Honeywell International's CEO Discusses Q1 2013 Results - Earnings Call Transcript
Executives
Elena Doom - Vice President of Investor Relations
David Cote - Chairman and Chief Executive Officer
David Anderson - Chief Financial Officer and Senior Vice President
Analysts
Peter Arment - Sterne, Agee
Jeffrey Sprague - Vertical Research Partners
Howard Rubel - Jefferies
John Inch - Deutsche Bank
Deane Dray - Citi
Scott R. Davis - Barclays Capital
Stephen Tusa - JP Morgan Chase & Co.
Steven Winoker - Sanford C. Bernstein & Co.
Operator
Good day everyone, ladies and gentlemen, and welcome to Honeywell's First Quarter 2013 Earnings Conference Call. (Operator Instructions) As a reminder this conference call is being recorded. I'd now like to introduce your host for today's conference, Elena Doom, Vice President of Investor Relations.
Elena Doom
Thank you, Leo, and good morning. Here with me today are Chairman and CEO, Dave Cote; and Senior Vice President and CFO, Dave Anderson. Today's call and webcast, including any non-GAAP reconciliations, are available on our website at honeywell.com/investor.
Note that elements of today's presentation do contain forward-looking statements that are based on our best view of the world and of our businesses as we see them today. Those elements can change, and we would ask that you interpret them in that light. We do identify the principal risks and uncertainties that affect our performance in our Form 10-K and other SEC filings.
This morning we will review our financial results for the first quarter, share with you our outlook for the second quarter and the remainder of the year, and finally we'll leave time for your questions. So with that, I'll turn the call over to Dave Cote.
David Cote
Thanks, Elena. Good morning, everyone. A very good start to 2013. EPS in the quarter was $1.16 and that’s normalizing for tax, that came in a penny above the high end of our guidance range and up 12% driven by the strong margin performance across the businesses. And we accomplished this in a slow growth macro environment that was really coupled with some particularly challenging prior year comps. And I think there is a nice reinforcement of our conservative sales planning process and the results you can get from that.
Sales of $9.3 billion were aligned with guidance and like we talked about during investor day, it demonstrates the importance of a balanced portfolio. Now I say that because while we saw our headwinds from lower defense spending, lower European auto production and generally challenging comps, we also saw modest signs of improvement at several of our key short cycle ECS businesses and across another quarter from EOP, not just in sales but in what the future is for sale.
Similar to prior quarters, EPS growth was driven by strong margin expansion. We were up 100 basis points to 16.2%, and this was driven by cost management or productivity. That focus on material cost and remaining conservative in our census planning. This discipline, along with our considerable amount of seed planting, helped us to deliver these results while maintaining our investments for the future.
Now as a result of that success, we are raising our full year pro forma EPS guidance by a nickel on the low end, making our new range $4.80 to $4.95, up 7% to 11% versus prior year. This reflects our strong first quarter performance as well as our confidence in our ability to drive continued margin expansion. However, also as we’ve been saying since October, we want to ensure we’re remaining balanced in our planning and as a result we’re maintaining a range that incorporates possible risks and opportunities.
We’re achieving these results while continuing our investments in the future or that seed planting that you always hear us talking about. In the quarter we proactively funded over $30 million of new restructuring projects, building on a healthy pipeline of projects as we’ve talked about in the past. This is more than we originally expected which again speaks to the strength of our first quarter results. We also continue to invest in stuff that’s really just terrific when it comes to new products and technologies and that are winning with our customers.
As an example, Honeywell SmartPath was selected by the Airport Authority of India or AAI to be part of a pilot project for satellite based precision approach and landings at the Chennai International Airport. As you know airport congestion remains a major issue globally and SmartPath will support this increasing demand by reducing delays, lowering operations costs for airlines and increasing traffic throughput. Think of it as like the Honeywell operating system for an airport so same concept.
We also saw a number of new wins from UOP, building on our already record backlog levels and setting them up for a multiyear cycle of continued up performance. For example UOP announced its 12 th all fixed project win since the beginning of 2011 driven by the renaissance in petrochemical investments spurred by low natural gas prices.
