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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day and thank you for standing by. Welcome to the Honeywell First Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Sean Meakim, Vice President of Investor Relations. Please go ahead.
Thank you, Shannon. Good morning and welcome to Honeywell’s first quarter 2022 earnings. On the call with me today are Chairman and CEO, Darius Adamczyk; and Senior Vice President and Chief Financial Officer, Greg Lewis. Also joining us are Senior Vice President and General Counsel, Anne Madden and Senior Vice President and Chief Supply Chain Officer, Torsten Pilz.
This call and webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com/investor. Honeywell also uses our website as a means of disclosing information, which may be of interest or material to our investors and for complying with disclosure obligations under Regulation FD. Accordingly, investors should monitor our Investor Relations website in addition to following our press releases, SEC filings, public conference calls, webcasts and social media.
Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and of our businesses as we see them today. Those elements can change based on many factors, including changing economic and business conditions. And we ask that you interpret them in that light. We identify the principal risks and uncertainties that may affect our performance in our annual report on Form 10-K and other SEC filings. This morning, we will review our financial results for the first quarter of 2022, share our guidance for the second quarter and provide an update on our full year 2022 outlook. As always, we will leave time for your questions at the end.
With that, I’ll turn the call over to our Chairman and CEO, Darius Adamczyk.
Thank you, Sean, and good morning, everyone. Let’s begin on Slide 2. First off, our collective thoughts are to millions of Ukrainian refugees. And we hope to see a peaceful resolution quickly. Our number one priority continues to be the safety and security of our employees and partners in the region and respond to their immediate needs. That said we delivered a very strong first quarter despite a challenging backdrop that included ongoing supply chain constraints, inflation headwinds and global unrest. I am pleased with our disciplined execution as we navigate these dynamics and capitalize on the ongoing recovery in our end markets.
We met or exceeded our first quarter commitments despite these challenges with adjusted earnings per share of $1.91, down 1% year-over-year, about $0.01 above the high end of our guidance range. Organic sales grew by 1% year-over-year. And our commercial aviation aftermarket, building products, productivity solutions and services, advanced materials and recurring connected software businesses all delivered double-digit organic growth. This was partially offset by 2 percentage point impact from lower COVID-related mask sales as we lap the height of the demand in 2021.
Our strong price realization allowed us to stay ahead of the inflation curve. We expanded segment margin by 10 basis points year-over-year, 10 basis points above the high end of our guidance range. Excluding the impact of our investment in Quantinuum, the margin expansion rate would have been 40 basis points year-over-year. Orders and backlog growth accelerated in the first quarter, indicating strong demand momentum despite macro headwinds. Led by strength in Aero, HBT and PMT, our end markets continued to recover. We’ll go into more details on orders and backlog trends on the next slide.
The first quarter is seasonally our lowest from a cash perspective. And as we communicated, this year, it is being exacerbated by the supply chain impacts and strong collections in Q4. We generated $50 million of free cash flow in the quarter. These results do not change our full year free cash flow guidance range of $4.7 billion to $5.1 billion, which Greg will discuss later. We continue to leverage our strong balance sheet, deploying $2 billion of total capital in the first quarter, including $1 billion allocated to share repurchases as we began execution of our recently updated commitment to buy back $4 billion in shares in 2022. From an M&A perspective, we closed the acquisition of US Digital Designs, a public safety communications hardware and software solutions provider. Looking forward, I continue to be encouraged by the strength we are seeing in many areas of our portfolio as we execute our rigorous and proven value-creation framework. Our Accelerator operating system is driving outstanding shareholder value.
Now let me turn to Slide 3 to discuss our orders and backlog trends. First quarter orders across Honeywell grew 13%, the strongest growth we have since the start of 2021 with the exception of second Q ‘21 growth, which benefited from 2020 COVID-related lows. Despite ongoing macro challenges over the last few years, our book-to-bill ratio has been greater than 1 for the last several quarters, indicating the strength of our demand and commercial success. Long cycle orders grew over 20% in the first quarter, led by strength in the overall Aerospace portfolio, PMT process solutions projects and SPS warehouse automation to help facilitate sustained growth through the coming years. First quarter backlog increased 9% year-over-year to $28.5 billion, or up 10%, excluding the impact of approximately $300 million of backlog we moved due to the Russia conflict. Backlog growth has also been accelerating consistently over the last 2 years as our end markets recover, giving us confidence in increased sales growth as the supply chain environment eases.
Now let’s turn to Slide 4 to discuss some exciting recent announcements. Last month, we announced a strategic collaboration with OTTO Motors, a division of ClearPath Robotics, that gives warehouse and distribution centers throughout North America an automated option to handle some of the most labor-intensive roles in an increasingly scarce job market. The collaboration enables Honeywell customers to increase efficiency, reduce errors and improve safety by deploying to OTTO’s autonomous mobile robots in their facilities. These autonomous mobile robots handle repetitive and often time-consuming tasks and allow scarce labor resources to be shifted to higher-value jobs. This helps boost worker satisfaction while reducing injuries and turnover rates. The pandemic and its lasting effects on labor shortages is causing companies to reconsider the way they operate. And companies are more willing than ever to invest in automation.
We also recently announced that we will supply Hecate Energy with an Energy Storage System for a solar park located in northern New Mexico. When completed in mid-2022, a 50-megawatt solar farm will be capable of supplying enough electricity to power up to 16,000 average New Mexico homes, which will help meet the state’s decarbonization goals. When combining with Honeywell’s Experion Energy Control Systems, the Energy Storage Systems will enable customers to accurately forecast and optimize energy cost at the site and will support access to reliable and cost-effective clean energy. Honeywell remains on the forefront of innovation that is leading the energy transition. Energy storage will be a play – will play a critical role in renewable power generation and will be vital to the decarbonization of global power systems.
