Good day, ladies and
gentlemen, and welcome
to Honeywell's Second Quarter 2014 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 would now like to introduce your host for today's conference, Elena Doum, Vice President of Investor Relations.
Good morning. Thank you, Leo. Welcome to Honeywell's Q2 2014 earnings conference call. Here with me today are Chairman and CEO, Dave Pote and Senior Vice President and CFO, Tom Slozak. This call and webcast, including our non GAAP reconciliations, are available on our website at honeywell dotcom/investor.
Note that elements of today's presentation do contain forward looking statements that are based on our best view of the world and of our businesses as we see them today. Those elements can change and we would ask that you interpret them in that light. We do identify the 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 Q2, share with you our outlook for the second half and the rest of the year, and then leave time of course for your questions. So with that, I'll turn the call over to Dave Cote.
Thanks, Elanor. As I'm sure you've seen by now, Honeywell had another terrific quarter and a very good first half of twenty fourteen. EPS of $1.38 increased 12% year over year when normalized with tax. So another quarter of double digit EPS growth with earnings coming in above the high end of our guidance range. We saw strong execution across the portfolio with margin expansion in each of our 4 businesses.
We're continuing to benefit from our enablers and key process initiatives that are delivering growth and productivity benefits. And we're achieving this while continuing to invest for the future planting the seeds that will drive outperformance and achievements of our new 5 year plan. In the quarter, we were encouraged to see that our organic sales growth accelerated 3%. We saw continued improvement in our short cycle order rates as the quarter progressed with steady growth in ESS, a return to growth in Advanced Materials, especially in Fluorine Products and a continued healthy pace of recovery in Transportation Systems. Our robust long cycle backlog, which stands at 15 point $7,000,000,000 up 4% from the end of last year, continues to support a favorable outlook with record orders for UOP and a continued uptick new process solutions orders.
We've also seen a moderation of the sales declines in defense and space that we saw earlier in the year. Speaking of D and S, I'm encouraged to see that the headwinds are nearly behind us. We're expecting growth in D and S in the 3rd quarter. In fact, we had 9% international growth in this last quarter. And early indications point to a modest increase next year.
We examples of where we have great positions in good industries. Honeywell Aerospace has been a pioneer in aviation for the last 100 years offering products and services that we found on virtually every aircraft worldwide. We've led the way from the beginning with 1st like the first autopilot, the first truly automatic flight management system and the first transatlantic biofuel flight. And we have differentiated through push into global connectivity as you've seen with recent partnership announcements with InmarSat and AT and T. And in oil and gas where our UOP business created the first conversion technology for upgrading crude oil, jump starting the modern oil refining industry, we're a driving force for innovation for the global petroleum and natural gas industries.
Today, our leadership continues with new process technologies designed to get more valuable products from every barrel of oil, convert coal and natural gas into plastics and convert biofeedstocks such as algae into renewable fuels. We not only saw double digit sales growth this quarter in UOP, but record orders and backlogs of the future continues to be promising. Another innovation I'd like to point out is our new Lyric thermostat designed for how people really live today. Using the location of your smartphone, the geofencing feature automatically turns the thermostat into energy saving mode when a home is empty, senses when you're coming home and heats or cools the house to your preferred temperature. It's just another example of how the Honeywell user experience or hue or huey depending upon how you want to pronounce it enables us to move quickly to develop exciting new products that are easy to use, easy to maintain, easy to install and exceed customer needs.
ECC has seen continued good growth through the retail channel and that's up 40% in the second quarter. We think the portfolio is well positioned aligned to favorable macro trends and there is significant runway to grow. We remain confident in our outlook for this year. As a result of our first half performance, we are raising the low end of our guidance again by 0 point guidance range of $5.45 to $5.55 or up 10% to 12% for the year. The closing of the sale of Friction Materials was a significant step in positioning our existing portfolio for continued outperformance.
We also realigned the Transportation Systems Business segment into Aerospace to better take advantage of the engineering and technology similarities and the shared operating practices between these two businesses. Under the realigned segment reporting structure, the passive friction we're keeping will remain under transportation system reported within Aerospace. We just concluded our strategic planning reviews with our businesses and in these all day sessions each of our businesses presents their 5 year strategic plan. While we're not expecting much help from the macro environment, I can tell you that each business has a strong roadmap to the 2018 targets we laid out for you back in March. The growth opportunities and new product pipeline are quite impressive.
We approach the finish line of our previous 5 year targets confident in the strong foundation in place for continued outperformance. We have great positions in good industry. We're investing both organically and inorganically 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 deliver on 2014 and beyond. So with that, I'll turn it over to Tom.
Thanks, Dave, and good morning. On slide 4, let me walk you through the financial results for the Q2. Sales of $10,300,000,000 were up approximately 6% on a reported basis, that's 3% organically and came in just above the high end of our guidance range. As we highlighted previously, the low first quarter organic growth was a bit of an anomaly with declines in defense and space and The contributions The contributions in 2Q from the businesses were broad based with each SBG sales growth at or above the guidance we had communicated. Regionally, organic sales were up 2% in the U.
