Good day, ladies and gentlemen, and welcome to Honeywell's First 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 is being recorded. And now I'd like to introduce your host for today's conference, Elena Doum, Vice President of Investor Relations. Please go ahead.
Thank you, Tony. Good morning and welcome to our Q1 20 14 earnings conference call. With me today are Chairman and CEO, Dave Cote and Senior Vice President and CFO, Tom Klosek. This call and webcast, including any non GAAP reconciliations are available on our website at honeywell.com/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 Q1, share with you our outlook for the Q2 full year and finally, we will save time for your questions. So with that, I'll turn the call over to Dave Cote.
Thanks, Elena. Good morning, everyone. I'm sure you've seen by now Honeywell delivered another good quarter to kick off 2014. 14. EPS of $1.28 increased 10% year over year when normalizing for tax, so another quarter of double digit EPS growth with earnings coming in above the high end of our guidance range.
This was driven in large part by our strong execution and higher sales conversion all while maintaining our seed planting investments for the future. Our enablers and key process initiatives are driving meaningful results throughout the portfolio. An important driver of our productivity continues to be the savings we're seeing from previously funded restructuring actions. With that in mind, we've been able to proactively fund restructuring and other actions by fully deploying the approximate $0.10 gain from the sale of BE Aerospace peers in the Q1, just like we did in the 4th quarter last year. I'd also point out that the company funded an incremental $10,000,000 of restructuring actions in the quarter from operations, so in total $0.11 of restructuring and other actions.
The projects funded in the Q1 alone are estimated to yield full run rate savings of about $70,000,000 over the next couple of years. That's annual. We're being proactive about keeping that restructuring pipeline full and we think these actions position us well for further margin expansion over the next 5 years. Margin, EPS and cash flow were all strong in the quarter in spite of slightly slower top line growth, primarily related to timing in PMT and lower defense and space sales. Sales in the quarter of $9,700,000,000 were up 4% reported and 1% organic.
However, if you exclude D and F where the headwinds are well known, organic sales for the total company were up about 3%. We talk a lot about great positions in good industries and our diversity of opportunity, which once again benefited us in the quarter. We saw good momentum exiting the quarter in our short cycle businesses, while our long cycle businesses maintained healthy backlog. We're also seeing pockets of recovery in below peak end markets. Transportation Systems, for example, continues its healthy pace of recovery.
And while weather may have been a factor in some areas, these challenges were mostly offset by weather related areas of opportunity. For example, ECC enjoyed strong double digit sales growth in combustion and heating control. The order momentum we're seeing out of our long cycle businesses and short cycle also positions us well for our expected acceleration of organic growth in the second quarter and second half of the year. Geography is also part of our diversity of opportunity. In the U.
S, we continue to see good growth excluding East. It's worth noting that each of our SPTs grew double digit organically in China in the quarter. So both our short and long cycle businesses are delivering on our high growth region strategy. Innovation and investments in new products and technologies are also driving value across the portfolio. We unveiled the Honeywell user experience or Huey back in March and we couldn't be more excited about what this would mean for Honeywell.
We recently opened a Huey design studio in Shanghai with other design studios set to open globally. We're focused on how we can drive significant change and improve the experience for the user, installer and maintainer. With all that being said, we remain cautiously optimistic on the macro economy. And with the strength of the Q1, we're confident in our revised full year outlook for pro form a EPS, raising the low end by a nickel, making our new range $5.40 to $5.55 up 9% to 12% versus prior year. Our outlook on free cash flow has also improved based on the strong performance we saw in the Q1.
As Tom will detail in a moment, we are now reporting free cash flow without adjustments for cash pension, NACCO payments and one time items. So the guidance range remains the same, but it's reflective of the Q1 performance and importantly without adjustment. In summary, we've got a lot of momentum momentum across the portfolio, which we highlighted in our March Investor Day with road map for future growth and profitability as part of our new 5 year target going out to 2018. Innovation and execution, our seed planting for the future, great position in good industries and the power of 1 Honeywell will continue to differentiate us, allow us allowing us to deliver on these targets and continuing to outperform. 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 Q1. Sales of $9,700,000,000 were up approximately 4% on a reported basis and up 1% on an organic basis. The total sales are right in the middle of the range we communicated early March of $9,600,000,000 to $9,800,000,000 and the organic growth rate was slightly lower than expectations due to timing in Aerospace and PMT. As Dave mentioned, excluding Defense and Space, which is expected to stabilize this year, our organic sales were up 3%.
Regionally, organic sales were up 1% in the U. S. And EMEA, with Europe showing resilience continued resilience despite some large customer project ramp down. China grew 14% on an organic basis with double digit organic growth in each of the businesses. As we will detail later, we're anticipating organic sales growth to accelerate as the year progresses.