Lastly, we are teaming up with World Energy, a carbon net zero solution provider, and Air Products, the world’s largest hydrogen producer, to build one of the most technologically advanced Sustainable Aviation Fuel production and distribution sites ever constructed. The facility will produce fuels that will displace over 76 million metric tons of carbon dioxide by 2050, the equivalent of 3.8 million carbon net zero flights from L.A. to New York. World Energy and Honeywell collaborated over the past 9 years. And this long-term engagement will continue to transform the industry, support the growth of zero carbon economy and help accelerate the decarbonization of the aviation industry. These exciting announcements reinforce our message at Investor Day that our innovative culture, our commitment to providing efficient and sustainable solutions to meet the needs of our customers and our new technologies will be integral to the next leg of growth.
Now, let me turn it over to Greg on Slide 5 to discuss our first quarter results in more detail and to provide an update on our 2022 outlook.
Thank you, Darius, and good morning, everyone. As Darius highlighted, we met or exceeded our financial commitments despite a very challenging backdrop. First quarter sales grew by 1% organically as supply chain constraints, predominantly in Aero, HBT and SPS, continue to hold back volume growth and cause our past-due backlogs to increase by approximately $500 million in the quarter. Our strong pricing was a highlight in the face of high inflation. Similar to the fourth quarter, 1Q also had difficult year-over-year comps with lower COVID-related mask demand, impacting growth by 2 percentage points, and the timing of sales in warehouse automation dampening our growth rate.
Turning to the segments, aerospace sales for the first quarter were up 5% organically compared to the first quarter of 2021, despite continued supply constraints as the ongoing flight-hour recovery led to more than 25% year-over-year sales growth in both air transport aftermarket and business and general aviation aftermarket. Commercial original equipment grew double digits in the first quarter as air transport original equipment returned to growth. That was partially offset by lower business and general aviation original equipment volumes. Growth from commercial aerospace was partially offset by defense and space sales that were down 14% in the quarter. Aerospace segment margins contracted as expected in the first quarter to 27.4% due to higher sales of lower-margin original equipment products, the impact of inflation and the absence of a one-time gain in 2021, partially offset by our pricing actions.
Turning to Building Technologies where sales were up 8% organically, led by favorable pricing across the building products portfolio, partially offset by lower volume in building projects. Orders were up double digits in the first quarter as a result of strong demand for fire products and building management systems. Backlog growth continued in building solutions projects and services, giving us confidence for the remainder of 2022. In addition, our healthy buildings portfolio maintained its momentum with orders over $100 million in the first quarter. Segment margins expanded 100 basis points to 23.5% due to our pricing actions and our favorable sales mix, partially offset by cost inflation.
In Performance Materials and Technologies, sales grew 6% organically in the quarter despite an approximately 1% headwind from Russia sales. Growth was led by advanced materials, where the business experienced double-digit growth despite lower automotive refrigerant volumes due to supply constraints affecting automotive OE production. Process solutions sales growth was led by thermal solutions and lifecycle solutions and services. Sparta Systems grew approximately 20% and turned an operating profit in the quarter earlier than expected in our acquisition model. UOP sales were down in the quarter due to lower process technology equipment volumes, although sustainable technology solutions continued to excel, growing over 75% organically year-over-year. Orders increased double digits year-over-year, headlined by over 20% growth in process solutions. Segment margins expanded 230 basis points in the quarter to 20.8%, driven by favorable pricing and sales mix, partially offset by cost inflation.
In Safety and Productivity Solutions, sales decreased 15% organically in the quarter. Remember that the first quarter of 2021 was near the height of our COVID-driven mask demand, creating a 9% year-over-year comparison headwind in the quarter. Productivity solutions and services, advanced sensing technologies and our gas detection businesses all grew at double-digit rates in the quarter despite the supply-constrained environment, highlighting the strength in much of the underlying SPS portfolio. As we expected, the timing of Intelligrated sales is shaping up to be a mirror image of 2021 with sales down in the first quarter, and we expect growth in the back half of the year. Segment margins expanded 20 basis points to 14.5%, led by favorable pricing and sales mix, partially offset by lower volume leverage and cost inflation.
Honeywell Connected Enterprise continues to underpin the growth we are seeing across the portfolio. In the first quarter, recurring revenue grew over 15% with SaaS growth of over 50%, led by the Sparta business. We also saw double-digit growth in our connected buildings, cyber and connected industrial solutions. So for overall Honeywell, our execution allowed us to deliver 10 basis points of segment margin improvement, 10 basis points above the high end of our guide with margin expansion in PMT, HBT and SPS, ending the quarter at 21.1%. And keep in mind, this expansion is net of a 30 basis point year-over-year headwind associated with our investment in Quantinuum.
On EPS, we delivered first quarter GAAP earnings per share of $1.64 and adjusted earnings per share of $1.91, which was down $0.01 year-over-year. A bridge for adjusted earnings per share from 1Q ‘21 to 1Q ‘22 can be found in the appendix of this presentation. Segment profit was a $0.01 headwind, driven primarily by lower volume and supply chain constraints, partially offset by strong price realization. A lower effective tax rate, 22% this year versus 22.3% last year, drove a $0.01 tailwind.
Share count reduction drove a $0.04 year-over-year tailwind to earnings per share. We saw a $0.05 headwind from below-the-line items, primarily due to lower pension income and increased repositioning. In response to the Russian invasion of Ukraine, we suspended substantially all our sales, distribution and service activities in Russia. And as a result, we recorded a charge of $183 million or a $0.27 impact to our GAAP EPS.
