Honeywell International Q1 2023 Earnings Call Transcript

Presentation

[Operator]

Thank you for standing by and welcome to the Honeywell First Quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to hand the call over to Sean Meakim, Vice-President of Investor Relations. Please go-ahead.

[Sean C. Meakim, Vice President-Investor Relations at Honeywell International]

Thank you Liz. Good morning and welcome to Honeywell's First Quarter 2023 earnings conference call. On the call with me today are Chairman and CEO, Darius Adamczyk; Senior Vice-President and Chief Financial Officer, Greg Lewis; President and Chief Operating Officer, Vimal Kapur and Senior Vice-President and General Counsel, Anne Madden. This webcast and the presentation materials, including non-GAAP reconciliations are available on our Investor Relations website. From time-to-time, we post new information that may be of interest or material to our investors on this website.

Our discussion today includes forward-looking statements that are based on our best view of the world and of the businesses as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings. This morning, we will review our financial results for the first-quarter, share our guidance for the second-quarter and provide our update to our full-year 2023 outlook. As always, we'll leave time for your questions at the end.

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

[Darius Adamczyk, Chairman and Chief Executive Officer at Honeywell International]

Thank you Sean and good morning everyone. Let's begin on slide two. To open today's discussion, I'd like to take a moment to reflect on what our company has accomplished over the past seven years. We've consistently outperformed against the market and our peers doubling our share price over that timeframe. We undertook a radical transformation agenda, dramatically simplifying and digitizing our operations and supply-chain, resulting in a much more contemporary company, which is a platform for growth. We launched our software business Honeywell Connected Enterprise, that continues to generate, not only value for our customers, but accretive growth and profitability for Honeywell. We also reshaped the portfolio, spinning off three sizable businesses while selling two others and adding 16 successful acquisitions, reducing cyclicality and enhancing our margins.

We reconfigured our strategic business groups to better align with end-market opportunities and customer needs. We've built our culture of innovation has led to significant new breakthrough technologies and ultimately meaningfully stronger organic growth. Last and I am not breaking any news here this will be my last earnings call as the CEO of Honeywell. As Vimal transitions into the CEO role in just over a month and I become Executive Chairman it's a great example of the emphasis Honeywell places on leadership development and succession plan.

With his decades of experience and success leading businesses across our portfolio Vimal is absolutely the right person to take on the CEO mantle for Honeywell into the next phase of our transformation. I look-forward to supporting him over the next year, providing him with additional bandwidth by helping with mergers and acquisitions activity, spending time with customers and strategic planning, our future is bright. With that said, the present is pretty good to. Let's turn to slide three to discuss our first-quarter performance.

We delivered a very strong first quarter, exceeding the high-end of our first-quarter organic sales segment margin and adjusted earnings per share guidance despite ongoing macroeconomic challenges. I'm pleased with our disciplined execution and differentiated technologies that enable us to over-deliver on our commitments. First quarter organic sales were up 8% year-over-year, led by double-digit growth in our aerospace and PMT businesses underpinned by a rigorous operational execution. The first quarter backlog grew to a new record of $30.3 billion, up 6% year-over-year and 2% sequentially, due to continued strength in aerospace and performance materials and technologies.

Similar to last quarter, orders remain a very positive story in aero and PMT, up double-digits organically in each, leading to 1% organic growth and 8% sequential growth overall in the first-quarter, overcoming the difficult year-over-year comps in HBT and SPS. We remain confident in our 2023 setup as we capitalize on recovering end-markets, combined with solid operational execution. Our segment margin expanded 90 basis-points year-over-year, led by robust expansion in safety and productivity solutions in Honeywell Building Technologies, as our strategic pricing actions to enable us to remain ahead of the inflation curve and we benefit from our productivity actions.

Excluding the net impact of the settlements as we discussed in our guide free-cash flow was $300 million in the first-quarter, in-line with our expectations and operationally stronger than 2022. We deployed $1.6 billion to dividends growth capex and share repurchases, including opportunistically repurchasing 3.5 million shares throughout the quarter, reducing our weighted-average share count to 673 million. We also announced the acquisition of Compressor Controls Corporation this week which Vimal will provide more detail on shortly.

Looking-forward, I am encouraged by the strength we're seeing in many areas of our portfolio. We continue to execute on our proven value creation framework which is underpinned by our Accelerator operating system. I am proud of our ability to over-deliver another quarter, amidst a challenging external environment.

Next, let's turn to Vimal to discuss some exciting recent announcements.

[Vimal Kapur, President and Chief Operating Officer at Honeywell International]

Thank you Darius and good morning everyone. Let's turn to Slide four, in February, we announced that ExxonMobil will deploy Honeywell's carbon capture technology at its integrated complex in Baytown, Texas. The plant is expected to be the largest low-carbon hydrogen project in the world at planned start-up and projected to produce around 1 billion cubic-feet of low-carbon hydrogen per day. Honeywell Technology will enable the facility to capture more than 98% of the associated CO2 emission, which will be sequestered and permanently stored by ExxonMobil.

In addition, Honeywell recently launched a European Clean Aviation project to develop a new-generation of aerospace qualified, megawatt-class fuel-cells powered by hydrogen. Green hydrogen is an extremely clean power source that can be used to propel future aircraft, which makes it particularly appealing to the aerospace sector as we work to reduce carbon emissions. Work on this project will be performed at Honeywell Technology Solution, Research and Development Center in Brno, Czech Republic and at all other Honeywell and project partner sites across Europe.