S. Despite the drag from defense and space 5% in Europe, Middle East and Africa and 10% in China. In China, we saw good growth in our short cycle businesses, namely ESS and Transportation Systems in addition to continued long cycle growth, particularly in UOP and Process Solutions. Once again, our quality of earnings was strong with most of the improvement coming from segment profit, which increased 10% in the quarter. Segment margins expanded points to 16.7 percent.
That's 70 basis points excluding the dilutive impact of M and A and 20 basis points higher than the top end of our guidance. We had profit growth and margin expansion in all four businesses, so really a balanced contribution across the portfolio. It's also notable that the better than expected performance from Intermec reduced the segment margin dilution from M and A in the quarter. Overall, we continue to see significant benefits from our productivity initiatives and proactive restructuring actions, while continuing to invest for growth. Items below segment profit were mostly as anticipated.
You'll recall that in the Q2 of 2013, we recognized an OPEB curtailment gain of $42,000,000 which was more than offset at the time by restructuring actions. So really no year over year net impact. In the Q2 of 2014, we funded $14,000,000 of restructuring projects bringing the total for the year to approximately $100,000,000 On a reported basis, the tax rate of 26.1% in the quarter represented a $0.06 tailwind or sorry headwind compared to the Q2 of 2013 and about a $0.01 tailwind relative to our guidance. EPS was $1.38 and $0.01 came from the better tax rate I mentioned. EPS increased 8% on a reported basis or 12% when you normalize for the income tax rate.
This was again driven by the 10% increase in segment profit, slightly more favorable below the line items and a minor benefit from lower share count. Finally, on free cash flow, approximately $1,100,000,000 in the quarter, 5% higher than 2013 and 101% conversion despite a 17% increase in CapEx and higher cash taxes. Year to date free cash flow was up 28% through the first half. Moving to slide 5, we're looking at Aerospace. Now this is prior to the realignment of transportation systems in the Aerospace.
We'll adopt that change in the Q3. You'll also see us file an 8 ks in the Q3 reflect this change on our historical reporting. But when it comes to all the forward looking guidance that I'll touch on later, we do reflect the new reporting structure. So Aerospace sales were flat in the quarter, which is in line with our guidance with 1% commercial sales growth offset by a 1% decline in Defense and Space. Despite the challenging top line, segment margin was up 30 basis points driven by commercial excellence and productivity net of inflation, partially offset by BGA OEM payments, a higher mix of OE content and investments in growth programs.
The flat commercial OE sales reflect strong growth in large air transport driven by OE build rates, offset by lower regional jet sales, engine shipment timing and higher VGA OEM payments. Now as a reminder, we have won significant content on a number of new OE platforms and have and will continue to incur upfront costs as a result. These costs are fully contemplated in the 5 year planning we have shared with you and our accounting for these costs is very conservative compared to the industry. The Aerospace business model is fully intact and these wins coupled with the exciting new technology offerings in aero give us full confidence that the growth will accelerate over the 5 years in our plan. Commercial aftermarket sales up 1% in the quarter with continued strong spares growth in both ATR and BGA.
This strength was offset by lower R and O revenues, a reflection of fewer maintenance events and timing, particularly in Business Aviation. Aftermarket backlog levels in R and O along with robust spares demand underpin an acceleration of aftermarket growth in 3Q. Defense and Space sales were down 1%, but a nice improvement from the 8% decline in the Q1. U. S.
Defense Aftermarket and Government Services declined significantly moderated from 1st quarter levels and growth in international markets, which referenced earlier, helped to offset those declines. Defense and Space is tracking to a 3% decline for the full year. On slide 6, we're looking at ACS results for the 2nd quarter. ACS sales were up 10% on a reported basis and 3% on an organic basis, in line with our expectations. The difference in the two rates principally reflects the contributions of Intermec.
Looking at the businesses, ESS sales, so the products businesses, were up 4% organic with ECC and scanning and mobility showing particularly strong growth. ECC continues to benefit from strong residential end markets and new product introductions, particularly in the retail channel. Dave talked about lyric and overall the thermostat category is performing very well for us. As for scanning mobility, following the ramp down of certain large programs in Q1, it returned to strong organic growth in the Q2. New wins, which ramp over the course of the year, are driving sustained growth.
Intermec also continues to perform very well supplementing the growth we're seeing out of the core HSM business. Our fire and safety excuse me, our fire safety and gas businesses have shown continued strength as well. On a regional basis, penetration of high growth regions remains a big driver of growth in ESS, as we saw strong double digit growth in both China and the Middle East. Moving to Building Solutions and Distribution, sales were up 2% with strength in distribution business offsetting pockets of weakness in Building Solutions, specifically the U. S.
Energy retrofit business. We are encouraged however as Building Solutions project and services backlog continues to grow. I'd like to take a minute to comment on what we're seeing in the commercial building sector. We've seen modest improvement from the Q1 to the Q2 in the ESS products businesses that serve the sector, primarily ECC and fire safety. We are anticipating further improvement in the second half.