Now if we take a step back for a moment, we see ourselves in what continues to be a slow growth microenvironment. We do see some reasons to be optimistic on the horizon, but we also see plenty of reasons to continue to remain cautious. For example U.S and European sales were as expected in the quarter. However, China saw a weak start to the year, reflecting a government austerity and a concerted attempt to contain growth. That being said, the majority of our businesses there are quite healthy. Inventory levels are returning to normal and order rates are improving, particularly in our long cycle businesses, signaling our modest recovery over the remainder of the year.
As we’ve said before, taking a conservative approach to topline planning helps ensure we deliver the results you’ve come to expect. You can expect we’ll be ready to capitalize on the opportunity if and when things do pick up. In the meantime, we’ll keep following the playbook you’ve come to expect from us. Seed planting for future growth, including investing in our businesses, launching a bunch of new products, global expansion and driving productivity through our key enablers so we can deliver this year, next year and beyond that.
So with that I’ll turn it over to Dave.
David Anderson
Thank you and good morning everyone. Thanks for your participation. Let’s go to slide entitled 1-2, 2013 results. I’ll just take you through the summary highlights. Again sales of $9.3 billion were approximately flat year over year on a reported basis and in line with our prior guidance, down about 1% on an organic basis. So adjusting for acquisitions and adjusting for currency. As expected, challenging comps in aerospace and also in transportation systems where headwinds in the quarter, although we expect these comps to get easier in the second half of the year. We’ll talk about that a little bit more.
Segment profit for the quarter was up 7%. Segment margins expanded as Dave said, 100 basis points to 16.2%, representing really exceptional sales conversion in the quarter. We saw margin expansion in three of the four SPGs and we’re going to take you through that in just a moment. But PMT you’ll note in particular benefited from a strong UOP quarter as we expected.
Global line, largely those numbers largely as anticipated and consistent with our prior guidance. You recall the pension favorability we have this year, which was essentially redeployed in the quarter to fund smart repositioning projects which will help continue to drive productivity in a slow growth environment.
The first quarter effective tax rate at 23.1% planned, against the planned 26.5% for the full year. The lower tax rate was driven by the passage of the U.S. tax extenders earlier this year, and that came just late enough to not be a 2012 benefit and early enough to be a first quarter 2013 benefit. That’s going to correct and will be offset later in the year and we are still planning the 26.5% for the full year. So EPS of $1.21 reported was up 16%, after normalizing of the 26.5% ETR, EPS would have been $1.16, up 12% and above the high end of the guidance driven by strong segment margin expansion in the quarter.
And finally, free cash flow for the quarter, $327 million, was up 9% versus prior year and right on track to our full year guidance. Let's go through each of the businesses in turn, start with slide number five with aerospace. Sales for aero down 1% in the first quarter again as expected. U.S. defense and space program wrap down as well as tough prior year comps in the commercial business, both contributed to a challenging top line sales quarter for aerospace. Commercial OE sales were up 1% driven by 9% growth in air transport in regional as a result the continued strong OE build rate. BGA OE, on the other hand was down primarily driven by backlog [brought] down in the first quarter of 2012.
Commercial aftermarket sales were down 3% versus prior year, a little color on that to help you understand what we are seeing today. It makes a lot of sense to look back at where we were this time last year. You recall in the first quarter of 2012, Honeywell commercial aftermarket sales were actually up 16%, which at that time was our eighth straight quarter also of double-digit spares increases. Of course we benefitted from strong win rates in airline selectables, due aircraft spares provisioning, favorable platform mix as well as higher than normal engine maintenance events and also some discretionary [end use] sales.
The key point is, obviously lapping a very strong period last year. Fast forward to today, and as we foreshadowed a year ago, the aftermarket growth has continued to moderate and as expected this quarter, we experienced decline in spares volumes mostly as a result of the strong performance we had last year but also as a result of the airline buyer behavior. However, the flight hours continue to be positive and we feel confident we will see aftermarket growth in the remainder of this year.