Moving to cash, we generated $50 million of free cash flow in the quarter, which was closely aligned to our expectations. This decrease was driven by higher working capital, including lower payables and higher receivables from strong 4Q collections, in addition to higher inventory as we continue to work through the constrained supply chain environment. Higher cash taxes due to the impact of tax legislation and R&D capitalization were also a free cash flow headwind in the quarter, consistent with our full year guidance.
Finally, as Darius mentioned earlier, we continue to leverage our strong balance sheet, deploying $2 billion towards high-return opportunities for our shareholders. Notably, we repurchased 5.5 million shares for $1 billion in the first quarter as we executed on our updated commitment to buy back $4 billion in shares in 2022. We also paid approximately $670 million in dividends, spent approximately $180 million in capital expenditures and invested approximately $180 million in M&A as we closed the acquisition of US Digital Designs. So overall, we executed better than expected, managing through a very difficult first quarter and accelerated our capital deployment as promised.
Now let’s turn to Slide 6 to talk about our second quarter and full year guidance. Signs of the recovery continue to unfold in our key markets, underpinned by strong orders growth across many of our businesses, as Darius highlighted in his opening. While uncertainties and persistent challenges remain in the macroeconomic backdrop, our rigorous operating principles have enabled us to demonstrate our agility and resiliency, positioning us well for the recovery ahead. Our end-market setup continues to be strong with ongoing improvement in global flight hours, return to public spaces and elevated oil prices. Global energy production continues to transition to a low-carbon future.
And Honeywell will lead that evolution with our strategically differentiated and sustainable technologies. We expect supply chain impacts to remain as challenging in the second quarter as they were in the first quarter but to start to abate as capacity for electronic components comes online in 3Q. We’re confident in the eventual return to normalcy in the aerospace supply chain. However, the timing remains difficult to call. Inflation will continue to be a significant headwind. However, our strategic pricing actions will continue to dampen impact to margins throughout the year.
In response to the Russian invasion of Ukraine, we suspended substantially all our sales, distribution and service activities in Russia, representing approximately 1% of total 2021 sales for Honeywell that we do not expect to return this year. In addition, we’re actively monitoring and navigating the worsening COVID-19 lockdown situation in China that is creating sales and supply chain risk.
With that as a backdrop, we expect second quarter sales to be in the range of $8.5 billion to $8.8 billion, down 2% to up 2% on an organic basis, or flat to up 4%, excluding the 1 point impact of the mask sales decline and the 1 point impact of lost Russian sales. This sales range assumes that COVID-19 lockdowns in China alleviate in May and that the Chinese operating environment remains relatively normal.
Despite the ongoing macro uncertainties, we now expect full year sales of $35.5 billion to $36.4 billion, which represents an increase of $100 million on the low end from our prior guidance, up 4% to 7% organically, with accelerated growth as the year progresses. That represents organic growth of 6% to 9%, excluding the 1 point impact of the lower mask demand and 1 point impact of lost Russian sales. We expect that our disciplined price actions will keep us ahead of the current inflationary environment, contributing approximately 5% to our sales growth, which is higher than we anticipated in our original guide and offsetting the majority of the approximately $400 million of lost Russia sales.
Now let’s take a moment to walk through the second quarter and full year expectations by segment. An update on our 2022 end market outlook can be found in the appendix of this presentation. Starting with Aerospace, the overall industry supply chain complex continues to be a challenge, but we do expect to see moderate improvement throughout the year. Sequential growth in flight hours will lead to another quarter of robust growth for our air transport and business and general aviation aftermarket businesses. This momentum will carry through to the end of ‘22 with growth led by the air transport aftermarket.
With build rates improving as expected, business and general aviation original equipment will grow sequentially each quarter for the balance of 2022. As ‘22 progresses and our comps ease, defense and space will see sequential improvement from the first quarter and return to year-over-year growth in the second half. We still expect full year organic sales growth for Aerospace to be up high single digits. Growth in the original equipment will lead to mix-related margin headwinds throughout the year. But we expect Aero margins to grow sequentially from the first half to the second half.
In Building Technologies, we expect momentum to continue with sales growth both sequentially and year-over-year throughout 2022 as supply chain constraints, particularly around semiconductors, begin to ease and we deliver on strong demand for fire and security products and building management systems. Our targeted pricing actions will also provide growth on top of that unlocked volume. We expect building solutions to return to growth in the second quarter and rebound well into the second half, finishing the year off strong.
Underpinning the growth throughout the portfolio are our healthy buildings offering, which will benefit from increased demand for air quality and touchless technologies. Higher government spending on infrastructure will provide additional growth opportunities for us as well. Overall, we now expect full year organic sales growth of high single digits to double digits, trending better than expected. We continue to work diligently to combat the current inflationary environment. And our cost controls and pricing actions will ensure that we maintain and build upon our margin expansion in both the second quarter and the back half of the year.
In Performance Materials and Technologies, the macro setup remains favorable for our portfolio as we are uniquely positioned to both participate in the oil and gas reinvestment cycle as well as enable the energy transition. However, PMT has the largest exposure to Russia among our segments. And our decision to substantially suspend operations in the country represents a near-term sales growth headwind, particularly in UOP. Process solutions project orders are expected to remain strong throughout the year. And volumes in the products businesses will increase as supply availability improves.