In the Americas Energy business, as I said, orders have been delayed due to financing and municipal contract holds up. While the projects can be lumpy, we are seeing bid activity heating up, especially in the Middle East and China and energy efficient projects globally. This along with the easing of year over year comps gives us confidence that our commercial building related sales will modestly accelerate in the second half. Moving to ACS margins, expansion of 50 basis points to 14.8 percent in the quarter, up 80 basis points excluding M and A. ACS continues to benefit from productivity net of inflation, commercial excellence as well as higher volume, while also continuing to invest growth.
Moving to slide 7, Performance Materials and Technologies. PMT sales were $2,600,000,000 up 6 percent organic and were above the high end of our guidance, driven primarily by stronger than expected results in UOP. UOP sales increased 17% in the quarter, driven by increased catalyst and gas processing sales, currently stands at $2,600,000,000 We saw a continuation of orders trends in gas processing, particularly at Thomas the remainder of the portfolio in high margin areas like services and advanced software solutions. Process solutions orders growth accelerated in the quarter, up approximately 7% organic and as we will preview modest sales acceleration is expected in the second half of the year. Advanced Materials sales increased 5% in the quarter.
We saw volume increases across the businesses with particular strength in fluorine products driven by new global warming molecule offerings. These volume increases were partially offset by unfavorable pricing particularly in resins and chemicals as we've been signaling. We expect these pricing headwinds to moderate in the second half of the year. Segment margins for PMT were up 30 basis points to 18% consistent with our expectation, driven by productivity net of inflation and higher volume, partially offset by price raw headwinds in resins and chemicals, unfavorable UOP catalyst shipping mix and continued investments for growth. On slide 8, you can see Transportation Systems, which again to remind you includes Friction Materials for the Q2.
TS had another strong quarter with sales up 8%, that's 4% without foreign exchange and segment margin expansion of 3 10 basis points. The sales increase was driven by turbo volume growth across our 3 largest regions Europe, North America and China. In each of these regions, our volume growth outpaced auto production. The growth we're seeing in Europe was strong in both the light and commercial vehicle segments. We've benefited from an uptick in European commercial vehicle demand, primarily driven by the Euro 6 regulation shift in the region.
Outside of Europe, both North America and China saw strong volume increases in light vehicles, both diesel and gas, which more than offset lower commercial vehicle volume sales in those regions. In North America specifically, commercial off highway sales remained soft consistent with trends in Mining and Agriculture segment. Overall, we continue to benefit from improving global industrial macros on vehicle production, regulation, turbo penetration and our strong win rates. As we begin to lap the strong second half performance from 2013, however, we do expect some moderation in these growth rates beginning in 4Q 2014. The segment margin improvement to 16.4% reflects the strong productivity and volume leverage in Turbo and the benefits from restructuring and other operational improvement.
With the closing of the Friction Materials divestiture behind us, let's now turn to slide 9 and walk through our guidance for the Q3 under our new reporting structure. We're expecting sales of $9,900,000,000 to $10,100,000,000 which would be up 3% to 5% reported or 3 percent to 4% on an organic basis. Segment margins are expected to be up approximately 50 basis points and earnings per share is expected to be in the range of 1.37 dollars to $1.42 up 10% to 15% from the prior year. For Aerospace, as I indicated earlier, we are providing guidance under the reporting structure with transportation systems included. Sales growth on a reported basis is expected to be flat to down 2% in the quarter, reflecting the year over year absence of Friction Material sales in the quarter.
On an organic basis or in other words without the Friction business sales are expected to be up approximately 2% to 3% with growth across the portfolio commercial, and space and transportation systems. In commercial, OE sales are expected to be approximately flat year over year with continued growth in ATR offsetting declines in BGA similar to the 2nd quarter. However, we are expecting acceleration in aftermarket growth in the quarter, up low single digit driven by continued fare strength and higher airline maintenance events. We're also expecting to see a return to growth in defense and space as Dave indicated, up low to mid single digit, where international programs continue to drive growth. In Transportation Systems, we're expecting mid single digit organic sales growth in the quarter.
And as for margins, we businesses. For ACS, sales are expected to be up between 8% 10% or 3% to 4% on an organic basis. And as a reminder, we closed Intermec in the Q3 of 2013. So this will be the last quarter of M and A impact from that transaction. Organically, we expect continued mid single digit growth in ESS and improvement in BSD.
Our short cycle orders have been trending up at ESS and the backlog is growing in Building Solutions. Both trends bode well for our 3rd quarter outlook. ACS margins are expected to be up approximately 20 basis points or practically or approximately 40 basis points excluding the dilutive impact from M and A. ACS continues to ramp their investment for growth in new products as well as adding feet on the street as we continue to further penetrate high growth regions. In PMT, sales are expected to increase between 4% 6% in the Q3.
In UOP, we foresee another quarter of increased catalyst growth. However, similar to the first half product mix in Q3 will result in a headwind to UOP margin. As a reminder, UOP sales can be lumpy quarter to quarter based on the timing of product. And as such, we are forecasting a sales decline of approximately 10% in the Q4 for UOP against a much more challenging comp. However, our outlook for the year remains intact for mid single digit growth in UOP and with the record orders and backlog we experienced in Q2, we expect strong growth to continue over our 5 year plan.