Defense and space sales were down 1%. U.S. sales were unfavorably impacted by the anticipated program wrap downs and these were partially offset by good growth in the international market. Looking at segment profit for aerospace, you can see margins up 80 basis points to a robust 18.9% in the quarter, largely driven by commercial excellence and also continued productivity net of inflation including the absence of the prior year unfavorable you will recall of the Hawker bankruptcy. Partially offset by lower commercial and aftermarket volume.
So with those highlights for aerospace, let's go to slide six, automation and control solutions. So ACS, sales were roughly flat for the quarter on both a reported and organic basis. Regionally, Europe was a little better than we expected back in January while the U.S. and Asia were a little bit worse. Let's just take a little bit closer look at the ACS businesses.
For ESS, energy, safety and security, sales were up 2% driven by good growth in ECC as a result of a more normal winter heating season, and also continued strong residential market condition and new product introductions in security products. Process solutions sales were down 2%, driven by challenging comps. It's really as a result of several large projects which have been steadily ramping down over the course of the prior year and into the first quarter of this year. Of the good news here for process solutions is that project pipeline remains very strong, the backlog is converting at a higher margin and it's partially as a result of being more selective in what we bid, as well as the organizational improvements we have made in the last year.
In fact, HPS margins were up strongly in the quarter. So a positive margin story for HPS and the contribution to ACS as a whole.
For BSD, Building Solutions and Distribution, sales were down 2% driven by several large project completions in 2012, coupled with a remaining U.S energy retrofit market, partially offset by continued growth in our Americas distribution business.
Now segment margin for ACS expanded 80 basis points to 13.8% in the quarter, the performance was driven again by commercial excellence by operational improvements and also by continued cost management and of course the benefit of previously completed restructuring actions which of course are continuing to flow through and pay dividends.
Let’s go now to slide 7 PMT and just the highlights for Performance Materials and Technologies. Now UOP sales were up 34% reported 10% organic in the quarter, primarily driven by increased petrochemical catalyst shipments and also equipment sales growth. UOP also continued to build backlog, now approximately $2.9 billion, reflecting an organic increase on both a year over year as well as on a sequential basis.
On the other hand, Advanced Materials was pretty soft in the quarter largely as expected. Sales were down 9% versus prior year driven by lower volumes in Advanced Materials as a result of planned plant outages in both resins and chemicals as well as in flooring products. Those outages had roughly a 6% negative impact on sales for the quarter. We will not expect these to have a significant impact on sales importantly for the remainder of the year.
Additionally, while we continue to see price rise pressure in resins and chemicals, the in markets there remain relatively stable and we exited the quarter with a robust order book supporting continued future growth outlook.
The segment margin for PMT was 21.8%, representing an increase of 200 basis points versus last year. again the strength of UOP sales in addition to favorable price net of inflation, partially offset by lower volume in Advanced Materials as a result of the plant outages that I referenced and also the continued investments that we make for growth in PMT.
So now to slide 8, transportation systems. TS, the sales decline was 4% in the quarter, year over year improvement over the fourth quarter performance. We continue to see European light vehicle production decline for approximately 10% as auto sales remain depressed across most of Europe, including now France, Germany and Spain. TS however has had the benefit of new launches, partially offsetting these declines and with higher turbo gas penetration in both North America as well as in China and while we expect a difficult environment in Europe to persist, the comps of course are going to get easier in the second half of the year.
Segment margins for TS were down 50 basis points, driven by the lower sales and also the investments we’re making to improve friction materials, partially offset by productivity actions. Overall TS continues to execute well in a difficult microenvironment it’s in, illustrated by maintaining margins at a solid level, despite western EU light vehicle sales at 17 year lows is driven really this productivity by continued efficiency improvements and also flexibility.