In UOP, we see sequential improvement in the second quarter and throughout the year as catalyst reloads increase in refining markets, and we are encouraged by the order pipeline for our sustainable technology. UOP is also a significant contributor to the liquefied natural gas capacity globally. And recent government announcements suggest incremental LNG capacity may ramp beyond what has already been committed, representing a promising opportunity for the business.
Advanced materials pricing will continue to be a tailwind throughout the year. And we are expanding capacity to position ourselves for further growth. In total, we still expect PMT sales to be up mid to high single digits for the year. PMT margins will benefit from our pricing and productivity actions. And we expect sequential and year-over-year margin expansion in 2Q and continued sequential improvement in the second half.
Turning to Safety and Productivity Solutions. We expect productivity solutions and services, advanced sensing technologies and gas detection to build on their momentum from the first quarter and continue to grow throughout the year. These businesses saw a year-over-year backlog growth of over 25% in 1Q and have demonstrated their ability to execute in difficult macro conditions, giving us confidence in the growth trajectory there, especially as the supply chain environment improves. Lower COVID-related mask demand will continue to be a year-over-year drag in 2Q. But as we enter the second half of the year, we will lap the difficult pandemic comps and personal protective equipment sales will return to growth, led by other product offerings in the portfolio.
In Intelligrated, we’re encouraged by the progress we have made in improving our operational efficiency and profitability. And we’re increasing our focus on project selectivity, finding the right balance between top and bottom line growth as we discussed. We still expect SPS sales to be flattish year-over-year for the full year with sequential improvement each quarter. However, we anticipate margins to expand sequentially throughout the year as business mix, pricing and volume compound.
Now let me turn to our expectations for the other core guided metrics. For second quarter segment margins, we expect to be in the range of 20.5% to 20.9%, resulting in 10 to 50 basis points of year-over-year margin expansion. Excluding the 30 basis point headwind from Quantinuum, we expect margins to expand 40 to 80 basis points. Second quarter net below-the-line impact, which is the difference between segment profit and income before tax, is expected to be in the range of $0 to $45 million with a range of repositioning between $40 million and $80 million as we continue to fund ongoing restructuring projects. We expect the second quarter effective tax rate to be approximately 24% and the average share count to be approximately 687 million shares. As a result, we expect adjusted second quarter earnings per share between $1.98 and $2.08, down 2% to up 3% year-over-year.
Turning to the full year. We continue to expect segment margins to expand 10 to 50 basis points, supported by higher sales volumes, price/cost management and our continued rigor on fixed costs. Excluding the 30 basis point headwind from Quantinuum, we expect margins to expand 40 to 80 basis points in the year. SPS will lead the margin expansion for the company as we continue to prioritize profitability in 2022 in that business, followed by HBT and PMT with Aero about flat year-over-year.
We continue to expect our full year net below-the-line impact to be in the range of negative $100 million to positive $50 million, including capacity for $300 million to $425 million of repositioning in the year. We expect the full year effective tax rate of approximately 22%. And we now expect a weighted average share count to be in the range of 684 million to 687 million shares for the year, reflecting our updated commitment to repurchase $4 billion of Honeywell shares in 2022.
We have raised our full year earnings per share expectations to $8.50 to $8.80, up 5% to 9% adjusted, an increase of $0.10 on both ends versus our prior guidance due to our accelerated share repurchase commitment. We still expect to see free cash flow in the range of $4.7 billion to $5.1 billion in 2022 or $4.9 billion to $5.3 billion, excluding the impact of Quantinuum. So in total, we’re raising our full year earnings per share guidance and increasing the midpoint of our sales range, absorbing the impact of external macroeconomic factors.
Now let me turn it back to Darius to discuss our enhanced environmental commitment coming out of our recent Investor Day.
Thank you, Greg. Let’s turn to Slide 7 and talk about the more aspirational approach we’re taking to our ESG commitments. ESG has been part of Honeywell’s DNA for decades. And we have an established track record of success in this area. Since we stood up our sustainability program in 2004, we’ve achieved every one of the ambitious targets we have set for ourselves, reduced our greenhouse gas emissions intensity by approximately 90% while spending over $4 billion on remediation projects to restore thousands of acres of land for our communities. While we’re thrilled in the successes we have had in the past, we believe we still have much to accomplish in the future. We’re currently on track to deliver on our 10-10-10 target set in 2019, further reducing our greenhouse gas emissions while deploying renewable energy projects and improving energy efficiencies at our sites.
In addition, last year, we committed to achieving carbon-neutral facilities in operations by 2035, a full 15 years earlier than the Paris climate accords. While these targets are successful in reducing our Scope 1 and Scope 2 emissions, we didn’t stop there. Earlier this year, we submitted a commitment to the Science Based Targets initiative to address our Scope 3 emissions across our value chain. Lowering the environmental footprint of our products, we continue to innovate with products and services that help our customers reduce their own emissions.
In addition to our ambitious sustainability targets, we’ve also enhanced our ESG disclosures with additional metrics on our Investor Relations website. These include an ESG data sheet that has metrics for diversity, water, greenhouse gas and more, a defense and space fact sheet that includes more detailed information on our sales makeup and a document that breaks down Honeywell’s many ESG-oriented offerings, which comprise more than 60% of our revenue today.
Now let’s turn to Slide 8 for some closing thoughts before we move into Q&A. As always, our value-creation framework helped us successfully navigate the quarter and over-deliver on our commitments. Most of our end markets will continue to recover, and we are optimistic about our future. Despite the ongoing geopolitical challenges, including approximately $400 million of lost Russian sales, we raised the midpoint of our full year sales range and increased our earnings per share expectations. Our value-creation framework is working. With the ongoing recovery of our end market, we remain optimistic about the future of our business. While there is a heightened level of macro uncertainty at present, we remain confident in our ability to execute on the pieces within our control.