Segment profit increased 6% in the quarter with margins expanding 30 basis points to 16.5% or up 50 basis points excluding the dilutive impact of M and A. We had guided to 30 to 50 basis points improvement in the margin rate excluding M and A, so the 50 basis points is on the high end of our expectation. We saw margin expansion in 3 out of the 4 businesses. Productivity continues to be a key driver across the portfolio, offsetting inflation and continued investments for growth. In PMT, we did experience some temporary margin contraction because of the expected headwinds around unfavorable petrochemical catalyst shipment mix and pricing headwinds in R-twenty 2 in resins and chemicals.
Still PMP at close to 21 percent segment margin was our highest margin business in the quarter and we continue to have a lot of confidence in their ability to expand margins going forward. Below segment profit, I wanted to comment on 2 items. The first is the gains we experienced from the additional BE Aero shares and second the tax rate. On BE Aero, which I'll further detail in a minute, the gain was more than offset by restructuring and other charges resulting in a $0.01 unfavorable impact on EPS. The BEA Aero gain is not included in our operating margin, but the restructuring and other charges are.
So operating margins expanded 10 basis points in the quarter compared to the segment margin expansion of 30 basis points. The tax rate of 26.6 percent was in line with expectations and represented a $0.06 headwind compared to 2013. Earnings per share of $1.28 was a penny higher than where we guided even after we funded incremental $0.01 of additional restructuring actions. There are a couple of things to mention on free cash flow. First, it was really strong, up 2.5 times 20 13 amounts.
The improvement came equally from better working capital performance and lower cash contributions to foreign pension plans. 2nd, we're simplifying how we define free cash flow as Dave mentioned. It's just free cash flow from operations I'm sorry, it's just cash flow from operations less capital expenditures, no more adjusting for pension or narco. We did this the same way for both 2013 2014, so the numbers are comparable and the growth is real. Slide 5 provides a more detailed view of the gain deployment actions in the quarter.
As you can see, the $0.10 per share gain from the 1,500,000 BE Arrow shares sold in the Q1 was exceeded by funding of restructuring actions and other proactive environmental remedies. So in total, an $0.11 headwind to earnings from restructuring activity offset by the BE Aero gain of $0.10 so a net 0.01 dollars headwind to earnings. Restructuring repositioning of restructuring, we represents the majority of the game deployment. Just as you heard in January, these actions are intended to proactively realign our businesses for growth and higher asset efficiency and will provide us with meaningful margin and earnings tailwinds in future periods. We're expecting these projects to yield approximately $70,000,000 of run rate savings in future years and each individual project has an excellent ROI.
We'll continue to maintain a steady pipeline of funds the exit funds the exit cost requirements from our key process initiatives and integration activity. A smaller portion of the gain was used to fund incremental environmental charges. This relates to certain remediation projects where we believe seeking proactive remedies with the regulators will lead to lower expenses and more cost stability over the long term. Overall, these actions position the company well for future earnings growth. And as a reminder, following the sale of 2,600,000 BE Aero shares in the Q4 of last year and the 1,500,000 in the Q1, we still have roughly 1,900,000 shares remaining and continue to have a very favorable view of the company.
Now let's take a look at the 4 business segments. Starting on Slide 6, Aerospace sales were down 2%, which is in line with our guidance. However, excluding the impact of the expected Defense and Space decline, Aero sales were up a solid 3%. Segment margin was up 30 basis points, which was actually a bit better than our expectation. From a sales perspective, commercial OE sales were up 1%, reflecting strong air transport and business aircraft shipments.
We have particularly strong 737 and 787 OE growth and broad strength across the business aircraft portfolio. Regional jet sales were lower, reflecting lower volume and free of charge shipment. Commercial aftermarket APR and BGA, partially offset by lower R and O revenues, a reflection of fewer maintenance events and timing. The 14% spares growth was driven by the recovery in the U. S.
And China and we highlighted this as a challenge in the Q1 of 2013 as well by the continued robust RMU sales in BGA. RMUs repairs, modifications and upgrades. Defense and Space sales were down 8%, which we expect to be the low point from a sales defense aftermarket revenue. On segment profit, the aero team was able to more than offset the impacts from the lower sales to drive segment margin up 30 basis points through commercial excellence, productivity net of inflation and favorable aftermarket On page 7, we're looking at ACS prior to the shift of HPS to PMT. We expect to file an 8 ks in the Q2 to reflect this change and we will update our historical numbers.
However, to be perfectly clear, when we share the guidance for Q2 and the rest of the year, which I'll review in a few minutes, we'll do that on the new reporting structure. So ACS organic sales were up 2% and reported sales up 8%, both in line with our expectations. The difference, of course, reflects the growth from M and A, in particular Intermec and RAVE Systems acquisition. Segment margin was up 40 basis points, almost twice our expectation. ESS sales for the products businesses were up 2% with EPC and Life Safety showing particularly strong growth and more than offsetting the expected declines in scanning and mobility resulting from the ramp down of certain programs.
Without this scanning and mobility dilution, ESS sales would have been up 5% with some favorable contribution from weather impacting ECC. We experienced higher U. S. Residential sales, including on the retail side, modest improvements in Asia and Europe and continued HDR growth in China and India. The Intermec acquisition continues to go well.