Let’s now with that review of the businesses for the first quarter go to slide 9 and give you the brief highlights for our outlook for the second quarter. Again for the second quarter we’re expecting modest sales growth roughly flat up 2% in the $9.5 billion to $9.7 billion range. EPS is expected to be in the range of $1.18 to $1.23, up 4% to 9% when normalizing for the tax rate in both years.
Let’s take a look then at each of the businesses, just the highlights of the revenue outlook for each of the businesses in the second quarter. Aerospace we’re expecting sales to be roughly flat, with modest growth in commercial partially offset by mid-single digit decline in Defense and Space. We continue to monitor after market activity in relation to global flying hours and airline inventory levels and we’ll see spares comps improve as we move through the remainder of the year.
For ACS in the second quarter, we think that’s going to play out much like the first, with sales flat up 2% driven by a modest organic improvement in ESS, and the timing of Intermec, which is expected to close by the end of June. This was partially offset by continued slowness in both HPS and BSD. We anticipate continued strong conversion in ACS with margins up year-over-year despite the potentially dilutive impact of Intermec in the quarter. And as a reminder, ACS margins for the year are estimated to be approximately 14.5% including 40 basis points of Intermec related dilution reflecting the acceleration we have seen in margin expansion here in the last couple of years.
PMT for the second quarter, we are expecting sales to be up 12% to 15%, which would equate to mid-single digit growth organically. UOP is expected to have another strong sales quarter, driven by the Thomas Russell acquisition and also higher equipment sales. Again as a reminder, UOP saw very strong licensing revenues in the second quarter of 2012 which are not expected to repeat at those levels this year. And as a result we expect PMT margins in the second quarter to be lower both sequentially as well as year-over-year.
Finally, in transportation systems, we are expecting sales to be flat to down slightly. EU light vehicle production is expected to be down approximately mid-single digits, with turbo volumes approximately flat sequentially. There is a possibility we could see low single digit volume growth which would be terrific. And this is reflected at the high end of the range, the revenue range for TS in the second quarter. So as you can see, very good performance despite a slow growth macro environment, recorded, as Dave said, by a strong focus on driving productivity and of course the balanced portfolio which gives us confidence in this outlook.
And now before going to the full year, I just want to take a few minutes to just say a few words and give you an update on NARCO. So on slide number ten, as we discussed in our December outlook call, and this is really the highlights of what we discussed but just to really make sure that we are reminding you of this, the long awaited NARCO trust formation is happening. And specifically, the NARCO bankruptcy plan is expected to be effective around April 30. And thus, we think it's likely the trust will be established in the second quarter, which means we will start seeing some trust formation cash outflows this quarter.
A couple of things we would like to take a moment to point out. First, we continue to estimate the 2013 cash outflows to be in the range of $200 million to $300 million pretax or $120 million to $170 million, which is shown on this slide, after tax. The outflows in 2014 are also expected to be roughly in that range, $175 million to $225 million, net of tax and net of insurance recoveries. And as you can see, 2013 as well as '14 in the left hand side of the chart, slide ten, reflect the high watermark for cash outflows as a significant portion of the early outflows are carryover of preexisting claims yet to be paid.
Now beyond 2013 and '14, we expect the cash outflows to reduce and stabilize subject to the annual payment cap on new claims of $140 million pretax, or approximately $60 million again net of taxes and insurance receipts. Now at this point we feel we are adequately reserved with over $1 billion remaining for NARCO specifically. So no P&L impact envisioned for some time. It's going to take several years of experience operating the trust to discern certain trends and claims activity and then reevaluate reserve levels.
So key takeaway number one is no change to the cash or earnings guidance for 2013 for this year. Key takeaway number two is this level of funding is very manageable, it will not impact our ability to assertively and positively redeploy cash to build value in other areas. We have been smart in how we have negotiated the trust terms, specifically with Honeywell's level of engagement in trust operating procedures and audit rights over the claims payment processes, in addition to the ongoing cap on new claims and you saw that in terms of that post 2014 presentation, all of which serve to differentiate the NARCO Trust from any other. Of course we’ll continue to update you on this as events unfold.