With that, Sean, let’s move to Q&A.
Thank you, Darius. Darius, Greg, Anne and Torsten are now available to answer your questions. [Operator Instructions] Shannon, please open the line for Q&A.
Thank you. [Operator Instructions] Our first question is from Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
Good morning.
Good morning. Just wanted to understand maybe on the margins first. So you’re guiding for sort of the second quarter sequentially for revenues to be up maybe $300 million. Margin is down though sequentially. So just trying to understand sort of what are the main segment drivers of that. And then within Aerospace, was the Q1 margin performance in line with what you expected? And what’s the conviction on that margin turning around through the year?
Yes. Well, let me start by saying the margins don’t need to turn around. They are actually quite good at 27.4%. So we’re pretty happy with where they are. And yes, they were in line with what we had expected. We do see them coming down a bit in Q2 though, because as we’ve talked about, the OE equipment margins are not favorable to us. And so we are facing some mix headwind, which those will continue to challenge us as the year goes on. And we also talked a lot about in our Investor Day, our investment increases in R&D, in particular, which again are very important for some of our longer-term programs. So we feel good about where we are. But that is going to be – we do expect a little bit of a sequential tick-down there in Aerospace, in particular, probably get a little bit of a tick-up in SPS. But those are really the – those are probably the two main movers overall. We will also have – our corporate expense generally starts out a little slower in the early part of the year and ramps up again. That’s not big dollars. But as you know, every $10 million is about 10 basis points for the company. So those are really the three things I’d highlight.
Thanks. And then just one very quick follow-up would be on China sourcing. You said, I think, you’re assuming in May, the issues recede in terms of supply chain issues in China from lockdowns. Did you give any kind of dollar number for Q2 of the expected impact?
I think, Julian, that’s really impossible to quantify. I mean, what we’re assuming in our guidance range for Q2 is that essentially things come back to kind of normal state in May. That’s the best data we currently have. If you think about our 20 manufacturing facilities that we have in China, about half of them are operating more or less normally and the other half are kind of impaired, to some extent, by either supply chain challenges inbound and/or the operation itself. But we do expect that to improve in May and get back to normal with normal production certainly in June with a steady improvement in May. And to quantify that right now would be impossible. But that underpins our guidance for Q2.
Yes. And if I just would add to that, I mean, how this all continues to happen in China, obviously no one can say for sure. If things like what goes on in Shanghai happened early in the quarter like they are right now, it’s going to impact our April. We’re already seeing that. But assuming everything comes back, as Darius mentioned, as things open back up after the first week of May, then we’ve got plenty of time to sort of make up that volume and recover the shipping. But how will that present itself throughout the quarter and the rest of the year really is kind of unpredictable.
And as Greg pointed out, timing does matter. I mean, we expected a slightly softer April due to the outages. And with these outages kind of happen in month 1, we have time to recover. We get outages in month 3, it’s going to be a much bigger problem. And frankly, we’re not anticipating that. We’re anticipating a recovery.
Understood. Thank you.
Thank you.
Our next question comes from Steve Tusa with JPMorgan. Your line is open.
Hi, good morning.
Good morning.
Hi, Steve.
Two negatives and two positives. The first, could you just clarify maybe with a little more precision where you expect the Aero margin to come in, in the second quarter, just to kind of like – kind of clear the decks on that? And then also on SPS, the warehouse business, how does that trend kind of sequentially as we go through the year? And then on the positive side, anything that you’re seeing or embedding on a pickup in defense or oil and gas in the second half of the year or maybe that stuff is still out kind of in front of us? Thanks.
Yes. I mean, let me maybe start on the second of your two questions. So in terms of defense and space, our orders in Q1 were actually quite good. They were double-digit orders growth in defense and space. But I wouldn’t tell you that we’re seeing a big uptick yet due to some of the geopolitical situation. But we do think it could happen. But we’re not going to call it that it’s going to happen until we see it. So the orders growth in Q1, although good, is not really tied to any of the geopolitical situation. And particularly in HPS, we saw good orders growth in Q1. We actually anticipate some strong orders in UOP particularly tied to some of our gas portfolio. So that looks good. So that’s sort of your second question. Greg...
Yes. I don’t know. Steve, we don’t guide individual segments any longer. As you know, we’ve not done that for a while. So we do expect to see margins tick down in Aerospace less than 100 basis points but more than zero. And there is a range around those things as well, which is why we don’t guide it any longer. And as it relates to IGS, that is a low single-digit margin business. We expect that to go up each and every quarter by – think about it as maybe 100-ish basis points per quarter as we work our way through the 2021 job that we took the charge on for last year, which the completion of those will be at zero margin. And we continue to get the benefit of the new projects and our execution improvements throughout the course of the year, which is why again we see both between that as well as volume leverage that we ought to get from our products businesses and the rest of the portfolio. That’s why we see a pretty consistent margin expansion sequentially quarter after quarter after quarter in SPS, which is why our best – it’s going to be our best grower of the year.
And just to add to that, I mean, if you take a look at our backlog, which you’ve just provided, commercial activity is not our issue. I think commercial activity is about as strong as we’ve ever seen it. You see the improving backlog positions, orders positions. And I think this is all about supply chain. And there is still unknowns around supply chain. I think on the semiconductor side, we probably have seen the bottom. But I would tell you the aerospace supply chain is still challenged. And our de-commit rate from our suppliers is high. And that’s why it’s so hard to call this thing because when you get a pretty high de-commit rate, it’s difficult to call exactly what that’s going to look like in Q2, Q3 and Q4. So we remain optimistic that it’s going to continue to improve. But we’ve got to kind of see it in the numbers.