In HPS, after several quarters in a row of strong orders growth, we're expecting to see sales accelerate in the back half of the year, pairing into 2015 with continued strong margin expansion. The increased orders growth will really start to show in the 4th quarter as we're expecting high single digit sales growth in HPS. In Advanced Materials, warming products and flooring products. Overall PMT segment margins are expected to be up slightly versus the prior year reflecting similar trends that we explained for Q2 with the exception that pricing pressures in Advanced Materials are expected to moderate. Let me move to slide 10 where I'd like to take a moment to refresh our 2014 segment outlook.
This guidance reflects the realignment of Transportation Systems and Aerospace as well the transition of process dilutions into PMT that occurred in 2Q. Let me explain the setup here. The left half represents the guidance we provided in April. So with Process Solutions already in PMT, but prior to the sale of Friction Materials and prior to the movement of PS. The right side reflects our current outlook, including the Friction Materials divestiture and the realignment of Transportation Systems into Arrow.
So at the bottom of the page, you can see our new sales guidance, which reflects the absence of approximately $300,000,000 Friction Material sales in the second half and our increased segment margin guidance for the year, driven by our strong first half performance and the margin accretion we will experience from the absence of Friction Materials sales in the second half. There are some comparable dynamics to be aware of as you think about the full year. First in Aerospace, with the inclusion of Transportation Systems, we're expecting 4Q sales to be down low single digit on a reported basis, but up about 1% to 2% on an organic basis driven primarily by the timing of OE shipments in our air Transport business. However, you can see the significant margin expense we're expecting this year with contributions from both Aerospace and Transportation System Businesses. Also as I referenced, we expect a decline in 4Q sales in UOP, all timing and comp related.
And I want to reiterate that we anticipate another good growth a year of good growth in 2015 from UOP given the significant multiyear backlog we're building. There are some minor puts and takes, but no real changes to ACS or PMT from their prior outlooks with continued margin expansion in both businesses. Turning to the next slide, slide 11. You can see the basis for our 3Q, 4Q and raised full year guidance. Full year sales are now expected to be $40,200,000,000 to $40,400,000,000 reflecting first half performance and a modest organic sales acceleration in the second half.
Estimated full year sales are lower at the midpoint from our previous guidance, reflecting the absence of approximately $300,000,000 of Friction Material sales in the second half. So on an organic basis, we continue to expect about 3% growth for the full year. Although acceleration is expected in the second half, most notably in Defense and Space, Process Solutions and Advanced Materials, we will see tougher comps in the 4th quarter, specifically in UOP and Aerospace that I mentioned. As you'll recall, we saw a strong acceleration in organic growth at the end of 2013 with growth of 5% in the Q4 of last year. On segment margin, we've increased our full year guidance and now expect 16.8% to 17%, up about 60 basis points at the midpoint versus last year.
On EPS, we're raising the bottom end of our pro form a guidance by $0.05 making the new range $5.45 to 5.55 or an increase of 10% to 12% versus the prior year. We are planning for a 26.5% tax rate in 3Q with 4Q just slightly higher to get to our full year planning assumption of 26.5%. So overall, we feel like we're executing well and delivering on the high end of our 2014 commitment. I'm now on slide 12. And before wrapping up, I want to give you an update on our new 5 year plan out to 2018.
On a total Honeywell basis, the targets are identical to those we shared at the March Investor Day. However, the individual components now reflect our new business segment reporting structure. So even with the Friction Materials divestiture, the overall Honeywell targets are identical to those originally communicated. We're continuing to target a 4% to 6% organic sales CAGR and segment margin in the range of 18.5% to 20% by 2018, which is 220 to 370 basis points improvement from 2013. Strong earnings growth, which we've come to expect from Honeywell.
On the left side of the page, you can see the previous outlook by business based on our old reporting structure. Moving to the right side of the page, our current targets now reflect the combined Aerospace and Transportation Systems Businesses Less Friction material as well as HPS transition to PMC. Some minor puts and takes, but overall very consistent with what you heard in March and significant contributions across the portfolio. And as Dave continues to emphasize the growth in margin story doesn't end in 2018. Each of our businesses still have significant run rate based on the continued evolution of our internal processes, global growth and execution and the value we add for the customer through innovation and the Honeywell user experience.
So even more to come. Let me finish on slide 13. The Q2 results put us another step closer to delivering on the high expectations for 2014 we laid out in December. The pace of accelerations in organic growth over the course of the quarter gives us confidence in our second half outlook, where we expect a modest uptick in organic growth and continuation of strong productivity. We're going to keep investing for our future focused on our new 5 year plan.
Innovation and new product introductions, which are the lifeblood of our growth remain a key priority as well as the investments we're making to further penetrate high growth regions. We feel confident that our balanced portfolio mix, alignment to favorable macro trends and focused cost discipline will enable us to continue to outperform. And we're focused on executing sustainable restructuring actions productivity actions, including delivering on the strong restructuring project pipeline we've already funded. So with that Elena, let's go to Q and A.