We are exceeding what were challenging expectations on the pace of integration and on performance. Also, the business continues to win a large number of orders that are expected to result in further 2014 growth. Process dilution sales were up 3% on organic basis in the quarter with continued good growth in high margin areas like services and advanced solutions more than offsetting the impact of large project completions. Orders growth also continues to be healthy and backlog is growing, which Darius and the PMT team will see the benefit of in
the future.
Building Solutions sales were essentially flat on an organic basis. We are encouraged by our Building Solutions orders and the project backlog growth, both showing mid single digit growth on an organic basis. And we're also experiencing similar growth in the services backlog. Not a trend yet, but certainly encouraging development as we look to the rest of the year. ACS margins expanded 40 basis points to 14.2% in the quarter and were up 70 basis points excluding the dilution from M and A.
ACS continues to benefit from driving commercial excellence, volume leverage and productivity while at the same time investing for the future. Moving to Page 8, Performance Materials and Technology. PMT sales were up 2% in line with our expectations and driven by 9% growth in ULP, offset by 4% declines in Advanced Materials. Although PMT margins contracted 100 basis points, the result was better than our expectations. And at 20.8%, PMT was again our highest margin business in the quarter.
On sales, UOP experienced significant growth in catalyst volume and gas processing, offset by an unfavorable mix in catalyst shipments and lower process technology licensing sales, resulting from timing and challenging comps. As you know, we are in the midst of adding UOP capacity, particularly on the catalyst side, which will help the business to better serve its $2,400,000,000 backlog. Advanced Materials sales were down 4%. We experienced volume increases in most of the Advanced Materials portfolio despite the tempering effect of the difficult weather. However, this volume growth was more than offset by unfavorable pricing in flooring products and resins and chemicals.
We do expect the pricing challenges to moderate in the Q2 and throughout the year as we lap prior year declines. The decline in the segment margin was principally driven by unfavorable catalyst mix in ULP, the price raw challenges in advanced material and temporary spike in raw material costs due to weather, partially offset by productivity net of inflation. On Slide 9, you can see Transportation Systems had a very strong quarter with sales up 9%, that is 7% without the benefit of foreign exchange and segment margin up 3.40 basis points. On the sales side, the increase was principally volume related. We experienced strong turbo volume growth in our 3 biggest regions, Europe, North America and China.
The Europe growth was strong in both light and commercial vehicle segments. We continue to benefit from improving global industry macros on vehicle production, also from regulations and gas penetration. We continue to benefit from a strong win rate with turbo unit sales from new product launches doubling from 2013 levels. As the year progresses and we begin to lap stronger periods from 2013, we do expect some moderation in the growth rate. The segment margin improvements to 15.5% reflects the strong productivity and volume leverage in Turbo and the benefits from restructuring and other operational improvements.
We continue to work on the Friction Materials divestiture and expect sometime in the second half of twenty fourteen. I'm now on Page 10 with a preview of the Q2. We're expecting sales of $10,000,000,000 to $10,200,000,000 which would be up between 3% 5% on a reported basis or approximately 3% on an organic basis. We're using a euro range of roughly 1.35% for the 2nd quarter. Segment margins are expected to be up in the range of 50 to 70 basis points excluding the dilutive impact of M and A.
EPS of $1.32 to $1.36 will be up 8% to 11% at our normalized 26.5 percent effective tax rate. On the segment, is expected to be in between minus 1% and plus 1% in the quarter with low single digit commercial growth offset by moderating defense and space decline. On commercial OE, we're still seeing healthy demand for air transport deliveries, which is helping offset the continued drag from lower regional aircraft sales. In commercial aircraft I'm sorry, in commercial aftermarket, we're expecting ATR spares growth to be about in line with flight hours in the quarter, as well as continued BGA RMU strength. As for margins, we expect some headwinds, primarily due to higher mechanical OE sales in both ACR and BGA and a higher proportion of ACR revenue the quarter, resulting in flattish overall margin growth.
For ACS, as I indicated earlier, we're providing guidance based upon the new reporting structure. Sales are expected to be up between 8% 10% or approximately 3% on an organic basis. The reported sales growth is largely driven by the Intermec acquisition and an acceleration of organic growth in ESS, particularly security and scanning mobility and also BSD. Modest improvements in non revenue projects are expected to favorably impact ECC, life safety and security and high growth region sales look to continue their positive trend. The 2 consecutive quarters of long cycle orders and backlog growth in Building Solutions is encouraging and should enable strong organic sales growth in the second half.
ACS margins are expected to be up again in the second quarter approximately 50 basis points or 100 basis points excluding the dilutive impact of M and A. PMT, including process solutions in both years, is expected or is expecting sales to increase between 3% 5% in the second quarter, driven by double digit increases in UOP and to low to mid single digit growth in HPS and Advanced Materials. In UOP, we foresee another strong quarter of increased catalyst and gas processing sales growth. While Advanced Materials, we anticipate broad sales growth across the portfolio, including improved production levels in resins and chemicals and our normal seasonal ramp up in flooring products. The PMT leadership is encouraged by the momentum in the order and the backlog increases in HPS.