Okay. Great, thanks a lot, guys.
Thank you.
Our next question comes from Jeff Sprague with Vertical Research. Your line is open.
Thank you. Good morning, everyone.
Good morning, Jeff.
Hey, I was wondering if you could share a little more color on the SAF project with APD, Air Products right? I mean, kind of the – maybe the first really big benchmark deal that I’ve seen, $1 billion project. Is there any way you can give us an idea of just the Honeywell scope in terms of kind of the front-end capital opportunity and then kind of what the – kind of the ongoing recurring revenue on catalysts and other things might be on a project of that size and scope?
Yes. I mean, I think it’s a couple of things. So I would characterize it the following. And we don’t release specific numbers to that project. But think about it as two dimensions. The first one is licensing and the technology itself, which can be recognized in one or two different ways, either an upfront paid-up license or a license that’s recognized as a royalty rate as SAF is produced. And then the second stream being the use of the catalyst itself to actually drive that SAF conversion. So this is not the only project that we’re going to be involved with. When we look at SAF and green fuels, we’ve won something like a double-digit number of projects in the last, call it, 6 to 9 months as we’ve been on an incredible run. It’s just one example of what we do. At some point, we’re going to give you a bit of a framework. We’re not ready to share that yet in terms of exactly what it looks like. But it’s going to be definitely margin-accretive. And you should think about it, very much like you said, as a recurring revenue base based on the catalyst reloads, which are going to be required to drive either SAF or green fuels and green gasoline.
Great. And maybe just a housekeeping question for Greg. What was going on with minority interest in the quarter? Did something change with an ownership position? And what would you point us to going forward there?
Minority interest, you are probably seeing the full quarter impact of Quantinuum, because if you remember, we closed that in December. And so now we are getting a full quarter of that minority interest. We get the consolidation of that, which you see in the P&L, which is all the OpEx. But then we get the offset for our partners, 46% share, going the other way.
So, any direction on the go-forward or the full year on that item?
We can look at it separately in our call later. I am not sure I have that right off the top of my head.
Great. Alright. Thanks a lot. I will pass it.
Thanks Jeff.
Our next question comes from Scott Davis with Melius Research. Your line is open.
Hi, good morning guys.
Hi, good morning Scott.
Yes. So, in your full year guide of 4% to 7% on volumes, how much of that is price? And are you still raising price? Do you still need to raise price to offset this inflation that doesn’t seem to be going away?
Yes. No, see, now we are ongoing working our price. I mean we basically are bumping up sort of the benefit of price by 1 percentage point. I think the one thing that, Scott, that I think you picked up, I mean essentially in this guide, it is a substantial raise to our guide range. I mean we didn’t explicitly say that, but it’s obvious. Because we are basically absorbing a $400 million hit due to Russia with commensurate margin rate of over $100 million. So, this is a fairly significant raise to our outlook. The way we can overcome that hit is through price. And we think now we are basically projecting an incremental point of price to a range of 5% or so.
5%. Yes, we had talked about 4% in the original guide. We now see it as 5% as you saw from the release. I mean we were up 7% in the first quarter.
Yes. And because we started doing this price increase a bit more aggressively in Q4 and Q1, obviously, as we get later in the year that starts to lap itself. Although I will tell you that we are going to stay on top of this thing, and we are continuing to chase inflation and trying to stay ahead. And obviously, we have to do more price increases here in Q2 to continue to stay ahead of it.
Yes. So again, just simplistically, we lost a point from Russia. We picked up a point on price. We kept the overall organic number to 10%.
Okay. That’s my one question. I will pass it on. Thank you, guys.
Yes. Thanks Scott.
Our next question comes from Nicole DeBlase with Deutsche Bank. Your line is open.
Thanks. Good morning guys.
Good morning.
Just maybe digging into HPS and PMT a little bit more and what you are seeing from an order perspective and as the higher oil price is reflecting its way through more interesting or advanced customer conversations?
Yes. No, I mean I think as you saw in the quarter, we had very good order rates, I mean double-digit, north of 20% order rates in HPS. UOP was a little lumpy. Frankly, our LST business was strong. Our UPT was a little bit less, so we expect a strong booking quarter in Q2. We will be – overall, particularly for UOP, we see strong orders growth, particularly as it relates to our natural gas-oriented portfolio. So, think about absorbents, gas processing, midstream, LNG terminals and all that business, it’s – we are a big partner of Venture Global to some of the projects that they are completing and their expansion. So, overall, we are very bullish in terms of what’s going on, particularly as it relates to the gas infrastructure that’s currently being built up both in North America, the Middle East and Europe.
Thanks Darius.
Thank you.
Our next question is from Andrew Obin with Bank of America. Your line is open.
I guess – good morning. So, I will ask sort of a long question. So, short part, can you just talk about UOP, a revenue decline sort of despite an easier comp and growing refinery output? Just what’s the short-term explanation? I think I missed it. And a longer term question, how do you think about longer term impact of Russian oil having to find new markets? I am just sort of thinking about the fact that globally, you will need to recalibrate a lot of these refineries, right, so to take Russian oil and then to take oil that will replace Russian oil in places like Europe. So, first one near-term UOP and second one, how do we think about longer term opportunity on refinery upgrades? Thank you.
