, I know it's early, but any thoughts on how April is starting? I mean, now there's just so many crosscurrents out there. Is this pickup in February March that you saw? Is it continuing into the early part of the second quarter here?
Well, it's a little tough to tell at this point, but we think it's going to be I don't know if it's going to be as strong as it was in February March, but it's certainly going to be a lot better than January.
Okay. Thanks a lot.
You're welcome.
And we'll go next to Steve Tusa with JPMorgan.
Hey, good morning.
Hey, Steve.
On the Aerospace side, you mentioned some funding issues, I guess, from some customers. I know there GE talked about some supply chain dynamics going on out there. I guess PCP there have been some issues around I guess seating with the 787. What is maybe the flavor of what's going on in the commercial aerospace side? If you could put a little more some more details around that?
Yes. Happy to clarify that comment Steve. It was more to deal with the commercial side and customers. Emerging market regions particularly in Russia with the impact that the global economy has had and the sanctions have had. Our customers some of our customers are experiencing some funding delays.
And so we've held up shipment until we can get those clarified. We're 100% confident it's going to resolve itself and already is resolving itself in the second quarter. So it's more a matter of risk management than any kind of demand issue.
Does that I mean, I guess Dave at a higher level, is that a comment on what's going on out there financially in emerging markets? Or is that an aerospace specific type of thing?
I would say this is more aero specific in certain emerging market countries.
Okay. So not something we should kind of from just a liquidity perspective out there globally. There's a lot going on with currencies and the central banks shoot money all over the place. So I guess we shouldn't be kind of concerned about this more globally for the economy?
No, absolutely. Okay. Yes. It is definitely concentrated in Russia Steve
and Russia. Okay.
You know the size of Russia for us.
Okay. Got it. And then just on UOP, what is the what's kind of the size of the international opportunity at Thomas Russell again? I know you guys have talked about, I don't know, like something like bidding on 10 projects and you guys have given some revenue numbers. I'm just that business is clearly going to have a little bit of a rough patch here.
It's only $500,000,000 in revenues. But what is kind of the size of international? And how can you put that into context as far as what the opportunity there is to kind of fill the hole in 2016? Yes.
I'd say it's a little tougher to say how big it could be because we're not quite sure ourselves. It's a lot bigger even than we anticipated when we first did the acquisition and we continue to be pretty encouraged by the stuff we're finding. So what we're seeing is much greater strength on the international side and of course less on the U. S. Side.
So we expect that the international piece of this is going to be a really good positive for that business. I can't put a number on it right now.
Right. But I guess can it be somewhat material to that $500,000,000 business in 2016?
Yes. Yes, definitely.
Okay. Okay. So you can see some of that come through to offset whatever we may see in RUSLE for 2016? And then one last question. You said $0.10 of exposure to this kind of euro hedging dynamic in 2016, I guess, at the Investor Day.
I'm just doing a rough math on what you said. I guess is it now about $0.15 or is it still around what's the actual year over year headwind number for $16,000,000 as we stand today?
Yes. Steve, I would compare the $1.24 that I mentioned that we're hedged at for the euro to next year's rate which will be $1.10 And you can kind of apply that to our business. I think the range we gave is still is intact. Okay. So
it's around $0.10 still no real change there?
Yes. It's reasonable to think about it as like a $0.01 for a So it's reasonable to think about it that way and I think it's important to think about it in the context of $6
Absolutely. Absolutely. Okay. Thanks. Thanks, Steve.
We will go next to Steven Winker with Bernstein.
Thanks and good morning guys.
Hey Steve.
Hey Dave you mentioned before in answering the earlier question that prices were high and M and A in the current environment is a gating factor right now. I know you're a patient guy sometimes, but how long and we're not in that many topics, right? But how long and how what happens on your capital deployment strategy? Do you start to consider other means of returning capital? Or you just say, look, over a long enough cycle, it still makes sense to wait?
What are you thinking?
I would say, first of all, you characterized me correctly. I'm generally more impatient about things, except when it comes to spending money in which case I want to make sure that we're smart. The New Hampshire chief in me still would bug me to overpay for something. I have to agree with both of those. At the end of the day though, we're still pretty much going to stick with what we talked about in that one $2,000,000,000 net cash position at which point we'll start doing more on the repurchase side.
And I think it's still a reasonable and a smart place to be overall. So it preserves firepower for those times when we can be opportunistic, but also says we're not going to let this get excessive.
Okay. All right. And then the acceleration that at least is baked in sequentially for ACS organically, Market dynamics that you're seeing in non res specifically, could you maybe just also give a little more color? Are you still seeing that strengthening? Are you seeing kind of oil and gas regional slowdown impacting any of those projects, the construction ones, not the oil and gas side of it.
What are you seeing in that market?
The way I'd describe it is that it's stronger than our overall organic growth rate, not as strong as we thought it would be. But it looks like a lot of that was I think a lot of that might have been weather impacted and we're anticipating that it continues to strengthen during the course of the year. Tom anything else? Yes. If you look at the products that serve that or the businesses that serve that sector, the non res sector Steve, it's they were between 3% 4% organic growth for the quarter.