PMT segment margins, however, are expected to be up slightly versus the prior year based on the mix of shipments within UOP, offset by moderating pricing pressures in Advanced Materials. In Transportation Systems, the strong performance is expected to continue, although tempered slightly from Q1 by the more challenging comps. Sales look to grow between 5% 7% driven by new platform launches, continued turbo gas penetration and flat or slightly better EU light vehicle production rates year over year. Segment margins will be similar to 1st quarter levels and up approximately 200 basis points, primarily driven by higher volumes in turbo and continued productivity gains. On Page 11, we're profiling the organic sales growth for the year.
We're expecting full year growth of 3% on an organic basis. So there's some modest acceleration from the Q1 growth rate of 1%. We want to explain the key drivers. The page shows the first half versus second half organic growth rate for 20 13 as well as what we expect for 2014. The first thing to notice is that the first half growth for 2014 is stronger than 2013.
We saw that in this Q1 as 1% organic growth, although Tepid was greater than the Q1 of 2013 where we saw a decline of 1%. 2nd, the slope of the line is similar each year. In 2013, we went from 0% in the first half to 3% in the second half. In 2014, we go from 2% in the first half to an expected 4% in the second half. Thirdly, the notations on the top of the 2014 bars show the expected organic growth rates excluding defense and space, which will be roughly 3% in the first half of twenty fourteen accelerating to approximately 4% in the second half of the year.
That happens because of the factors mentioned on the right side of the page. In aero defense and space declines significantly moderate. Also commercial OE is expected to improve slightly, driven largely driven by the absence of the prior year's large 4th quarter BGA OE payment. In ACS, we anticipate scanning mobility returning to growth after lapping the program wind downs I discussed earlier and also layering on new business wins. The macro environment is also expected to modestly improve with continued residential strength and improving non residential markets benefiting ESS.
And as highlighted earlier, the last couple of quarters have seen a nice lift in Building Solutions backlog, which is expected to result in stronger sales growth rates in the second half. In PMT, the pickup in the second half was driven primarily by better process Q4 of 2013. The process solutions backlog of projects and services continues to grow nicely, which like building solutions is expected to result in better second half sales growth. And as mentioned earlier, advanced materials pricing headwinds are expected to moderate in the second quarter and back half of the year and we're also expecting a boost from higher volumes and higher salsa sales in fluorine products. Finally, in expected to be at a slower pace than the first.
I'm now on Slide 12, where we provide an outlook of segment performance for the year. Again, this guidance reflects the realignment of our Process Solutions business in the PMT from ACS. So let me explain the setup here. The left hand side of the slide represents the guidance we provided in March and is based on the old reporting structure. The right half reflects our current guidance.
On a total Honeywell basis, if you look at the bottom line, the segment guidance for the year has not changed. However, there are some minor changes to the segments that you should be aware of. Aerospace sales remain roughly in line with the guidance, but reflecting the slower R and O graph growth in the Q1 and slightly lower margins impacted by volume leverage on that lower sales growth. ACS and PMP now reflect the shift of profit solutions for the full year. Organic sales are expected to improve in the second half of the year for both businesses.
We've also provided updated margin profiles, which show continued expansion in both ACS and PMT. The transportation system guidance reflects the 1st quarter top line strength and strong margin expansion. We're now expecting TS margins to approximate 15% or more in 20 14. So small puts and takes, but as I said, no change to total Honeywell sales or margin outlook. Moving to Slide 13, we have an update on our full year guidance, which is very similar to what we shared at the March Investor Day except for 2 things.
1, we're raising our full year pro form a EPS guidance at the low end by $0.05 resulting in a new range of 5 dollars to $5.55 which is up 9% to 12% versus 2013. This reflects our Q1 performance and the confidence we have in our outlook. 2nd, we're raising our free cash flow guidance by approximately $300,000,000 to reflect the strength we saw in working capital in the Q1 and lower foreign cash pension contribution. To be clear, the $3,800,000,000 to $4,000,000,000 range looks the same as what we showed you previously in March, but that range was based on the prior definition of free cash flow, which excluded several non operating items. So with those changes, we continue to expect sales in the range of $40,300,000,000 to $40,700,000,000 which is up 3% 3% to 4% on a reported basis and 3% on an organic basis.
Our sales range reflects euro at $1.30 for the second half of the year, so a little bit of a headwind there. We also continue to expect segment margins between 16.6% 16.9%, which would be up 30 to 60 basis points from 2013 or 50 to 80 basis points excluding the M and A impact. So as Dave said earlier, still a very balanced outlook for the year, but take into account the good start we saw in the Q1. On Page 14, I have a brief wrap up. In markets that continue to be somewhat challenged, we're off to another good start to the year.
We exceeded our expectations on most fronts, including margins, earnings and free cash flow, while at the same time continuing to invest for future growth and productivity. We raised our earnings and cash guidance to reflect a strong Q1 as well as our expectations for growth acceleration in the second half. We intend to continue our outperformance by leveraging our balanced portfolio, which as you know is and security and urbanization combined with a growing middle class and customer productivity, all of which remain intact. So with that, Elena, let's go to Q and A.