Finally, this week, we announced a $40 million plus win in our Connected Enterprise business with Globalworth, a leading real-estate investor in Central and Eastern Europe. Globalworth is using Honeywell's Force for building technology to help monitor energy consumption down to a device at asset-level across their commercial office buildings in Romania and Poland, while maintaining occupant comfort and productivity. Our solution will help reduce operating cost and lower energy consumption, key outcome for Europe's overreaching climate objectives.

These existing technologies provide us with new growth vectors, while reinforcing Honeywell's sustainability message demonstrating how we are helping the world solve its toughest challenge across all our end-markets. Now, let's turn to slide five to discuss an exciting new acquisition, we just announced this week. On Wednesday, we announced an agreement to acquire Compressor Controls Corporation in short CCC, a leading provider of turbo machinery control and optimization solutions, including control hardware, software and services for $670 million in all-cash transaction.

CCC technologies primarily serve the LNG gas processing, refining and petrochemical segment and will bolster Honeywell's high growth sustainability portfolio with new carbon capture control solution where the same turbo machinery is used to achieve effective removal of CO2 from the process plant emission. This acquisition will be integrated into Honeywell's Process Solution business and strengthen Honeywell's leadership in industrial control, automation and process solution enabling customers to accelerate their energy transition.

CCC's EBITDA margins are accretive to Honeywell and we expect to achieve a cash basis, return on investment of more than 15% by 5th year that CCC is part of Honeywell. The transaction represents 15 times 2023 expected EBITDA on a tax-adjusted basis and 13 times EBITDA, assuming $8 million of annualized cost synergies. I'm excited about the new technologies and adjacencies we have unlocked through this latest transaction. We said before that we have an active M&A pipeline and this is further evidenced that we are continuously enhancing our automation portfolio by investing in new opportunities.

Now, let's turn to slide six to discuss the first-quarter results in more details. As Darius mentioned, we delivered a strong first-quarter result, despite a dynamic economic backdrop. Our operational agility enabled us to exceed our financial commitments. First-quarter sales grew 8% organically with double-digit growth in PMT and aero, where we generated continued volume improvement on a strong demand and an improving supply-chain. In fact, volume grew 2% for overall Honeywell in the first-quarter despite an impact of troughing activity levels in our long-cycle warehouse automation business.

Excluding SPS volumes were up 7% for first-quarter. Our backlog grew 6% year-over-year and 2% sequentially and our orders grew 1% organically and 8% sequentially driven by long-cycle strength in aero and PMT. Supply-chain remains a constrain on our overall growth, however aero saw further outward improvement and we saw past-due backlog reduction across all our short-cycle businesses. In addition to strong organic growth we expanded segment margins by 90 basis-point year-over-year to 22%. We continue to reap benefits from our investment in Honeywell Digital that have enabled us to stay ahead of the inflation curve through the strategic pricing action.

Despite the top-line headwinds SPS led the other SBGs with the largest segment margin expansion as they benefit from their rightsized price-cost base. Now, let's spend a few minutes in the first quarter performance by business. Aerospace, sales for the first-quarter were up 14% organically, led by 20% growth in commercial aviation, the fifth straight quarter of at least 20% organic growth and eighth straight quarter of double-digit growth. Sales growth was strongest in commercial aviation aftermarket where continued flight hour recovery resulted in increased spare shipments and repair and overhaul sales particularly in air transport.

Commercial original equipment sales also increased double-digit, driven by higher business and general aviation sales. Defense and space returned to growth in the first-quarter as we were able to convert our strong 2022 orders book, increase sales volume. Book-to-bill defense -- book-to-bill in defense and space remain greater than one in the quarter. As expected, the aero supply-chain continued to make modest progress sequentially. Improvements in material availability from the lower supplier de-commitment rates enabled us to increase our original equipment and spare shipments by 20% year-over-year in first-quarter. Our past-due backlog remains at historically high-level as expected, with plenty of volume yet to be unlocked.

Segment margin in aerospace contracted 80 basis-point year-over-year to 26.6% driven by higher sales of lower margin original equipment products, partially offset by our commercial excellence effort and volume leverage. Performance Materials and Technologies orders grew organically across all three businesses ahead of our expectations, led by over 20% growth in UOP. We remain particularly excited about traction in our sustainable technology solutions business where orders doubled year-over-year. For sales PMT grew 15% organically in the quarter with double-digit growth in all three segments of the PMT portfolio.

This was the fourth consecutive quarter of double-digit organic growth in PMT. UOP grew 19% organically in the quarter led by refining catalyst shipment and gas processing partially offset by lower refining and pet-chem equipment volumes. Process Solutions grew 16% organically driven by strength in projects and smart energy. In advanced material, sales grew 12% in the quarter as we saw another quarter of robust demand in fluorine products that more than offset some softness in our Electronic Materials business.

Segment margin contracted 20 basis-point year-over-year to 20.6% as a result of cost inflation, higher sales of lower-margin products and the previously communicated disruption in one of our PMT plants that caused some unplanned downtime, partially offset by commercial excellence and volume leverage. Safety and productivity solutions sales decreased 11% organically in the quarter, sales decline were led by warehouse and workflow solutions and productivity solutions and services. The aftermarket services portion of our Intelligrated business continues to perform well as expected, with sales growing greater than 20% in the quarter at accretive margins and the sensing portion of our sensing and safety technologies business remains a bright spot in the portfolio.

Continuing on the trend from last year, segment margin for SPS was once again a standout in the quarter, expanding 270 basis-point to 17.2% as a result of productivity actions and commercial excellence, partially offset by lower-volume leverage and inflation. In building technologies, sales increased 9% organically in the quarter, with growth in both building products and building solutions. Project sales were up double-digit for the fourth consecutive quarter as we continued to convert our strong backlog.