So I think it's very much in line with what we think the markets are doing.
Okay. All right. I'm sure you have a lot of people waiting, so I'll pass it on. Thanks.
All right. Thanks, Steve. Thanks.
We'll go next to Joe Ritchie of Goldman Sachs.
Thank you. Good morning, everyone.
Hey, Joe. So
interesting on the organic growth, you're one of the few companies we've heard of so far where trends actually got better as the quarter progressed. I mean, you actually had some companies talk about March not happening. And so I'm curious Dave from your perspective, what kind of impact do you think that oil and gas and the currency moves here in the U. S. Are having on just industrial CapEx spend broadly and how that impacts your business?
I would say on the CapEx side, I mean the only real effect that we're seeing is on the oil and gas piece of this. I'd be hard pressed to point to something else where I would where I could say that currency was having an impact on those decisions. I don't know Tom if anything comes to your mind or anything else. No. So that's the only one that I could see and that's more oil price impacted than it is currency.
So it seems like there's more of a direct impact to your business, but nothing indirect you guys are hearing from your customers today?
Yes. I would say in general when it comes to FX, the only effect we're really seeing is on the translation side. And as you know, we hedged the income number there. And so it shows up on the sales side, but preserves the income side, which is one of the reasons our margins look good. And geez, I think we should be
getting kudos for being smart on how we hedge this year and next. I'll give you kudos. It's by far the number one question I got from investors heading into the quarter. So I think taking tabling some of that risk was definitely a smart and prudent mood on your part. Maybe one other question, because you did mention the margins.
I mean, in your core operations, the margin expansion this quarter were really good despite slower organic growth than expected. You've got this like 5 year target at the high end of 75 basis points. And assuming organic growth continues to improve with the capacity investments that you've made, it would seem to me that that 75 basis points should be a lot steeper. So maybe some comments around the conservatism around the high end of that guidance range over your 5 year planning period?
Well, I would love to see that myself. And as you know, margin rates are a combination of a lot of things. So we're going to continue to drive it. I'm very committed to that 5 year plan and understand what I promised I'd deliver there. So there's a whole combination of things that go into it.
And yes, I'd love to see that margin rate improvement continue and I don't see any reason why we don't continue with a triple digit increase this year.
All right. Helpful, guys. Thank you.
See you, Joe.
We will go next to Nigel Coe of Morgan Stanley.
Yes. Thanks. Good morning, guys. Yes. So just wanted just to come back to this January issue again.
And if I just do the rough math and maybe Tom can help me out here. It looks like February March trended at 5% and I'm sure that benefited from a little bit of the snapback from January. First of all, is that correct? And then secondly, given all the macro volatility, do you think we're in a sort of a more volatile month over month pattern from here on Dave? Well, I don't know if
it's going to be more volatile month by month. I would say though, I really do believe that lower oil prices are going to play through bigger in the macro economy than what we've seen so far, especially in the U. S. And this is kind of the longest the consumer has gone historically with not spending kind of new found riches whether it's through oil price or tax refunds. So I think we're going to start to see the benefit of that sooner rather than later.
I don't think it waits till next year. That being said, I don't want to count on it either because if I'm wrong, that's not a good place to be. So I don't think that kind of what we saw January, February, March continues. And then we'll see something that's a little more stable going forward. And on your first question, Nigel, yes, you got it pretty much right in terms of the Feb March numbers.
Okay. And then just a follow-up question on the aerospace. You called out tough China comps. You called out Russia. But outside of the outside of those regions, would you say on the especially on the ETR side that airlines airline behavior was consistent with plan?
And did provisioning have any impact on either the quarter or the year over year comp?
Provisioning didn't have that much impact on us that I'm aware of. And yes airlines have been pretty consistent. And I actually think aerospace improved during the course of the year because of the timing on some of the shipments that didn't happen in the Q1. Yes. I think also the when you look at it by region, it's quite interesting, Nigel.
And we had mid single digit growth in spares ATR spares in the U. S. But because of those China issues, we were definitely weighed down.
Okay. And then just finally, you announced a big order in Egypt's Egyptian refinery $1,400,000,000 When does that start hitting the backlog?
I'm not sure. I don't know if that's in the backlog number yet.
Okay. Thanks,
guys. We'll go next to Howard Ruble of Jefferies. Good morning, gentlemen. Thank you. Dave, there's been a lot of stimulus efforts in Europe to help the economy.
We can see a little bit of it in air traffic. What about on the ground in some of the ACS businesses or elsewhere?
I'd say ACS we're starting to see some improvement. I don't think it hit as fast as what you'd see on the Aerospace side. But yes, we're expecting that that's going to play through especially as that economy gets closer to 2%.
Is there any market you can see better? I mean is it still just Germany or you see France improving or Spain or anything of that order?