Thanks, Tom. Tony, we will now open up the line for our first question.
Thank you. The floor is now open for Thank you. Our first question is coming from Jeff Sprague with Vertical Research Partners. Please go ahead.
Thank you. Good morning, everyone. Hey, Jeff. Hey. Could we drill in a little bit more on kind of the building related trends in ACS?
Tom, you gave us some color there. But just on BSD, I'm curious if there's some geographic color you can shed on what's going on in the firming there and if there's some color you can shed on kind of energy retrofit versus new construction? Yes. I'd say the growth in orders in HBS was high single digits for the quarter on an organic basis. And that came across very strong in the Americas.
Europe was also very good. And Asia, which is a little bit smaller for us, was a little bit down. But in the Americas, we're seeing really good wins in energy, smart grid solutions as well and services. Our service bank continues to grow. Across the board pretty good results there in orders perspective.
And again, as we said, this is the Q2 where we're seeing that momentum. So hopefully bodes well for the second half. And then when you look at ESS and what's going on there in particular in environmental controls, can you elaborate a little bit more how the quarter played out? Sounds like it was a pretty strong heating driven quarter. Does that then fall off as we get into the Q2?
No, I think the trend I mean very strong yes, ECC was very strong, Jeff, in the quarter, mid to high single digits on a growth perspective. Americas was very strong in combustion as well, so both homes and combustion. But the trends will probably be mid single digits growth over the course of the year if the conditions kind of stay where they are. So we're encouraged by it. We also have the new products, Jeff, that we've been introducing and that's helping.
Right. Can you elaborate a little bit on kind of the call you're making on the euro? So you're just kind of expecting a dollar, euro fade here as we get into the back half of the year. And if that doesn't happen, what kind of hedge that is to your second half earnings outlook? Yes.
I mean as we said we're using $1.35 for the 2nd quarter and $1.30 for the 2nd half. I mean, we're closer in obviously to the 2nd quarter and we kind of feel more confident with that. We're not trying to be as we're forecasted here. I think it's just more conservatism that we're including. The impact on the second half would not be very significant.
Yes. The average in the second half of last year on the euro, Jeff, I think it was $1.33 roughly $1.34 in that range in the second half. So a little bit of a headwind, but remember that's at the midpoint of our revenue outlook for the second half.
But roughly speaking, a euro cent is an EPS cent on a full year basis? Is that about right?
Roughly. Yes, a little less than that, but close. And that's assuming the euro is isolated.
Right, right. Okay. Thank you very much. Thanks, Jeff.
Thank you. Our next question is coming from Scott Davis with Barclays. Please go ahead.
Hi. Good morning, guys.
Hi, Scott.
I don't think you mentioned particularly Dave, I don't think you mentioned anything about the management changes and pretty substantial really. Maybe the question really is because I don't think we have a half hour to talk here, but the question is, what do you expect to get better? What is the what's the messaging, I guess, in the sheer volume of changes you made? And there are changes in mandates and I mean I'll just open it up to that.
Yes. I don't think you're going to get a lot more from me than what we already talked about, because we tried to explain it the first time through. I'd say the reason I didn't bring it up is I kind of viewed it as that history and we already went through that. But at the end of the day, the whole point is just we've got really good people coming up and we need to make sure that we provide opportunities for them to grow. And at the same time, we've got the 5 year plan that we've committed to that has some pretty big themes that we want to make sure that we drive.
So M and A, high growth regions, the software focus, QE, and it says that HOS Gold. And as I look at those, I want to make sure that we develop them as a company. And this gives us an opportunity with the vice chairs to really make sure that happens and that we deliver on that 5 year plan. So it's really pretty much what I said Scott in the announcement we sent out.
Okay. Fair enough. And not to nitpick, but defense down 8% I think was a little bit worse than what we had expected. I mean, can you give us a sense of how that transitions through the year when it particularly when it flattens out becomes a net neutral?
I mean, assuming by 1Q of 2015, it's going to be an EBIT comp. But how do you think about the next three quarters? Yes. The decline Scott, we start to see them in the Q2 and we'll actually probably be flattish in the second half. So for the year, we're expecting to be in line with kind of a low single digit decline for the year.
And you recall that we have a sorry, we have an easier comp right in the Q3 of this year. So likely to see an actual increase in D and S revenue in the Q3 given the 11% decline in 3Q of 2013.
Okay, perfect. And then just a quick one on HPS. Can you give us a sense of the order book in that business how the Board outlook looks?
Yes. I'd say the if you look at it from a book to bill ratio, pretty strong. And from the pure growth percentage, we were also mid single digits for the quarter.
The long cycle projects, the bigger projects up a little bit more than that more in the high single digits.
Okay. That's perfect. Thank you guys. I'll pass it on.
Thank you. Our next question is coming from Steven Whittaker with Sanford Bernstein. Please go ahead. Your line is open.