Services volumes also increased in the quarter, resulting in 13% organic sales growth in building solutions. Turning to our product portfolio, the supply chain is improving as expected, building products grew 7% organically year-over-year through continued strength in our world-class fire franchise. HBT orders were stronger than expected in first-quarter, although down mid single-digits year-over-year organically as we lapped outside 2022 comps from the height of supply-chain challenges.

While inflation remained elevated and our strong building solutions sales presented as mix headwind, our commercial excellence and productivity effort allow us to mitigate these challenges and expand HBT segment margins by 170 basis-points to 25.2%. Growth across our portfolio continues to be supported by accretive results in Honeywell Connected Enterprises, an ongoing indicator of the power of strong software franchise. Robust overall growth was driven by double-digit growth in cyber, industrial, aerospace and connected building. The future outlook is also strong due to double-digit growth in orders. Overall, this was a great result for Honeywell. Our adjusted earnings per share in the fourth quarter grew 8% to $2.07 to $0.11 above the high-end of our first-quarter guidance and up 16% excluding pension headwinds.

Segment profit drove $0.21 of year-over-year improvement in earnings per share, the main driver of our EPS growth. Excluding the pension headwinds, below-the-line and other added. $0.03 year-over-year, a lower adjusted effective tax-rate contributed $0.02 of improvement and reduced share count added an additional $0.05, our total EPS excluding the pension impact of $2.22. This was offset by $0.15 headwind from a lower pension income, a bridge from adjusted EPS from 1Q 2022 to 1Q 2023 can be found in the appendix of this presentation.

We made good progress on cash for Q1. Reported cash-flow for the quarter was negative $1 billion due to payment of settlement signed in fourth quarter of 2022, which we signaled in our guidance call. Excluding the net impact of these settlements, we generated $300 million of free-cash flow, up from $50 million in the first-quarter of last year. This increase was driven by improved working capital, including more favorable payables and inventory balances. As we discussed, our inventory planning focus will be a major contributor to our cash performance in 2023 and we are off to a promising start. So overall, Honeywell operating playbook continues to deliver strong results and that combined with our differentiated portfolio of solutions will enable us to drive compelling growth in earnings and cash for the quarters to come.

Now, let me turn it over to Greg as we move to slide seven to discuss our second-quarter and full-year guidance.

[Greg Lewis, Senior Vice President and Chief Financial Officer at Honeywell International]

Thanks Vimal and good morning everyone. As we look to the rest of 2023, our original guidance framework continues to be solid. We delivered above our Q1 guide as we navigated known risks and have raised the year to reflect that. Our demand profile remains robust with record backlog and favorable order trends in aerospace and PMT. We continue to monitor the macroeconomic backdrop and its impact on our shorter-cycle businesses and our rigorous operating principles enable us to stay agile to outperform through another challenging year.

For our 2Q sales guidance, we expect to be in the range of $9.0 billion to $9.2 billion, up 1% to 4% on an organic basis. We now expect full-year sales of $36.5 billion to $37.3 billion, which represents an increase of $500 million in the low-end and $300 million in the high-end from our prior guidance incorporating our strong first quarter results. We are raising our organic growth range now at 3% to 6% and we continue to expect a greater balance of price and volume versus last year and have upgraded our full-year expectations in aero while softening our outlook for SPS to reflect the demand we're seeing.

Moving to our segment margin guidance, we expect the second-quarter to be in the range of 21.8% to 22.2% resulting in year-over-year margin expansion of 90 basis points to 130 basis-points due to continued benefits from our improving cost position and business mix in SPS and commercial excellence in HBT. For full-year 2023, we are upgrading our segment expectations -- our segment margin expectations by 10 basis-points in the low-end to a new range of 22.3% to 22.6% or 60 basis points to 90 basis-points of year-over-year expansion.

Our rigorous fixed-cost management and favorable price-cost strategies remain key elements of our operating playbook, helping us to drive margin expansion. Now, let's take a moment to walk-through the second-quarter and full-year expectations by segment. Looking ahead for aerospace, demand across our end-markets remain very encouraging. We expect modest sequential sales growth in the second quarter as flight hours continue to improve with particular strength in commercial aftermarket. This flight hour growth enhanced by further recovery in wide-body aircraft as international travel recovers will lead commercial aftermarket to be our strongest end-market for sales in 2023.

On the commercial OE side, we also expect strong volume growth as build rates, particularly for business and general aviation OEs continue to trend upwards. In defense and space, we passed the growth inflection point in 1Q and we expect similar organic growth rates throughout the year, as we convert our strong defense order book into sales. While the demand environment supports rapid topline acceleration, the pace of sales growth throughout 2023 will ultimately be determined by the rate of recovery in the aero supply-chain.

Our expectation for the supply-chain remains unchanged, modest, steady improvement each quarter. Reduced [Indecipherable] from suppliers should allow for sequential improvements in factory output given the positive signs from the supply-chain and continued strength in our order book, we now expect aero organic sales growth in the low-double-digit range, an upgrade from our outlook last quarter of high-single-digits to low-double-digit growth. However, we anticipate most of the incremental sales strength to come from our OE business resulting in modest mixed pressure on margins. We now expect aero segment margins to be flattish for the full-year.