Thanks, Tom. Leo, we'll now take our first question.
The floor is now open for questions. Thank you. Our first question is coming from Scott Davis of Barclays.
Hi. Good morning, guys. Hi. I wanted to you didn't really talk much about M and A in the release, right? I'd say not at all.
But it's Roger Fraden now has had a couple of months in the role. I mean, can you give us a sense of how he's progressing and as far as pipeline and changing the M and A process and your confidence in being able to do deals in the next 12 months?
Yes, Scott. I'm happy to answer that. As you know, historically, our approach to M and A has been really a bottoms up process from the businesses. So each business has resources and has an action plan to maintain a robust portfolio of M and A targets. And that's what you've seen generate the deals that we've done over the years.
And as you alluded to, when we did the appointment of Roger into the Vice Chairman's role, And one of the things Dave asked him to do was to focus with our M and A team on the pipeline and that portfolio. So we've kind of gotten a top down focus from Roger in addition to the process that we've had in our history. So, what you guys got 2 ways of looking at it. And when you look across the portfolio, we are seeing quite a bit of interest as a result of this process. As you know, we're quite active in looking at potential deals in aerospace, ACS and in PMP.
And I think that activity will continue. For what it's worth, Scott, Tom has also said he enjoys having Roger report to him on this.
Well, good luck. We'll be watching closely on that. But guys can you give us a better sense? I mean I've struggled to understand this business for a lot of years and I'm talking about UOP and the quarter by quarter variability. I mean it's a fantastic business.
I have no idea how you forecast it or how you really have any confidence 1 quarter to the next in that regard. But how does a business like that have such a strong quarter without there being an inventory build or some sort of something going on at the customer level that may come back and bite you in the tail in a quarter or 2? I mean, I just don't understand it, I guess.
I'll answer first and turn it over to Tom. But I'd say on an annual basis, it's pretty forecastable. They don't have a lot of inventory to have to fool with in the 1st place. A lot of this is a technology sale. I mean, there is some inventory, but not a huge amount.
It's the between quarters that can be more variable, but even that variability is generally forecastable. It's just that you can end up with lumpiness when it comes to 1 quarter versus another. But we generally have a pretty good handle on what's going on the door. Yes. I think Dave hit it on the head, Scott.
It is quite lumpy, but because of the long cycle nature of it and we referenced the backlog earlier, I mean, we're at a record backlog of $2,600,000,000 up double digits from last year. So we have good insight into what's going to happen quarter over quarter. And that backlog dissipates and will end up in our P and L over a fairly short timeframe, 1.5 years to 2 years. So we do feel like we have a good track on forecasting that.
Okay. And last just quickly guys we used to think about in TS we used to think about turbo as being one of those businesses that was kind of 600 basis points over Auto SAAR, maybe a little bit better in some quarters maybe a little bit worse. But has that changed at all? I mean is there a different thought process in how that grows versus AutoStar globally?
Well, we do end up with a regional mix difference that can impact us because we've got a strong position in Eurodiesel. And that was one of the things that really helped us, just that industry bottoming out this year, so that all the wind finally started to show up as opposed to mitigating the declines we were seeing in euro autos. But overall, yes, it's going to continue to grow well for a long time. Yes. I mean, I guess what I'd say is that I'd reemphasize the growth profile that we've got going.
I mean, it's in all of our big regions. I mean in North America both on the diesel and gas side a strong double digit growth. China strong double digit growth on both diesel and gas as well. And Europe is doing pretty well as well. And the commercial vehicle side in Europe in particular is very strong.
Those regulations and the other things
But that 600 basis point above SAAR, like I mean is that changed? I mean I think are you punting on the answer?
Well, Scott, I would say that European light vehicle production in the quarter was flat. And so for turbo, we had organic growth of 5 percent, so 500 basis points within that range.
Okay, good. That's what I really wanted to know. But thanks guys. Good quarter. Thanks.
Good luck.
Thanks Scott.
Our next question comes from Steven Winoker of Sanford Bernstein.
Hey, thanks and good morning everybody.
Hey, Dave.
Hey, Dave, just an initial question on that turbo move to in transport to aero, how much is cost a part of that? Or should I say how much cost reduction are you expecting from delayering? Is there any in there in addition to the technology justification?
No, not really. In fact, our turbo business is pretty lean already. And I'm hoping when we reference operating practices in the release, I'm hoping for more leanness to transfer into the aero business looking at turbo as a model.
Okay. So the rationale here is sort of subscales and existing a separate reporting segment now. Obviously, the technology is always overlap, but you could have gotten that otherwise and maybe some practice opportunities here. Is that how I should think about it?
Well, I might modify that a bit. I agree on size. Subscale, I don't know that I'd call it that. Within that industry, their scale is quite good. On the technology side, it's one thing to tell 2 businesses that, hey, would you guys cooperate?