Sure, Andrew. I will take the first one. And from a short-term perspective, two simple things to think about. I mean first off, the way we had our plan set up was we were going to be completing some projects in UPT that had already been in flight. So, we are going to have – as that winds down, we are going to have a year-over-year comp in the equipment business in the early part of the year that will be negative. And we see the catalyst business growing throughout the remainder of the year, which is going to support the growth rate more beyond that. So, it’s – and the other aspect of that is back to Russia, as an example, the biggest place we are going to see the impact of Russia is going to be in UOP. And so UOP being down, I think it was 9% in the quarter, roughly 7% of that is from the loss of the Russia volume in 1Q.
Yes. UOP gets disproportionately – I talked about the 1% hit for our revenues for the year. That’s disproportionately UOP-related. And you saw that already in Q1. So, that’s just to help that frame it up. As it relates to your second question, I mean essentially, in terms of Russia oil, I mean simplistically said, instead of flowing less, we think it’s going to start flowing south. And I think the good news about us is that we have a global presence across the West and the South. And I think that benefits obviously a lot of our PMT businesses. And as I mentioned earlier, kind of the gas infrastructure build-out in Western Europe, which will take place both in Western Europe, but also in the Middle East and in the U.S., will also have positive benefit to our business. So, all-in-all, I mean I think we are well positioned there.
How long do you think it would take to quantify it for the industry?
I mean that’s hard to answer right now. I think we are still kind of weeks into this conflict, so we will see. I mean we are obviously involved in a lot of the discussions of the new projects and so on, but – and I am very, very confident that any of the build-out that’s going to take place, particularly of our modular design concepts, which really revolutionized LNG, I am quite confident that we are going to be a player in that space.
That is nice. Thanks a lot.
Thank you.
Our next question comes from Sheila Kahyaoglu with Jefferies. Your line is open.
Hi, good morning Darius. Thank you.
Good morning.
Can you talk about price a little bit more because it was really good in the quarter, up 7%? How are you seeing price and inflation across the business, given some are shorter cycle and some are longer cycle, like aerospace? Can you maybe quantify what you saw across the business segments, the inflation burden or the price/mix benefit?
Yes. I mean let me start. I mean if you think about price/cost, the price inflation, think about a 7% and 5% number, in that kind of neighborhood. I mean we – this is really the benefit of Honeywell Digital. We talked a lot about that at Investor Day. But I now can tell you exactly on the impact of price/cost for every of our 37 business units and exactly what it’s going to look like going forward for the next three quarters. And I can tell you that in bps. It’s really enabled us to establish an operating system, where we know what we need to do in terms of price. We know what we do in terms of coverage and where that business unit will be. And it’s a weekly rhythm that we are on with all the businesses. As a matter of fact, we have got a meeting later on today to talk about that topic, and we continue to stay on top of it. But it’s not as simple in some businesses than others. I mean some businesses, we have contractual obligations, contractual limitations in terms of what we can pass on and when. And we are finding ways to be – to do that. I mean everybody knows that inflation is with us. It’s probably going to continue to be with us. We are going to stay diligent, and we are very pleased with our results and able to stay ahead of the price/cost. I think Greg, do you have anything you want to add?
Yes. The only – to your point, just maybe expanding on your contractual obligations and also protections, so we have some protections as well. So, as you could probably guess, the price equation is greater in SPS, HBT, PMT. And we are a little bit more constrained, but also a little bit more protected in aerospace, where we have more of the longer term contracts.
Great. Thank you.
Our next question is from Josh Pokrzywinski with Morgan Stanley. Your line is open.
Hi. Good morning guys.
Good morning.
Yes. Good morning. So, just a question on the supply chain side, I mean I think we are still kind of hit or miss in terms of companies out there seeing improvement into 2Q and over the balance of the year. It seems like particularly in HBT and maybe some in SPS, a bit more kind of sequential improvement through the year than maybe others have seen. Is this finding more suppliers? Is it kind of an overall commentary that you guys have seen out of all the base? Kind of surprised that the China lockdowns have an impact. But could you speak to sort of how you are getting that improvement?
Yes. I mean there is – yes, there is a lot of variables here. Let me try to unpack it a little bit. I mean HBT and SPS, the supply chain is complex due to the variety installed base of our products. It is somewhat contained primarily to the semiconductors. And when you think about semiconductors, you are talking about the 5 to 10 core suppliers that we are monitoring. So, it’s actually a little bit easier for us to get our arms around the situation and know when things will come in, when they won’t come in. And we are cautiously optimistic about an improving supply source coming through for Q2, Q3 and Q4. And frankly, looking into Q2 from the beginning vis-à-vis Q1 or Q4, we actually looked a little bit better than we did in the other quarters. So, we have reason to be cautiously optimistic, provided we don’t get de-commits on semiconductors. Now, when you get into the Aero segment, it actually becomes a bit more challenged. And to give you some very specific numbers, our level of de-commits, which is sort of last-minute cancellations or push-outs, was at a level of 22%. I mean that’s what makes it so difficult. It was actually worse than in Q4, where it was about 19%. We are counting on some improvement in Q2 and Q3 and Q4. But now you are not talking about less than 10 suppliers, you are talking about tens, if not hundreds of suppliers. And trying to really figure out exactly how well they are going to deliver and when it becomes more challenging. Obviously, we have deployed our own people, our resources to that supply base to help them through some of their capacity challenges. We have got a program around that. But it is challenged. And I can’t tell you that we have a full and perfect view as to exactly what’s going to happen. We are working through it. And as you can see, we certainly have the backlog more than to support the business. And we are not just watching. We are actually doing and we have got a substantial force of people to just work there at aero supply chain.
Our next question comes from Nigel Coe with Wolfe Research. Your line is open.
Thanks. Good morning everyone. Thanks for the question. Before I get into my question is, we have got a few inbounds, just to clarify the comments on China. Did you say early May, the first week of May in terms of the Shanghai lockdowns moderating?