In Performance Materials and Technologies, the constructive outlook across our end-markets will continue to drive favorable growth. For the second quarter, we expect sales to increase sequentially and year-over-year, led by continued strength in our projects and smart energy businesses within Process Solutions as well as lifecycle solutions and services. This strength will likely continue throughout the year, supporting a strong growth for process solutions overall. In advanced materials, continued demand for fluorine products will enable us to capitalize on our capacity expansion investments, we made in 2022, but we still expect to see some softness in electronic materials until the second-half of the year.

In UOP, our growth outlook is supported by robust demand for gas processing equipment and we see increasing global demand for our sustainable technology solutions as legislation has improved project economics. For the full-year, another quarter of strong orders and backlog growth gives us confidence in our sales expectations, although more challenging comps moving forward mean that the first quarter will likely be the largest in terms of organic growth. We still expect sales for overall PMT to be up mid single-digits for the year. Segment margin and PMT should expand sequentially in the second-quarter and throughout the second half lead to modest expansion for the year. Looking ahead for SPS, we're expecting low-double digit year-over-year declines in the second-quarter as we see continued impact from the decline in investment for new warehouse capacity and short-cycle demand softness in our products businesses. However, we expect sales to grow sequentially from the first quarter, led by strength in sensing and safety technologies. The aftermarket services portion of our Intelligrated business continues to grow at strong double-digit rates and we anticipate this trend continuing throughout the year.

In our short-cycle businesses, the demand outlook for 2023 is a bit more challenge than we initially anticipated and as a result, we now expect SPS to be down high-single-digits, lower than our initial guidance last quarter of down mid single-digits to high-single-digits. However, from a margin standpoint, we still anticipate another solid year for SPS, as we see the results of our operational improvements and as sales mix continues to improve, as evidenced in our first-quarter results.

In building technologies we are encouraged by our strong start to the year and the overall execution in the business. For the second quarter, sales should improve sequentially and lead to modest year-over-year growth as the supply-chain environment continues to slowly improve, allowing us to further work down the past-due backlog, we built last year, in our building products business. We expect this robust backlog along with stimulus-led institutional demand in verticals such as airports, health-care and education to remain resilient throughout the year. On the Building Solutions side, we are encouraged by the strong demand for our building services and we see our long-cycle building solutions sales likely outpacing product sales in 2023.

For overall HBT while we delivered high-single-digit growth for the first-quarter, comps get harder as we progress throughout the year, given that the impacts from our supply constraints were most acute in the first-half of 2022 and we maintain our full-year sales outlook of low-single digit organic growth although, as we've said previously, will continue to monitor orders for Q2 and may have an upgrade opportunity, after we complete the second-quarter. HBT remains well-aligned to emerging secular themes of sustainability and energy efficiency and we see runway for growth acceleration as we exit 2023. For HBT's segment margin, we still expect year-over-year expansion in 2023 as we maintain our momentum for the first-quarter.

Turning to our other core guided metrics net below-the-line impact, which is the difference between segment profit and income before tax is expected to be in the range of negative $130 million to negative $185 million in the second-quarter and negative $500 million to negative $625 million for the full-year. This guidance includes a range of repositioning between $50 million and $100 million for 2Q and $225 million to $325 million for the year, as we continue to fund attractive restructuring projects and properly position Honeywell for the future.

We expect our adjusted effective tax-rate to be roughly 21% in the second-quarter and for the year and the average share count to be around 671 million shares in 2Q and approximately 670 million shares for the full-year. Earlier this week, the Board approved a $10 billion share repurchase authorization, providing us with continued flexibility on the best way to deploy our balance sheet. As a result of these inputs our adjusted earnings per share guidance range is between $2.15 and $2.25 for the second-quarter up to 2% to 7% year-over-year.

For full-year EPS, we are upgrading the low-end of our guidance range by $0.20 and the high-end of our guidance range by $0.05 to a new range of $9 to $9.25, up 3% to 6%, reflecting our continued confidence that 2023 will be a strong growth year for Honeywell, despite the year-over-year pension headwinds. Excluding these headwinds, EPS growth will be 9% to 12% up for the year. We still expect to meet our original free-cash flow guidance of $3.9 billion to $4.3 billion in 2023 or $5.1 billion to $5.5 billion, excluding the net impact of settlements. So, in total, we executed a strong first-quarter with outperformance across all guided metrics and are raising our full-year 2023 organic sales growth, segment margin and adjusted EPS guidance ranges.

Now, let's turn to slide eight and I'll hand the call-back to Darius for some closing thoughts before we move to Q&A.

[Darius Adamczyk, Chairman and Chief Executive Officer at Honeywell International]

Thank you Greg. In summary, we're off to a strong start to 2023 over-delivering across-the-board versus our guidance, allowing us to meaningfully raise our full-year guidance for organic growth, segment margin and earnings per share. Our value-creation framework is working. The macroeconomy remains uncertain, but we continue to grow our record backlog and executing on it provides significant runway in the near-term. Honeywell remains well-positioned to outperform in any environment. Thank you to all of our Honeywell colleagues who continue to drive differentiated performance for our customers and shareholders.

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

[Sean C. Meakim, Vice President-Investor Relations at Honeywell International]

Thank you Darius. Darius, Greg, Vimal and Anne are now available to answer your questions. We ask that you please be mindful of others in the queue, by only asking one question. Liz, please open the line for Q&A.

Questions and Answers

[Operator]

Our first question comes from the line of Steve Tusa, JPMorgan.

[Stephen Tusa, Analyst at JP Morgan Cazenove]

Guys good morning.

[Darius Adamczyk, Chairman and Chief Executive Officer at Honeywell International]

Good morning.