But I could say over 12 years, there's been an evolution there. It used to be the aero business wanted to charge the turbo business $200,000 per person for cooperation. We're putting them together in a
way that a
lot We're putting them together in a way that allows us to get much further advantage out of that technology derivation of a jet engine. And we're the only guys who have that. We want to take further advantage of it. But I'm also hoping for a lot more of those lean practices to transition into aero, because the aerospace industry is, let's say, rife with opportunity when it comes to running for leanly than it does today. And while I'm pretty proud of what we've been able to do and where we've been able to get to, at the end of the day, I think there's still one hell of a lot more opportunity there for us.
And this is a good way to have best practices in house that they can be looking at.
Okay. And speaking of moving organizationally to drive better financial results, HPS within PMT now, just maybe talk about the projects that are complete. It's down 1% flat organic. But again, this North American build out that's just at the very, very early stages. What are you seeing there?
Any hopes that we should anticipate a ramp up soon?
Yes. Steve, like we said, the first of all, there's a lot of excitement around the combination of those two businesses. And we do think that market wise it's going to enable us to better serve the common customer base that's there. I think you're referring specifically to HPS. I mean, the second quarter were very strong, up 7% on an organic basis.
And that's another quarter of pretty good growth for them on the order side. As I said, that hasn't factored into our full year guidance. UOP as well, as I said, the bulk orders and backlog are strong. Talked about the lumpiness, but the same trajectory for both of those businesses is really good. And unlike the TS-one, as Dave said, I do hope to get a little bit of productivity out of that combination as well.
Okay. And just lastly, you mentioned you just wrapped up the strap process. What again, just remind me what macro assumptions did you give the business the SBUs to use the 5 year plan in terms of top line base growth?
I think we used the I mean the Global Insights GDP forecast looks at 3% and about 3% to 3.5% is kind of the assumption globally. No. No. I'm not
different than
what we've said back in March just because I don't think that much has changed since that time. I think the FX, we assume the euro is at about $30,000,000
Okay, great. Thank you. I'll hand it off.
See you, Steve. Thanks.
Our next question comes from Steve Tusa of JPMorgan.
Hey, good morning.
Hey, Steve. Hey, how bad is UOP going
to be in the 4th quarter?
What an interesting way to
put it. I don't know
that I would say it's bad. I would say it's all contemplated within our Q4 guidance. You could see it turned up pretty well for the year. I don't know, Tom, if there's anything else you want to share there. No.
I mean, full year UOP will be 5% as I said, down 10% in the sorry, 8% in the 4th quarter. But Q1 was 9%, this past quarter was 17%. We'll see mid single digits in 3rd quarter and probably 8% to 10% down in the Q4, but full year right on track. And again, that order and backlog should be very strong.
Yes. I don't think it's I don't think there's an issue with the trend in the business. I'm just trying to kind of reconcile the 3% organic growth you did this quarter. And the only thing that really seems to be getting worse or just on a lumpiness or a quarterly basis whatever just from the math would be UOP. I mean everything actually seems to be looking better like accelerating.
And so I'm just kind of like the 3% organic even with UOP, unless it's dramatic, which 8% is a pretty big number. So I'm just trying to reconcile that 3% you did this quarter versus why with things getting better, why that should be 3% in the 4th
quarter? Yes.
I think
I'm sorry. I was
just going
to add that. I think we also mentioned that we do have other tougher comps in particular in air transport OE and also in Transportation Systems relative to both of those were up 15% in the Q4 of 2017.
Right. But I mean you didn't really grow in commercial aero this quarter. So you're going to be down in commercial aero in the 4th quarter?
Our ATROE growth this quarter was in full digits.
Okay. So there was a the biz jet stuff kind of offset that? Right. Okay.
Your thesis though Steve though it's not the way you're talking about it is seems reasonable.
Right. Okay. And then just I guess I'm just going to ask this every quarter and this quarter was particularly interesting because DuPont preannounced negatively and I got a flood of e mails about R-twenty two pricing. Getting I don't really get chemicals. Questions around chemicals pricing for a lot of the other companies that I follow.
And with the resegmentation you just did, you kind of went to a little less disclosure, which I don't particularly view as a good thing. Is this the final kind of iteration of outside of acquisitions of what the portfolio looks like? Or could we maybe break out the more process kind of oil and gas related businesses? And maybe again kind of at some point evaluate this chemical business as a part of the Honeywell portfolio?
I would say in terms of organization, I kind of like it just the way it is now.
Okay. So no change? No. Okay. Thanks.
If there was, you couldn't expect me to say anything anyway, Steve, so
It's my job to ask the question. Thanks.
All right.
Our next question comes from Jeff Sprague of Vertical Research.
Thank you. Good morning, folks.
Hey, Jeff.
Hey, how's it going, Dave? Could we get a little more color on commercial building for U. S. Specifically? The color Tom gave, I think, was global and helpful, but a little lay of the land on U.
S. Specifically, if you have it?
Yes. I would say, Jeff, the growth in the product businesses that are serving commercial buildings are reasonable. I mean, mid single digit in the Q2. I expect that to continue for the remainder of the year, if not accelerate a little bit more modestly. In terms of the pure building solution business, the sales the business in the U.