Thanks and good morning all. First question, Tom particularly, what kind of visibility do you have beyond the net BEA sales of that 1,900,000 shares I guess to additional one time gains in the pipeline that can fund restructuring on a repositioning on a continued basis? In other words, you've got a lot of ambitious goals in that 5 year plan. It's going to require a lot of ongoing repositioning over that 5 years and we're seeing it now.
Do you have a
lot of confidence and visibility into the offsets there?
Yes. Obviously, the BEA for the last couple of years and some of the other transactions in the last couple of years have been nice catalysts for restructuring. But even without those, we've through operations been able to generate sufficient capacity and that's part of a lot of what we've done as well. So that's what I look to. And in terms of how we set our plans, we do try to incorporate capacity for that on an ongoing basis.
Now it's not going to be 100 of 1,000,000 of dollars every quarter, but we are very mindful of that.
And in the same way that you've moved on cash now to reporting on a cleaner basis without the adjustments, Is there some thought to doing the same thing on restructuring or any of these other items or not really?
Well, I'm not exactly clear what's not clean about the restructuring.
Okay.
That's reported in our GAAP earnings, Steve.
Right. No, I just met some of your peers choose to treat the operating earnings all in. That's all.
That's the point I'd like you to make much more strongly, Steve, in all your comments. I've always felt for 10, 12 years, we've always included everything and talked about it that way. And you allow greater license with some others when it comes to what's in, what's out. We don't do that.
Okay. I'm sure you're talking about the collective view. And then finally, on the book to bill, you talked about it just now in, I guess, in HPS. On the entirety of the kind of long cycle businesses across Honeywell, could
you give us that number? It's actually been nice. Arrow has been above 1%. And as I said on HBS and HBS also pretty strong.
The backlog, Steve, is up just about 1% on a year over year basis in the quarter.
Okay, great. All right. Thanks a lot. I'll pass it on.
Thank you. Our next question is coming from Steve Tusa with JPMorgan. Please go ahead. Your line is open.
Hey, good morning.
Hey, Steve.
Can you just give us the I guess, you talked about the can you give us the prior guidance or at least PMP new guidance on the prior basis? Is there any change to that up 4% or up 10% up 4% in revenues and up 10% in margin up 10 basis points in margin?
For the full year you're saying? Yes. The second quarter.
For the full year?
Yes. I think in terms of the PMT full year sales outlook, it would have been roughly $50,000,000 less in terms of revenue and margins would have been about 50 basis points less than what we're showing on the current outlook.
Okay. So the fact that I guess you are kind of tweaking that down, but then moving so I guess moving HPS in there, I mean HTS margins then must be going up a lot.
Yes.
Yes. There's an ongoing improvement in HTS.
But I mean, I'm getting I guess, I'm getting something it's like more than 100 basis points. I mean, for to have that margin go down like that for PMT, but have the combined segment go up 50 basis points. I mean that's a huge increase in HPS. But I think limited I mean there's not that much volume growth there, right?
It's low to mid single digits. So but yes, you're right.
It's certainly better in the second
half. Is that a mix dynamic? Is that more software coming through or something or just blocking and tackling?
I mean over the last couple of years as you know in HPS Darius has been focused on driving operational improvements in the business. I mean the business is up 200 basis points in the last 2 years through the end of December. And you're still seeing continued restructuring actions that are directed at that business. They've also done a nice job of driving growth in services and software side, so advanced solutions. So the mix of their revenues has been pretty good as well.
So it's a combination of both operational improvements and the portfolio and what they've been emphasizing.
Okay. And then I guess just on
At the end of the day, Steve, your premise is right. If you take a look at overall CMT, that Q1 struggle continues on a bit during the course of the year. So we expect it's not going to be as good as what we had said initially. And one of the offsets to that is going to be solutions performance and what Darius has been able to achieve there. And it's across the board, it's better growth, better cost performance, better organization.
I'm really intrigued with what I see going on in that business and where we can take it.
Can you take it more into instrumentation?
I would say you're going to see us continuing to drive our software capability because that's a big part of where we differentiate ourselves is just doing a great job on the software side and adding value there.
Okay. And then Dave, any change in the way you view the Advanced Materials business? I mean, you've combined HPS and UOP now clearly like a very attractive play on this whole global multi industry companies don't talk about. Is there any kind of change on the portfolio view, especially in the context of the liquidity and high valuations out there, and quite frankly a multiple for you guys that remains at a discount. Any thought around how core that business is over the long term?
I would say the thought is the same and that's that it is still core. One of the things that getting back to this diversity of opportunity is I like facts out there so that while never there's never one thing that really tells me, but there's also never any one thing that really takes the whole thing to take off. I think it just creates more sustainability, which means that to have all the moving pieces moving in the same positive direction at the same time or negative direction is unlikely. So what we're seeing right now in particularly resins and chemicals and in fluorine, there's a couple of unique aspects that are causing them to not perform as well as we might like. But at the same time, I know those things are going to be changing.