[Stephen Tusa, Analyst at JP Morgan Cazenove]

Congrats again Vimal on the change and I guess your first call is going to be I guess, the second-quarter, but on that front maybe give us some color on the sequential trends as far as earnings are concerned for the rest of the year 2Q, 3Q and 4Q, just to kind of level-set everybody after this pretty strong first-quarter?

[Vimal Kapur, President and Chief Operating Officer at Honeywell International]

Yes, so sequentially as Greg gave you the full-year view, we do expect the growth momentum to continue, even though at a slightly different rate. Part of it is, we had a pretty strong quarters in PMT and HBT prior year so we are dealing with the tough comps. So there is certainly going to be some revenue comparison issues there -- aero will be very strong and SPS as we guided will be moderated performance over the rest of the year. So, but overall, we remain confident on our new guide of 3% to 6% organic growth rate and we'll work hard to perform on that. Greg, if you want to add anything?

[Greg Lewis, Senior Vice President and Chief Financial Officer at Honeywell International]

No, I think you hit it. I mean the second quarter are going to be really nice results I think and across the portfolio albeit, we're just coming off of four quarters of significantly strong double-digit growth in PMT for four straight quarters, HBT at high-single-digits for three to four straight quarters but underlying business performance going-forward is going to be really healthy.

[Stephen Tusa, Analyst at JP Morgan Cazenove]

Sorry. So what's the sequential performance for EPS? Should we think about that as kind of in-line with normal seasonality or like how do we think about the phasing of EPS for the rest of the year?

[Greg Lewis, Senior Vice President and Chief Financial Officer at Honeywell International]

Yeah, when you look at EPS, sales I mean, we're going to be roughly in-line with our normal kind of percentage of the year in those quarters, this year and last year are a little bit heavier in the back-half. This year, a little less so, but it's not going to look out-of-the norm.

[Stephen Tusa, Analyst at JP Morgan Cazenove]

What is the norm? Can you just remind us, because it's been a couple of years of...?

[Greg Lewis, Senior Vice President and Chief Financial Officer at Honeywell International]

Well, you're asking about many different metrics Steve, so it depends on which one you're talking about.

[Stephen Tusa, Analyst at JP Morgan Cazenove]

EPS.

[Greg Lewis, Senior Vice President and Chief Financial Officer at Honeywell International]

Yeah, I mean, when you look at it right now, we're going to have a little bit of a heavier back-end of the year fourth-quarter will probably be bigger than second and third, but the second and third will be with within spitting distance of one another or roundabout.

[Stephen Tusa, Analyst at JP Morgan Cazenove]

Okay, great, thanks a lot for the color.

[Greg Lewis, Senior Vice President and Chief Financial Officer at Honeywell International]

You got it.

[Operator]

Our next question comes from Julian Mitchell with Barclays.

[Julian Mitchell, Analyst at Barclays]

Hi, good morning. Maybe, just wanted to try and understand dialing-in on the second-quarter for a second so you've got a smaller than maybe normal sequential sales increase. It doesn't sound like that's anything sort of macro or demand related, it's maybe more on supply so any extra color on that? And also, it looks like you're guiding for sort of sales to be up sequentially in Q2 from wide, somewhat but flat margins. So is that just something around maybe aero OE mix, just any thoughts on that, please?

[Darius Adamczyk, Chairman and Chief Executive Officer at Honeywell International]

Yeah Julian. If you actually look at the historical revenue, sort of step from Q1 to Q2 it's very much in line what we've done historically. Last year was a bit of an anomaly given that it was more heavily impacted by some of our supply-chain challenges, but if you look at the historical graduation from Q1 to Q2 it's very much consistent and in-line with that if you look at the prior year averages.

[Greg Lewis, Senior Vice President and Chief Financial Officer at Honeywell International]

We've grown anywhere from 4% to 7% quarter-to-quarter sequentially, this guide has us rising like a 3% to 4% range. Last year, we had a really big step-up in PMT, it's a little bit less in Q2 this year, but again very much within historical parameters. And from a margin perspective again, last year we went down in margin rate from Q1 to Q2 so our guide is solidly within our Q1 performance. I think at the top end, we're up 20 basis-points, at the bottom-end we're down 20 basis points, so it's frankly right in the norm, so I wouldn't read too much into it.

[Julian Mitchell, Analyst at Barclays]

Thanks very much. And then, just my follow-up would be around the SPS piece sort of updated thoughts on that second-half outlook, particularly the PSS portion, kind of how are you looking at that in the second-half on revenue versus warehouse and if there's been any change in your warehouse growth or sales assumptions for the year? Thank you.

[Darius Adamczyk, Chairman and Chief Executive Officer at Honeywell International]

Yes, so I mean let's kind of take this piece by piece, in terms of PSS, we've kind of actually seen sequential improvement off for Q4 so we think that, that business is back on the rise and we saw that sequentially, so I think that, that's very much consistent with our assumptions and very much in-line with our expectations. When it comes to IGS that market continues to be relatively soft, but having said that, our quote activity and our opportunity activity significantly increasing for Q2, Q3 and Q4 because as we're looking forward in the pipeline that continues to get better and better. So, we're cautiously optimistic we're going to see much better order trends, as we head into the last three quarters of the year.

[Vimal Kapur, President and Chief Operating Officer at Honeywell International]

I think Darius put it quite well. Look, this is -- IGS revenue for this year is kind of already locked given the long-nature of the business here, we're really working hard to secure good base of orders for 2023, so that we can print a good year for 2024 ahead, and we remain -- one thing I can assure you, we're not going to lose share, so it's all more on the market and as market recovers, we will get our fair share of demand.