S. Was tempered a bit by the energy business. We had a couple of really large projects completed in 2013 that tempered the sale. In terms of the orders growth there, it's flat. It's flat globally, but on the Americas side, it's been picking up to mid to high single digit is what I said.
The mid to high single digit U. S. Energy retrofit, but global flat on orders?
Yes. Okay.
Thank you. And I was just wondering Dave if you could address Europe a little bit more specifically. I think the plus 5 was an EMEA comment. How is kind of core Europe actually doing? And was there any slowdown in Europe in the quarter or in June that you noticed?
Overall, it's kind of interesting as our Europe orders have actually done okay as you've been hearing us say for the last 2 or 3 quarters. So I'm a little surprised actually given that they're the overall economy doesn't perform all that well. And we don't have a lot of expectations for the economy to perform all that well over the say next 2 or 3 years. That being said, our orders are okay there.
And just one final one for me and I'll move on. Perhaps too granular for this call, but are you seeing any signs of kind of choppiness pressure in the commercial helicopter market?
I can't say no. I don't think so. We actually think that's going to be a pretty good market for a while.
Yes. Just some cautionary comments out of Eurocopter this week in Farnborough and some coppiness at Bell also. Maybe it's just noise in the quarter, but
Yes. I'd speak to that. I'm not sure of what their expectation was either. But I'd say overall, we still think that's a growth market.
Great. Thank you guys. Take care. You're welcome.
Our next question comes from Howard Ruble of Jefferies. Good morning.
Hey, Howard.
How are
you? Good. Numbers were nice. Couple of things. You never stop pushing excellence.
And while Friction Material is the last obvious divestiture, how do you think about keeping the guys at the back of the line equal with the people outperforming at the front?
Well, that's something we pay a lot of attention to all the time and in several different ways. One of the things that we'll be one of the ways we'll be doing that more in the future is through this HOS Gold effort that you've heard us talk about. And especially as we go through the strategic planning or what we call strap exercise, we spend a lot of time looking at that. And I don't I can't say that we look at it and threaten sale if they don't kind of come up to par. But at the end of the day, I'd say there's I'm really encouraged by the upside I see across the portfolio in the implementation of HOS Gold and the ability to raise sales growth and margin rates everywhere.
And then kind of staying with that theme, you're spending a lot of money on new are you are you getting the productivity you want? And are there how do you think about maybe how much of this is contributing to organic growth as opposed to just the normal economy?
Sorry about new products or productivity Howard?
Well, I guess I mixed them both. I mean, one is the productivity associated with new product development. And then second is how is that contributing to the organic growth Tom?
Well, first off, the look at in pure financial metrics, we're not decelerating at all on investments in new products. So for example, if look at R and D investments, it's not that's not per se generating productivity. But when you look at productivity across direct materials and our people costs, I would say that is that has been as strong as it's been in the last couple of years is the way I look at it.
And then last, Intermec, looks like you're getting the top line you expected. How would you evaluate where you are in terms of the integration process? And when do we really see its profitability normalize with the rest of the business units?
Yes. I'd say, Howard, the way we look at that one is a year ago everybody when we closed the deal, it was a business that was not very profitable at all. And you fast forward to now and if you look at what we've done, I mean, just to look at the multiple that we paid and compare it to today, you would say we're at 17, 18 times multiple. You factor in synergies gotten and that are in place, we're down to sub-five type multiple. It kind of gives you an idea that we feel like we've been successful.
So when you look at the plan itself and you look at both revenues and the income and the cash, all of those metrics were performing a lot better than the plans. John and his team in scanning mobility as well as the Intermec has really done a nice job of integrating those businesses.
Thank you very much.
Our next question comes from John Inch of Deutsche Bank.
Thank you. Good morning, everyone.
Hey, John.
Good morning. So how did your businesses I realize it's not a huge exposure, but how did your businesses fare in Latin America? And the corollary might be does market weakness in Latin America, Dave Cody, maybe provide you an opportunity perhaps with respect to capital deployment or step up some investment spending there or something like that?
We continue to do very well in everything south of the Rio Grande. And you look at the big ones, Mexico and Brazil. We continue to do well there. Mexico, we've got about 14,000 employees. In Brazil, we've got about 1,000.
Our sales have been quite good there. In terms of investing, I still think that there are places where you think about it before you do it. It's not a no brainer. But overall, those have been a very good market for us.
Were your Brazilian businesses up in the quarter?
Yes. Yes. I'd say in single digits.
Defense and Space, were there any pockets of Defense and Space or expectations of Defense and space pockets like within the framework of that business that you expect to actually get better over the course of the year? And I'm curious how if anything has changed with respect to how you're seeing this business? How you're going to manage it? I'm assuming it gets managed down over time, but maybe not?
Yes. John, the way I think of the Defense and Space business is it has two pieces of products business where we're dealing with the U. S. Government and or the prime contractors. And then there's the service business that's largely unrelated to the aerospace industry.