Yes. I mean, that target keeps moving. But we think in the – certainly in the first half of May, we expect some ease-off in terms of the Shanghai lockdowns. That’s what we have built into our guidance, if you will.
Okay. Great. Thanks Darius. And then just a follow-on with the supply chain constraints, particularly in Aero, the commercial aftermarket, up 20%, not too shabby. But is that growth and that ramp-up, that recovery being constrained by supply chain, i.e., it’s not just OE and defense, it’s also aftermarket? And then within the aftermarket recovery, are we seeing yet the wide-body sort of ramp coming through yet, or is that still on to come?
Yes. So, it absolutely is going to be a constraint on the aftermarket part of the business. I mean certainly, our MSP power by the hour is going to be rev/rec just based on flight hours. But the bit of that, that’s tied to spares and repairs is going to have a physical constraint for sure. And that’s also, by the way, exactly what creates a little bit of our margin pressure as well because we have got firm commitments to our OEs. And so that creates a bit of a squeeze between where the products will go in the chain and what the profitability around that is. So, that is for sure an issue. Are we seeing some return to wide-body travel, we are. I wouldn’t call it dramatic at this point in Q1. But we are seeing a little bit of a sequential move there. But we have said all along, that is really going to be tied very much to travel across the globe as opposed to domestically. And so when – particularly with China locking down, and that curtails, of course, anything in and out of China even longer.
Yes. And to be – just a couple of other things here, I mean, yes, I mean as Greg pointed out, wide-body travel has been still constrained and limited. And that’s still upside to go for us, given particularly our installed base on those aircraft. But the fact is if you look at our backlog position, we are in tremendous shape in Aerospace. And probably, the biggest issues we see is in defense and space, where we have a growing past-due backlog at a faster rate than even some of the other segments. So really, we don’t – we are not that worried about the commercial inbound. And we saw just an incredible order rate, strong double-digit order rate in Q1. All our focus is really on output in the supply chain. We get that going, I think very, very good, very, very quickly because…
And just again to put some numbers behind it, we talked about our past-due backlog going up $0.5 billion in the quarter. About $200 million of that was in Aero. About half of that was in defense and space, but the other half was in commercial. So, there is clearly an impact in both areas. But as Darius said, as that unlocks, then the volume and the leverage that will come along with that are really attractive.
That’s great color. Thank you.
Thank you.
Our next question comes from Deane Dray with RBC Capital Markets. Your line is open.
Thank you. Good morning everyone.
Hi Deane.
Good morning Deane.
I would like to stay in Aero. If I look at the segment outlook, the defense and space being flat surprises me a bit. And at the Analyst Meeting, Darius, you said you would not be surprised to see that be at high-single digits this year, given the uptick in international defense budgets. Is it the fact that the U.S. defense budget is flat offsets that? But why is that arrow not pointing higher?
Well, because we are really not seeing a lot of new orders yet to some of the geopolitical conflicts to replenish the inventories. I mean I think – and by the way, checking with some of the other OEs, that’s not necessarily unusual so that could be an uptick. When we talked about at Investor Day, there was some built-in optimism around that coming in. And I still think it will happen. I am just not going to call it yet until we actually see the orders coming through. Having said that, we did see double-digit orders growth in defense and space in Q1 just naturally without the addition of plus-ups in the defense budget. So, I think it could still be at that level. I am just not going to call that until we actually see it more pronounced in our orders rate. And I am still optimistic that it will happen.
Great. Thank you.
Thank you, Deane.
We have time for one more question.
Our last question is from Andy Kaplowitz with Citigroup. Your line is open.
Good morning everyone. Thanks for taking me in.
Hey Andy.
Hi Andy, good morning.
Darius, 9% is the highest backlog growth Honeywell has recorded this cycle despite macro uncertainty. Do you think the higher backlog is just a reflection of the handoff in your businesses from short and long cycle demand, or is this maybe a function of the fact that if we go back to what you said during the heart of the pandemic that Honeywell’s portfolio wasn’t really set up well in the pandemic, maybe the opposite is happening now? And would you expect your orders and backlog trajectory to stay at these elevated levels for a while?
You just nailed it, Andy. Yes, that’s exactly – you have got it exactly right, which is as we look in, because we look at short cycle and long cycle. And you see now a little bit of a transition from its slow, because short cycle is still very good for us, but now we are starting to slowly see that long cycle coming through. You see it in our backlog. You see it in our order rates. And now it’s the time of the cycle where the long cycle businesses will start to have a bit more traction. And a lot of people are saying there may or there may not be a recession in the next 6 months to 12 months to 18 months. But I certainly hope it doesn’t happen. But if it does, I actually think that Honeywell can weather the storm quite well, given the kind of backlog position in the markets we are in, which is energy and aerospace, which frankly have been hurt disproportionally hard during the pandemic and now are starting to come back strong. So I am very, very optimistic about kind of the position, the backlog we are in. And I think you said it exactly right, we are seeing kind of a transition occurring slowly, but surely. And it’s not because our short cycle is weak, but the long cycle is now starting to slowly pick up.
I appreciate it Darius.
Yes. Nice. Thank you, Andy.
Thank you. I would now like to turn the conference back over to Darius Adamczyk for closing remarks.
I want to thank our shareholders for your ongoing support. We delivered strong first quarter results in a typical Honeywell fashion and have and will continue to navigate the numerous uncertainties with operational rigor and agility in order to drive superior shareholder returns. Thank you all for listening, and please stay safe and healthy.
This concludes today’s conference call. Thank you for participating. You may now disconnect.