So let’s now turn to slide 11 and take a minute on the full 2013 guidance summary. As you can see, some small puts and takes based on what we’ve discussed today, but very much in line with your expectation. Sales expected to be up 3% to 4%, 1% to 2% on an organic basis. We’re still assuming a year rate of 1.25 at the midpoint which we believe remains a prudent assumption in light of the volatility we’ve all been experiencing.
Now the revenue forecast for the full year is down slightly from our previous expectations. Really has to do with the assumption regarding the timing of the Intermec close. Previously we were assuming June 1. Now we’re assuming June 30. We’ve incorporated the full impact obviously of sequestration. And then obviously just the continued outlook for slower growth in the macro economy, with increased segment margins importantly for the full year, 10 basis points on both the low and the high end. These increases reflect our strong first quarter performance and our continued confidence in driving margin expansion through our enablers and our ongoing proactive funding of repositioning.
The full year tax rate is still expected to be 26.5%, which is consistent with prior years. So as I mentioned earlier, we would expect the first quarter tax favorability to be offset in the second half of the year. So taking into account these items, we’re raising our full year EPS guidance at the low end by a nickel, resulting in a new range of $4.80 to $4.95, up 7% to 11% versus 2012. And as you can see, we’re still expecting around $3.7 billion of free cash flow so no change there. And as Dave said earlier, we believe a very balanced outlook for the year, but taking into account the good start that we saw in the first quarter.
So with that let’s go to slide 12, just a brief wrap up before we turn it over to Elena and to you for Q&A. the first quarter obviously reflected another strong quarter for Honeywell and like most top performing companies, we continued to set high expectations and we continued to deliver. We remain confident in our 2013 outlook. We continue to plan for growth in a low growth environment, with mix orders trend by business and region, which is to say we’re not counting on a big second half recovery to deliver strong results.
We’re focused on executing our proven playbook, driving sustainable operating leverage, progress on key productivity initiatives in addition continuing to fund smart new restructuring projects that will yield incremental savings in 2013 and 2014. And finally we’ve planted a lot of seeds for the future, with a strong portfolio aligned to favorable macro trends. These are all intact. Industrial reinvestment, infrastructure expansion and renewal, continued urbanization combined with a growing middle global middle class. These trends are going to continue to build and we’re going to continue to leverage those. We’ve got the right people. We’re developing the right products for the right market at the right value to capitalize on these trends.
So we look forward to global growth returning to more normal levels, but we’re not beholden to it. We’re going to keep doing what we always do, executing on our business strategies, continuing to evolve with the company and as Dave said, seed planting for a strong future.
So with that, Elena, let’s go to you and to the group for Q&A.
Elena Doom
We’ll now open the line for questions.
Question-and-Answer Session
Operator
(Operator Instructions). Our first question comes from Scott Davis with Barclays.
Scott R. Davis - Barclays Capital
Good numbers obviously and thanks for not disappointing like some of the other large cap names have here. It makes our lives a little easier. But...
David Cote
Scott, I just wanted to note that we broke your paradigm about lackluster results today.
Scott R. Davis - Barclays Capital
Well, you did but I still got another 24 that aren’t so great either, so.
David Cote
As you might imagine, I read that last night and said, I can't wait to (inaudible) that one up tomorrow.
Scott R. Davis - Barclays Capital
That’s all right.
David Cote
Did you (inaudible) your stuff?
Scott R. Davis - Barclays Capital
That’s good. Somebody does. So look, the only thing I am going to pick on then just this kind of flattish free cash flow year-over-year and obviously you are going to spend some capital? But it begs the question of given just how weak the macro, the overall macro is coming in in the quarter, and your outlook which I don’t think indicates much of a recovery from here. I mean why do you think you need to make substantial capital investments from here?
David Cote
Well, if we take a look at where the increase is coming from on the CapEx side, it's really for orders that we already have in PMT. And this is growth that’s going to happen. We have got the new molecules, we have landed the new orders in UOP and we got to be able to ship the stuff. And it's as simple as that. And that’s where the increase is primarily coming from. This is a good thing not a bad thing.