And that's where we're seen the most pressure. Thankfully, it's a lower margin business, but that's where the top lines for expense and space are the most pronounced for us. We're now approaching periods where we're going to start lapping comps. So that will that pressure will subside. The other thing that we've got on there is the international side.
If you read the paper this morning, I mean, unfortunately, those things happen, but that tends to bode well for military budgets outside of the U. S. And so we're seeing an uptick as Dave referenced in sales on the international side of the pension space. So you got some balancing dynamics
going there. I think the net
to the defense space. So you got some balancing dynamics going there. I think that they'll net to the positive we had in the second half of the year. I think the other thing to recognize John is as we've said before, defense is really more of a sales channel for us. It's not like before, defense is really more of a sales channel for us.
It's not like we have while the jet engine might unique to a certain defense application, at the end of the day, it's still coming out of a jet engine factory that's also producing commercial
and Right.
And all incremental. Maybe one more. If global markets Dave Cody kind of do not begin to show more signs of life, I realize you're outperforming today, but let's call it over the course of the coming year. Does that cause you to perhaps modify or even accelerate aspects of your operating framework to hit your hit or hopefully exceed your 5 year targets?
Well, as you
know, I've been one of the guys who's generally been more negative on year plan is pretty consistent with that. I've never counted on much and so far that's been a good call. So I feel pretty good about where we are and what we're saying.
Thank you very much. You're welcome.
Our next question comes from Christopher Glynn of Oppenheimer.
Thanks. Good morning.
Chris. Hi there. Your brother-in-law Tom says, hi.
Thanks for passing that along. I got a text from him last night.
I guess it's going to be an easy question.
So we'll see. So I wanted to follow-up on the M and A and part of Roger's job now I think is the opportunity to look at sourcing larger deals. And we see the Intermec integration was pretty rapid fire with the benefits. So I'm wondering are you just starting to develop the pipeline for larger deals? Or is that something that's already kind of established?
I don't think there's been a concerted effort to find larger deals with Roger joining that area. I do think that he has the tendency and the license and the idea of looking across Honeywell and trying to identify opportunities that might touch on more than one business or that might be in an adjacent business adjacent to the 3 business segments that we have. That might lead you to think that there's larger deals in the making. But I would say that's not the primary objective. I'd say the primary objective is to augment those existing portfolios and find good growth ideas that are in industries of like.
I'd add Chris that I while we did an okay job on origination, as Roger said, if you get into this around the company looking at it within the businesses, across the businesses and adjacencies that might make sense is really invigorating the overall kind of origination process. So I think it's going to give us a lot more ideas to work with than what we've had in the past. And you've heard us talk about we want to many times that we have and want even more of a robust pipeline. Because the more ideas you have, the more stuff you can go after, the more opportunities it gives you and also allows you to be more selective. You can end up being I'd say in a much better position to negotiate if you have 9 other good deals that you can do so that you don't do something silly when it comes to pricing.
Right. Well, we haven't seen that be a problem. So I think our bias then would be more to higher frequency of deals in your accelerated capital allocation rather than seeing something larger?
Well, I guess it depends how you define larger. But I would say, you've heard me say many times, we never say never on any of this, because it's going to depend upon the construct of the deal. But whatever we do, I can promise you, we'll be consistent with the financial and operating discipline model that we've talked about in the past. And we'll have strong cost synergies that come out of it consistent with Tom's point on Intermec because that certainly is what one of the things that I think has helped define our track record.
Great. Thanks
guys. Leo, we have time for just one more question.
Very good. We'll take a question from Andrew Obin of Bank of America.
Yes. Good morning. Just a little bit more color on UOP and HPS. Could you just tell us more on petchem demand by region because we're hearing mixed commentary this earnings season?
UOP by region?
Yes. And HP, yes. It seems that some pieces of oil and gas and petchem industry are moving in different directions by industry. Just trying to get what you guys are seeing.
It's pretty broad based. I mean, if you look across all of the regions, I mean, oil and gas has been particularly strong both in the U. S, the Middle East, China in particular. Anything Tom
could add? Yes. I'd say the Middle East has been outstanding for both UOP and for HBS and China. So I think those are really good. But it's not like the U.
S.
Is No. Canada.
And just a question on Aerospace. You sort of noted that RMUs growth is moderating and I think you guys were positive. Can you just talk about what's happening there and any sort of broader trends that are taking place?
Well, I think on RMUs, the sales levels are very strong. It's just that we had such an uptick in the early and middle part of 2013 and really even into 2014 that we're starting to lap periods that are really strong. But we're sustaining the level of new product development there and the offerings that are going on to those platforms, particularly on BPA side and particularly related software.
Thanks a lot.
Well, thank you for your participation today. I do want to turn the call over to Dave Cote for any final comments.
Well, we're quite pleased with our Q2 results and our outlook for the year. And I think it's a good reflection of our expectations for ourselves over the next 5 years. We have a great portfolio to grow with. Our process initiatives continue to progress and our culture provides sustainability as we evolve and continue seed planting. We're building on a great base and with the addition of our drive for HOS Gold software including CMMI Level 5 and Huey, we see a lot of good things to come for Honeywell.
Thanks.
Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a