I would just kind of I'd say leave it as a general comment. The North is still stronger overall. And I think it's going to take a little bit of let's say a few more months before say some of the Southern economies really stack to feel it.
But it sounds to me though like you're being very conservative and it's still a wait and see. You're not adding people or anything like that at the moment?
I could say I am definitely not adding people in Europe.
Thank you. And I get it. Yes.
Just to put a little color on that. I mean as we've continually said over the last 2 or 3 years the Europe and Africa for us have been relatively 1%, 0%, -one percent consistently quarter over quarter over quarter. This year was similar. To your point, aero was stronger. We also saw good performance in the turbo business, good volume growth as that as the gas penetration continues to grow.
So but it nets out to similar to the environment that we've seen in the past for Europe.
No, I appreciate that. I'm just you don't want them to spend all that money and not get anything for it. And you have a lot of early cycle businesses and that's why I asked
the core.
Yes. I think it does it will show up Howard. I don't think though this turns Europe around. I do believe that we'll see some short lived impact from all of this. But at the end of the day, they still need to address a lot of their social issues.
And they're just my fear is that some of this is going to cause them to delay taking the actions that they need to become more competitive as a region.
And then just as a follow-up in a slightly different vein, you have talked a lot about new products. And could you elaborate a little bit on what we might see in a fashion later in the year in terms of it sounds like a lot of things are going to happen in ACS either in Connected Home. Is there a as you're sort of previewing ideas to the dealers or otherwise, when might we expect some rollout and impact from this?
Yes. As is typical with us and I know you hear me talk about this diversity of opportunity a lot and that there's never while there's never any one big thing that's going to hurt us, which I think is a good way to run the place, There's never any one big thing that's going to make all the difference for us either. Rather it's going to be a series of products in a number of areas that are going to make the difference here. And I'm actually pretty encouraged and some of the gross margin rate improvement you saw was attributable to just being able to introduce new products at better margin rates because it adds more value. And I think you're going to I feel pretty confident you're going to continue to see more of that.
Thank you very much.
You're welcome, Allen.
And we will take our final question from Andrew Obin of Bank of America Merrill Lynch.
Thanks a lot for fitting me in guys. So my question is just follow-up on Joe Rich's question. Obviously, the margins were fantastic in the quarter. But if I look at your core growth outlook, the 2018 target is 4% to 6% top line. And last year, we were below this target and the idea was that we're going to accelerate into 2015.
And as I look at your organic growth target for 2015, it seems we're actually decelerating versus 2014, 2% to 3% versus 3%. So does that mean that the plan now is more about margins as opposed to organic growth? Has the balance shifted between the 2 given what we're seeing now for 2 years?
I would say 2018 is still 3 years away. And things have a way of changing. And of course, we're trying to make sure that we end up in that range that combination of sales growth and margin rate growth. And right now, yes, last year and this year, organic sales were not as good as what we'd hoped for, largely because global GDP didn't even achieve the kind of conservative numbers that we thought we had in there. So I'd say, yes, we're going to make sure that we continue to work on both.
If GDP growth isn't there to support that kind of organic sales growth, then you'll probably see even more margin rate improvement and vice versa. If global GDP does start to take off and sales start to improve, well, you'll see more attributable to the sales side. So we're still committed to those 5 year targets and we're going to continue to work both of those variables. Yes. If I can add the as we talked about at the Investor Day, we are experiencing really good win rates and we are expecting inflection points in aerospace and in PMT given the investments that we've made in the new platforms that we're on.
So I think that's going to be a nice catalyst and we still obviously have our eye on organic growth as a big part of it. That's a good point Tom. And we talked about that on Investor Day with those inflection points. Those are definitely happening.
And if I can just squeeze in one technical question. In terms of your change in your methodology for PMT for input costs, what kind of impact did it have in terms of your organic growth number? Did it have a negative impact for the annual guidance? I didn't quite understand that.
It's about 0.5 point of it, I guess. About 0.5 point for the quarter, yes. The reason that we excluded Andy is just that it has no impact on operating income and you want to use that as a proxy for volume and what's occurring out there in your actual shipments. So the shipments are actually fine. Operating income is just fine.
And in fact, it increases our margin rates
because of it.
So that's why we excluded it because it just didn't seem to make sense.
No, terrific. Really appreciate the comment. Thanks a lot.
All right, Andy. Thanks.
And ladies and gentlemen, that does conclude today's question and answer session. I would now like to turn the conference back to Dave Code for closing comments.
In a difficult Q1 macro environment, we were actually quite pleased with our operating performance and I hope you were too. Our initiatives like HUS Gold, Huey and Software are working and our business model continues to deliver. Raising our guidance for the year is a nice display of our confidence in our ability to deliver this year, next year and beyond. The diversity of opportunity resident in our portfolio really does make a difference in our ability to outperform. Our opportunities far outweigh any risks we deal with and we're actually pretty excited about where we're going.
So thanks for listening. Bye bye.
Thank you. And this does conclude today's teleconference. Please disconnect your lines at this time and have