Scott R. Davis - Barclays Capital
Sure. But isn’t there a potential to have a decrease in some of the areas just given that you probably don’t need to spend much capital at all for flattish type growth?
David Cote
I would say it's flattish for this year, that’s the way we are going to think about it. But when we are making these kind of investments, we need to be looking further out than that. And I'd say we are pretty rigorous about how do we think about CapEx and where do we put the money. And any of the spending we are doing, I'd say is more than judicious when it comes to the returns that we are going to get from it. And as I said, the big increase is really coming out of PMT where we already have the orders in hand and we have to be able to support it.
Scott R. Davis - Barclays Capital
Yeah. No, I totally understand that part of it. Okay. And then just as a follow up, when you think about the amount of cash you have in Europe and other areas around the world, is there any flexibility in how you fund the NARCO trust, and I also assume that some of this CapEx you are spending is going to be overseas money as well. The PMT, a fair amount of that is U.S., but anything that kind of gives you some flexibility on utilizing overseas cash instead of having to use your U.S. base?
David Anderson
Scott, this is Dave. You know we just continue to be smart in terms of our tax and treasury planning, in terms of managing our cash balances. Again the guidance that we gave you at the beginning of the year, all of our communications in terms of both cash and coverage ratios and everything else, assumed this outflow. So we just continue to be smart on that, continue to be very smart in terms, as I said, our tax and treasury planning.
Scott R. Davis - Barclays Capital
Yeah, it's doesn’t totally answer it. I guess my question is, can you use some of that European cash to fund NARCO or it has to be U.S. dollars?
David Anderson
Specifically those need to be U.S. dollars.
Scott R. Davis - Barclays Capital
Okay. I figured as much. I just wanted to make sure. Okay, thanks and congrats guys. I will let you move on.
Operator
We will move next to Peter Arment with Sterne, Agee.
Peter Arment - Sterne, Agee
Question on aerospace aftermarket. Just in general, I know you are not planning for a stronger second half kind of pick up in the global economy but you are expecting an improvement on the commercial aftermarket. Is it -- you know as we transition, is it just easier comps or what kind of gives you the confidence when you are talking about what you are seeing for airline inventory levels.
David Cote
First, I want to state, we are not counting on much, Peter. We have tried to do that as a company and we lowered our sales sites even further in just about every business, saying we got to make sure that we are playing conservatively. So we are really not counting on much.
David Anderson
Yeah. I'll just maybe piggyback on Dave's comment, just add a little to it. We are looking at now up, low to mid-single digits in the commercial aftermarket for 2013. We think that’s kind of a reasonable range given the first quarter performance and also just looking at the pattern of global flying hours and our patterns for sales for last year. So the comps as we said earlier and as you know, become much easier in the second half. So I think that is a good way to think and to plan going forward. You know some of the specifics on that, we continue to see very good R&O on both BGA as well as on the ATR side of it.
Elena Doom
And that’s really two thirds of the make up in aftermarket.
David Anderson
Yeah, absolutely. That’s a very good point, Elena. That’s two thirds of the makeup of the revenues of the aerospace aftermarket. So we’re continuing to see that being relatively good. And also our anticipation for the spare side of BGA is pretty good.
Elena Doom
Yeah. RMUs are continuing to be very strong.
David Anderson
And our RMUs are continuing to be very strong. So I think there’s a lot of reasons why we think this low to mid-single digits. But that has tempered from where we started the year.
Peter Arment - Sterne, Agee
That’s helpful. And just maybe speaking in general about the region, is it similar regionally, around the globe? It sounds like just in general from your report that Europe feels a little less bad and Asia is a little softer. Is that consistent also like what you’re seeing?
David Anderson
Yes.
Operator
We’ll move next to the side of Stephen Tusa of JP Morgan.
Stephen Tusa - JP Morgan Chase & Co.