But if I take resins and chemicals, when I take a look at positioning, it is still the lowest cost producer in the world and that includes being able to land product in China cheaper than the Chinese can manufacture it domestically. So we've got an advantage there. And I think what you'll probably see is capacity elsewhere in the industry coming out over time and moving our pricing dynamic up. If I take a look chlorine, it's largely driven by patent. And when you have stuff that comes off patent, well, pricing tends to get hit.
That's what you're seeing now. However, we have new patents coming in for the HFO stuff and that's gearing up now. As a result of that, we're going to see some really nice performance out of the floorings business over the next few years. So I would kind of liken it more to we've got this unusual dynamic going on in both of these businesses. It's going to be turning over the next year or so and we'll benefit from it.
So they're still good businesses. It's just you can't have every business performing at the same time because it doesn't work. Right. Okay. Fair point.
Thanks.
Thank you. Our next question is coming from Nigel Coe with Morgan Stanley. Please go ahead. Your line is open.
Thanks. Good morning. So just wanted to dig into the ACS PMT potential synergies there. We've been talking about the go to market potential there for a while now we have the risk segmentation. So I'm wondering Dave, do we should we expect there to be more integration between these two businesses going forward?
Or is it basically the same as before just they now happen to be in the same segments?
Probably somewhere in between. Got to wait for Darius to finish his work there on what he thinks. But at the end of the day, there is stuff that is common. And let's say, the 60% of the customers that HPS has are the same UOP as If you take a look at who they deal with, it should be about the same. The technology, there should be even greater overlap than there is, because you will be developing processes and HPS the controls that manage the process.
And while we've done some of that already, there should be more opportunity there. On the other side, you have UOP, which is more obviously in the chemical business and some on the mechanical side when it comes to how to run those chemicals. And you've got HPF, which is largely a software business. And that's not going to change. That's I have a tough time seeing the chemical guys running the software engineering or vice versa.
So that's why I say, I think it's going to be somewhere in between and I'm waiting for Darius to finish his review on what he thinks makes the most sense here.
Okay. No, that makes sense. And then switching to TS, 15.5% OM, I think is the best you've ever done in the quarter, given that there have been some changes in the portfolio over that time frame, but 15.5 percent you said that to me. And within that number, is friction still losing money? Or is it back to breakeven?
It's nearing breakeven. It was probably a third of the overall margin improvement for the quarter for Transportation Systems.
Okay. So one third of it. And then some other quick one. The free cash flow guidance just to clarify that includes the cash taxes on the B tail?
Yes, it does.
Okay. Great. Thank you very much.
Thank you. Our next question is coming from Howard Rubel with Jefferies. Please go ahead. Your line is open.
Thank you. I have one ACS question and then one on other item. First on ACS, I mean we've been seeing
Hi, Woody Howard. Hi.
Hello, Dave. And in fact, this new management structure eliminates confusion between you and the CFO now. So I appreciate that.
I'm sure there's more to that story.
In any event, Dave, good morning. Thank you.
Thank you, Al. Good morning to you too.
With respect to U. S. Housing, it's been a little sloppy on the starts and I know that's small relative to your business. Have you seen anything there that's an indication of pent up demand or some change in the overall market?
Yes. I don't think the when you look at our revenues in ACS, Howard, we don't have a precise way of determining where every product ends up, whether it's in a commercial setting or residential setting. But with that said, there are very strong verticals within ACS in the last couple of quarters. I'd point to the retail sales in particular for ECC that has been a strong indication consumers are in fact very interested in energy related product, thermostats and other things.
And then to follow-up on another subject. You've used a lot of the discretionary gains to go after environmental so that you're reducing the long term obligations there. Could you just address for a moment Dave, what you've done so that the entire process of the enterprise has gone after eliminating legacy liabilities so that the result is that you don't have to find well use gains to fund liabilities, but in fact can use them to, I'll call it, advance the enterprise?
Well, I look at both as advancing the enterprise. But to your point, one of them is eliminating a negative as opposed to accentuating a positive. And as you know, I started this effort 12 years ago now and thinking that the way my question was given that if you take a look at all of our products and all the stuff we do around the world, we're basically on the side of the angels with everything we do, whether it's energy efficiency, clean energy generation, safety, security, all those macro trends are good things for the world. Yet we had this legacy liability that was just uncomfortable and very inconsistent with our message. I also felt that all this stuff cost you more over time and that our previous strategy of just waiting for what we lost in court was not a good one and we prefer to do this proactively.
But we're at a point now where we can actually see the end of the road on this. To the extent we can accelerate meeting that end of the road, well, I'm all in favor of it. And I'd say we're not too far away now, Howard, from being at that point where we've been able to accelerate a lot of these issues, make it less expensive to get done because either our remediation is quicker or more effective or we're able to resolve it faster. And I can see that within our 5 year plan horizon, which is a nice place to be.
I mean is there any way to quantify it? I mean it could be $50,000,000 $100,000,000 a year in potential cost avoidance down the road?
Yes. My view is it's more on the I'll try not to be too bullish yet until I actually know. But I'd say that's the right kind of range to think about it out. Thank you, Dave. You're welcome.
Thank you. Our next question is coming from Peter Arment with Stern AG. Please go ahead.