[Operator]

Our next question comes from Nigel Coe with Wolfe Research.

[Nigel Coe, Analyst at Wolfe Research]

Thanks good morning, thanks for the question. Maybe just be a little bit clearer on kind of what surprised to the upside and it sounds like it's partly supply-chain, but it also sounds like it's partly demand so, maybe just talk about that and we saw a pretty significant uptick in accounts receivable on the balance sheet, which might indicate that March was perhaps particularly strong, so maybe just talk about that as well?

[Greg Lewis, Senior Vice President and Chief Financial Officer at Honeywell International]

Sure, let me take that. So, if you think about our guidance 90 days ago, we talked about really three specific risks that we were watching. One was China with Chinese New Year and concerns about whether everyone was going to go home and then come back and wind-up with lockdowns in China. It didn't happen. Things turned out quite well, there was really no disruption in China at all. Second one was really again aerospace and where we're going to get a substantial, sequential improvement in output and we did.

We were up 20% in our output in aerospace year-over-year which was above the high-end of our guidance and was quite strong and then the third one was PMT, and we talked about the fact that in December, we had some challenges with the freeze in the Louisiana area with some of our factories there, and we had an outage early-January, which we needed to shut-down a plant and bring it back up again and it came up quite well and in fact on-time and after the plant was restored it was operating at levels that were greater than before the outage even occurred.

And so that's why, what you're seeing is essentially PMT and aerospace in particular drove probably over $100 million each on the top-end of our own guide in terms of the revenue outlook. So, those are things that we're conscious of and we're watching and managing where we could and things turned out quite well. So that was really good and then again as you mentioned, accounts receivable goes up. As you recall, 50% of our revenues in any quarter in the last month of the quarter, we had a really strong revenue performance AR goes up and we've got a lot of receivables here to collect in April and I'm sure that will bode well for strong cash here in Q2.

[Nigel Coe, Analyst at Wolfe Research]

Great. Thanks Greg. I'll leave it there, one question.

[Greg Lewis, Senior Vice President and Chief Financial Officer at Honeywell International]

Yeah.

[Operator]

Our next question comes from Scott Davis with Melius Research.

[Scott Davis, Analyst at Melius Research]

Hey, good morning guys.

[Darius Adamczyk, Chairman and Chief Executive Officer at Honeywell International]

Good morning

[Scott Davis, Analyst at Melius Research]

And welcome Vimal. Guys, you announced this buyback is pretty darn large, $10 billion is a big number and we're hearing chatter from other companies here and there that M&A is just starting to get into a little bit of a sweet-spot where valuations are starting to make a little bit more sense and PE is less competitive of course. How do you guys think about your pipeline of deals that's out there and the optionality versus kind of the guide I think that share count down kind of 1%, ballpark means, you may not be going in and hitting the bit on that $10 billion right away, but how do you think about the ebb and flow or the buyback versus that M&A and perhaps the big question there is, what does your backlog and pipeline look like and I'll stop there. Thanks.

[Greg Lewis, Senior Vice President and Chief Financial Officer at Honeywell International]

Hey Scott. Real quick, just what you saw with the $10 billion authorization that is like what we always do. We work our authorization down to about $2 billion range and then we frankly almost as a matter of course re-up to $8 billion or $10 billion and so you should view that as us just doing our normal re-staffing of our buyback authorization to give us the flexibility that we always have. So, there is nothing abnormal in that at all-in terms of the cycle of the way we operate, but I'm sure Darius will talk about capital allocation aspect.

[Darius Adamczyk, Chairman and Chief Executive Officer at Honeywell International]

Yeah. I mean in terms of our framework. You've got to remember, we are holding to the framework of 1% min buyback per year-on average and we've done that, we've stuck to that and I think that $10 billion authorization continues to underpin that kind of an algorithm, So, I think I wouldn't look too much or too little into it, it's just supportive of that and we're going to continue to buyback shares as we see, they're priced aggressively and we'll do at least 1%. On the M&A which I think is the more important question is I think I've always said, there's time to be a buyer and there is a time to be a seller. I have not seen a better time at least since I've been the CEO to be a buyer and you saw one deal we did this past week, I think that it's an opportunity for us to be much more active. The pipeline is probably better than it's ever been and I think we've got some interesting bolt-ons that we're looking at that hopefully we're going to be able to close here in the next few months.

[Scott Davis, Analyst at Melius Research]

Darius, just natural follow-up, it's quite a statement never seen a better time to be a buyer I don't think I've ever heard you say anything in that context or that bullish in your tenure. And then, would you consider going up in size, you just said bolt-ons, but perhaps something a little bit more larger in the pipe?

[Darius Adamczyk, Chairman and Chief Executive Officer at Honeywell International]

I think, we said the bolt-on for us is to upto $5 billion, $6 billion, $7 billion range so we'll say that, that's decent in size. The reason I'm more bullish, is look, the cost of money has gone up significant. I mean, you see the interest rates and frankly the competition is different -- the competition for assets now is primarily for strategics. A lot of the PE activity is not. I wouldn't say it's non-existent but it's not as nearly as strong as it used to be and I think it's smart to be a buyer or seller in various cycles of economic conditions and interest rates, and I think right now -- I think it's smart to be a little bit more aggressive and being a buyer.

[Scott Davis, Analyst at Melius Research]

Very encouraging. Thank you. I'll pass it on guys, good luck.

[Darius Adamczyk, Chairman and Chief Executive Officer at Honeywell International]

Thank you.

[Operator]

Our next question comes from Sheila Kahyaoglu with Jefferies.