Yes. Good morning, Dave. I'll make sure I'll get
that in. Good morning, Tom. My question is really on the securing kind of your
first half guidance in Aerospace versus the second half. I'm surprised the second half has been showing up stronger given just kind of the overlay with 2% growth you're showing. You've got OE growth aftermarket I think is flight hours growth. So at least mid single digits. So I'm just wondering given the defense is probably going to be closer to flat in the second half at least what it seems like given your 8% down this quarter.
What am I missing I guess? Is it just conservatism at this point given the FEM? Or is there something else? No. I don't think you're missing anything.
On the defense side, as Elena said, we'll get a nice bump in the Q3 because of the comps that we had last year. Overall, the second half is will be what you see there. But for the year, we're still going to be down in defense. In terms of first half to second half, the R and O timing that we saw in the first quarter, we're going to start seeing that cutting. So that's going to help us quite a bit in the second half.
I mentioned the BGAs. So I think the 2% that we're showing for the full year is a full reflection of all the puts and takes that we've got.
Peter, I just want to add, we also have some launch contributions factored into the second half outlook for BGA OE. It's not significant, but obviously that does impact the it's currently scheduled for the Q3, which would be obviously a drag on revenue.
Okay. That's helpful. And then just quickly on just on the aftermarket trends in general, are you seeing any differences from a geography standpoint? I mean, it seems China was up 14%, but that seems to be a very volatile number. I volatile number.
I could remember 2 years ago it was up 40% 1 quarter. So what are you seeing in general there?
In terms of the aftermarket?
Yes. Just from a geography standpoint any difference that you can call out?
Yes. Well, you recall in the Q4, the U. S. Saw in the high double digit fare growth. We continue to see that in the Q1 of this year in terms of the ACR fare.
Europe, call it, relatively muted growth. And China, obviously, it's a big pop, but versus a easier pop in the quarter of last
year. And I think Peter I've drawn you in the past showing flight hours versus outspares or what is going? I'm sorry, Dave, can you say what you're saying? I think I've drawn my little chart for you in the past showing how flight hours grow at a relatively stable rate, but fares ordering around those flight hours vary significantly? Yes, you have.
Yes, correct. I think if I take a look at China, 40% a few years ago was pre buy given the tightening. What you saw after that was the tightening. Now what you're seeing is a catch up. So at some point it's pretty natural.
Great. Thank you very much.
You're welcome. Thank
you. Our next question is coming from Shannon O'Callaghan with Nomura. Please go ahead. Your line is open.
Good morning, Dave, Tom and Elena.
Hey, good morning, Shannon.
Hey, just maybe a little follow-up on that commercial aero piece. In terms of the OE sales growth, I mean, in the quarter, can you give us the split kind of AT regional BGA and how that flows as you're talking about this second half OE acceleration?
So Shannon on the ACR OE component of it and this is consistent with what we talked about in the December outlook call and again in the Q4 earnings release. But you are seeing very strong growth at the on the air transport side, offset by declines in regional debt sales. And also we have some free of charge shipments that again we're expensing or recognizing as we're incurring them. And those continue that's the outlook really for the duration of the year. Those fundamentals don't change for and so that's slower growth than I guess you would maybe likely expect if you were just plugging in the air transport component of it.
But the regional piece is obviously putting a drag on our overall sales.
And I'd add on the PGA side. The Q1 growth that you saw will continue to throughout the course of the year. So a mid single digit growth on BGA only for the year.
And when does the regional kind of pressure ease?
Well, we're hoping that that certainly gets better in 2015, but largely dependent upon the overall market.
Okay. Just on free cash flow, definitely applaud the change in definition. So thanks for that. I was just wondering if you have the kind of updated numbers for this year of what you've built in for narco pension and the cash taxes in the appendix you have them for sort of what they were in 2013. Do you have those numbers of what you've baked in for 2014?
In terms of the big buckets, Shannon, I'll just walk through a few of them. And on cash pension, we're now expecting 0 in 2014 for cash pension and that's versus the previous estimate of about $100,000,000 for 4 contributions. On the narco component of it, we were previously excluding the establishment payments for narco, which were roughly call it $200,000,000 free cash. And we're still that's still the expectation, but we've just now embedded that into our free cash flow forecast.
And obviously you got to wait I guess until the available well, no you would know the cash taxes, right? So what about the available per sale piece? What's that?
You're talking about on the fees, the share?
Yes, yes. Because you're baking that in now too, right?
Yes. The first quarter impact was included in the Q1 free cash
flow. Okay. Right. So that's already baked in and there's no more.
Yes. Okay.
All right. Thanks a lot.
All right. Tony, we'll now conclude today's call. I want to turn it over to Dave Cote for any final
remarks. All right. Thanks, guys. Well, we've had a nice start to the year. And as a result, we feel confident in raising total year guidance for both earnings per share and cash flow.
Outperforming in the short term while seed planting for the long term continues to be an important dynamic for us. We intend to not just outperform this year, but also over the next 5 years. So thank you for listening and I hope all of you have a marvelous Easter weekend. See you.
Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a