[Sheila Kahyaoglu, Analyst at Jefferies Financial Group]

Thank you and good morning everyone. Maybe bigger picture as well can you talk about what you guys are seeing Darius across the pricing portfolio? I think Greg, you mentioned pricing contributed 6 points to organic growth of 8 including SPS. How does pricing balance out and volume throughout the remainder of the year and how do you see it playing across the segments?

[Darius Adamczyk, Chairman and Chief Executive Officer at Honeywell International]

Yeah. I mean I think, you saw kind of 6 to mix [Phonetic] as we move forward. I think, frankly we were still projecting to be about a 4% price impact for the year so obviously, pricing is going to become a bit tougher in the second-half of the year as we kind of lap some of those comps, but overall pricing is going to continue to be a significant value driver for our results, given the differentiation and the technologies that we have in our portfolio. So, that's kind of how we see this, obviously coming off of 6% and projecting 4% for the year, we expect something a bit lower in the second-half, but that's all very much within the algorithm that we expected for the year and actually gain confidence in this algorithm given our raise both in the bottom and top end of our ranges -- I don't know, Greg, if you to...

[Greg Lewis, Senior Vice President and Chief Financial Officer at Honeywell International]

I think you said it, this is not really that different from what we talked about and we have positive price every quarter of this year. So no concerns in that, again we've talked about it for the last six, nine months as inflation settles down a little bit, there are going to be pockets where -- won't be as necessary as is it was a year-ago and so that's what you're seeing now.

[Sheila Kahyaoglu, Analyst at Jefferies Financial Group]

Great, thank you.

[Operator]

Our next question comes from Jeff Sprague with Vertical Research Partners.

[Jeff Sprague, Analyst at Vertical Research]

Thank you, good morning everyone. Hey just a two-parter on kind of aero OE. I mean, it looks like you're making pretty good progress as you stated and you acknowledged some supply-chain issues, but was a little surprised when your customers called you out by name yesterday. Just wondering if there's something Honeywell-specific that's hung-up from a delivery standpoint or you would just kind of point your finger further down the line to your suppliers, is just kind of part one, if you could add any color there.

And then just also on OE kind of incentive payments and the like, where do we stand for 2023 now? Is this still kind of peak year for headwinds or does some of that maybe move into 2024, if deliveries aren't quite what you thought they might be?

[Darius Adamczyk, Chairman and Chief Executive Officer at Honeywell International]

Yeah, so let me kind of start with the first part of your question. I think, as we look at our output, it ranges depending upon whether it's avionics or some the mechanical things we're up anywhere from 20% to 40% plus, so I think we're actually very pleased in terms of the output. Like, I can assure you that in terms of the bottlenecks, it's not Honeywell and it's not sort of throughput to our facility. So, we have a lot of issues with our supply base as well and frankly some of those being large public companies. I'm not going to sit here and call them out on a call like this frankly, it's our responsibility and it's our job to deliver and I'm not going to use somebody else as an excuse for us not delivering that's our job to manage and frankly, the earnings call is not the right place to actually have those kinds of discussions.

So, we're going to work at it. We own it. They know the supply-chain in aerospace is not perfect, it's getting better and it's getting better relatively quickly, probably even better than we anticipated, but there is work to do and there's four or five layers of the supply-chain and what we're seeing and feeling flows down to our suppliers. We're still getting some very inconsistent supply base. I mean our de-com rate went from being 19% 20% Q4 down to 15% but 15% is still not good but improving and we're making those improvements and we've launched hundreds -- I mean, literally hundreds of people into our supply-chain to assist our suppliers and frankly probably put more time and effort to be responsive to the needs of our OE base and I don't know, Greg?

[Greg Lewis, Senior Vice President and Chief Financial Officer at Honeywell International]

Yes, and on the incentive side, we're not making any adjustments to our expectations as far as that is concerned, it's still very early in the year as far as we know OE deliveries are still going to be roughly in the range of what we had anticipated, as we opened the year and like you said, we expect this year as probably the peak and then it's going to flatten out or come down slightly next year but still be relatively high. Should that shift left to right a little bit, we'll see, but at this moment, we're keeping our expectations as they were.

[Vimal Kapur, President and Chief Operating Officer at Honeywell International]

I think one point I wanted to add was that the diversity of our portfolio in aero is quite unique. We supply engines, avionics, navigation equipment, lighting, breaks, the list goes on. So due to diversity our volume is growing overall, but there could be some category where the growth is slightly less versus others, and I think that puts us in a unique position on how we get viewed by our customers, because they obviously want growth to occur consistently across all product lines. So, want to have that appreciation that our diversity is one of the unique factors compared to our peer group here.

[Jeff Sprague, Analyst at Vertical Research]

Great, thanks for that color. Appreciate it.

[Operator]

Our next question comes from Joe Ritchie with Goldman Sachs.

[Joe Ritchie, Analyst at The Goldman Sachs Group]

Thanks, good morning everybody. So just wanted to stay on aero for my one question. I guess, as you think about the margins for the year, you guys talked about flat margins, but started the year off down and what's expected to improve as the year progresses? Is there friction associated with the supply-chain that's impacting the margin side because your aftermarket business is growing faster than OE so just any color on like the what gets better in aero from a margin standpoint as the year progresses?

[Greg Lewis, Senior Vice President and Chief Financial Officer at Honeywell International]

Yes sure. I mean, think about it this way. The first and most basic one is volume leverage, right. We are very much in control of our fixed-cost and revenue is going to go up each and every quarter sequentially and it will have a crescendo and probably the highest quarter in Q4, so just by that alone we're going to get some volume leverage. So, there is not like any big changes from one quarter to the next that I would call-out from a mix perspective. Now again, that can always fluctuate as time goes by but the single biggest thing that you should expect is really around both volume leverage, it's fairly simple.

[Joe Ritchie, Analyst at The Goldman Sachs Group]

Okay, great. Good enough. Thanks.

[Operator]

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

[Deane Dray, Analyst at RBC]

Thank you. Good morning everyone.

[Darius Adamczyk, Chairman and Chief Executive Officer at Honeywell International]

Good morning.

[Deane Dray, Analyst at RBC]

Hey Darius, since this is your last call, just wanted to say congratulations on your run as CEO and look all CEOs want to go out on a strong note and leaving the company to good hands and I think this quarter speaks to that. So congrats.

[Darius Adamczyk, Chairman and Chief Executive Officer at Honeywell International]

Thank you. Appreciate that.

[Deane Dray, Analyst at RBC]

For my one question on Intelligrated aftermarket, it was always this high-growth in installations and waiting to get that critical mass in the installed base to start to get to the aftermarket. Have you reached that point and what's that mix going-forward between OE and aftermarket? Thanks.

[Vimal Kapur, President and Chief Operating Officer at Honeywell International]

Yeah, so overall, our performance on aftermarket has been double-digits for last couple of years including this year. In fact, we are performing extremely well I would say in high-teens. So, we are at a point to your question on the mix now, two-thirds, one-thirds. I think we are going towards that mix now which is the start. I mean, this business is seven, eight years-old, so if you roll the dice 15 years from now, the mix will be probably more in favor of aftermarket as we are experienced in other parts of Honeywell, but it's trending very frankly better than our thesis, consistently north of 15% and we're pretty pleased with that and margins are pretty attractive.

[Deane Dray, Analyst at RBC]

Great, thank you.

[Operator]

Our next question comes from Gautam Khanna with Cowen. Gautam, your line is now open. Our next question will come from Chris Snyder with UBS.

[Chris Snyder, Analyst at UBS Group]

Thank you. So the guidance, at least at the midpoint, seems to suggest slightly better organic growth in the back-half relative to Q2, and comes despite tough comps and maybe some macro concerns out there. So, could you just maybe provide some more color on the sub-segments or business lines, where you think you could see better organic growth relative to Q2. And also, does this dynamic maybe reflect some Q2 conservatism? The prior commentary kind of said that Q2 seasonality is coming in below normalized levels? Thank you.

[Greg Lewis, Senior Vice President and Chief Financial Officer at Honeywell International]

Sure. Again, what I would tell you is Aerospace, we expect now to have some really nice sequential organic growth as the year progresses, which is -- it's going to be a big level of support for us overall. Back to 2Q, it's very much in-line with kind of our historical trends and so we feel good about the guided range that we're at. In terms of the back end of the year as far as PMT is concerned I think we'll have really strong back-half there as well. SPS will get actually sequentially a little bit easier as the year goes by so we'll probably hit the heights of our declines here in the first-half and the second-half will get a little bit easier and that will take a little bit of pressure off the overall portfolio. So, I think we're going to see really nice growth throughout the portfolio in three out-of-the four businesses and easing of the SPS comps will help.

[Darius Adamczyk, Chairman and Chief Executive Officer at Honeywell International]

Yeah. And the other factor is that we're gaining more-and-more confidence in output out of aerospace. I mean we're continuing to grow, it's -- the work that we've done in terms of amending their supply-chain is producing results, I quoted some of the year-over-year numbers earlier and we expect that progress to continue and even accelerate, particularly as we get into the back-half of the year. So, we're very confident in our outlook for the growth that we have and looking-forward for signs, especially order rates for HBT to see how that looks like because obviously our Q1 results, they were also better than expectations, both in terms of revenue, as well as order. So we'll see how Q2 goes and that may offer some further upside.

[Chris Snyder, Analyst at UBS Group]

Thank you. I appreciate that.

[Operator]

Thank you. I would now like to turn the call back over to Darius Adamczyk for closing remarks.

[Darius Adamczyk, Chairman and Chief Executive Officer at Honeywell International]

Once more, I want to thank our shareholders for ongoing support. I valued our dialog over the past seven years and I also want to thank the entire Honeywell family including our colleagues both present and past who took [Phonetic] tremendous company over the past two decades and it's thanks to all your hard work and perseverance. It has been an honor to be able to lead this company.

We delivered outstanding first-quarter results and more importantly I have the utmost confidence that we'll continue to do so in the future under Vimal's leadership with the typical level of operational rigor, you've come to expect from Honeywell. This company's best days remain ahead of us and we look-forward to discussing this further at our upcoming Investor Day next month. Thank you all for listening and please stay safe and healthy.

[Vimal Kapur, President and Chief Operating Officer at Honeywell International]

Thank you.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Sean C. Meakim, Vice President-Investor Relations
• Darius Adamczyk, Chairman and Chief Executive Officer
• Vimal Kapur, President and Chief Operating Officer
• Greg Lewis, Senior Vice President and Chief Financial Officer

Analysts

• Stephen Tusa, JP Morgan Cazenove
• Julian Mitchell, Barclays PLC
• Nigel Coe, Wolfe Research
• Scott Davis, Melius Research
• Sheila Kahyaoglu, Jefferies Financial Group Inc.
• Jeff Sprague, Vertical Research
• Joe Ritchie, The Goldman Sachs Group, Inc.
• Deane Dray, RBC
• Chris Snyder, UBS Group AG