I think Scott took care of all the brown nosing for today’s call. So I’ll skip that part.
David Cote
We can’t get enough.
Stephen Tusa - JP Morgan Chase & Co.
So just on the short cycle trends, it’s a little bit all over the map here. Danaher talked about U.S being a little bit weaker. G was down 17% in Europe and it fell off a cliff in March. Maybe if you could just talk about your year, your highest frequency, economic indicators, the businesses you watch for that and maybe just talk about those trends, anything interesting that happened in March and into early April here.
David Cote
Sure. I would say when it came to March, things actually started to look a little tougher than they had before. Interestingly in the first couple of weeks of April things look a little bit better than they did before, but there’s nothing here and there’s a business we do watch called Basic Switches that we pay attention to something that portends to our future. But at the end of the day I wouldn’t say there’s anything that’s caused any of use to say okay, the trend has begun in one direction or the other. There’s just this order equivocation if you will where you just say okay, I still don’t know enough one direction or the other to make a permanent or let’s say more long lasting call. That’s why we’re going to stay conservative. I’d like to think that this is the trend, but after a couple of weeks of things being slightly better I’m certainly not ready to declare.
Stephen Tusa - JP Morgan Chase & Co.
Can you just remind us also on these moves in commodity prices with oil going down and natural gas coming back up, how that impacts PMT and how you see that, is there any impact to the net out? And also I guess Advanced Materials as well, the price dynamic there, any risks?
David Cote
I don’t see any risks from -- first of all gas pricing going up is a good phenomenon for a PMT because now you have more people willing to look for the stuff and pump it because that’s, when it’s only 253 box that’s filled they just don’t make sense. And when you get up to 450, well there’s a lot of stuff that makes more sense than it did before and we’ll encourage that dynamic. I like it. If we take a look at oil, whether it’s $80 or $100, that is worth looking for more. So I don’t see either of those trends being any hard movement around those numbers to be a problem for us.
Stephen Tusa - JP Morgan Chase & Co.
So the pipeline, the quotation and opportunity pipeline ULT is still robust no matter what’s going on here?
David Cote
No. it looks very good and I’d say all the seed planting that we did there since we acquired it and all that additional Horizon’s re-spending and becoming more global in our outreach is all stuff that just continues to play out very well for us.
David Anderson
As well as the strength of their position in the petrochemical industry has really reflected Dave in how they really outperformed peers in the first quarter.
Stephen Tusa - JP Morgan Chase & Co.
One last quick one. A lot of these chemical companies have been getting hit recently and I guess what is the risk that some of these projects get pushed even further? Are you seeing any of that?
David Cote
I can’t say we’re feeling anything like that. The stuff that we’re looking at doing and we were investing really has nothing to do with commodity trends or anything like that. It’s more the world needs energy. The world is going to continue to need energy. The world needs the new HFOs that we have invented. That’s where the investments are going and that’s where the backlog is built. And I have tough time seeing that really changing. It's always possible, but with any kind of minimal global economic growth, those trends continue.
Operator
We will move next to the site of Jeff Sprague of Vertical Research.
Jeffrey Sprague - Vertical Research Partners
Just a few things. Could you just elaborate a little bit more on what you are seeing in Europe overall. I mean your comments there sound a little bit better, actually a lot better than most people that we are hearing. Can you put your finger on some particular share gain or something going on with end markets, your particular end markets?
David Cote
Let's say, if we take a look at the overall macros, we are not saying things are better there. And based on how things are going, we would still forecast and plan for 0% GDP growth over the next three years. It's just the way we are going to continue to think about and plan for it because there is nothing to indicate that they are ever going to have just a bang up quarter or year. So we are going to keep thinking about it that way. Part of what I think we are seeing, is last year we took -- orders trends were really pretty negative in Europe. We were down pretty much double-digit all year along. It's just one of those things that we had to manage. We got our cost structure in line, which helped. But then on the orders side there is a bit of a rebound that you get from the (inaudible) just being down so much and managing your way through that.
So I am not ready to declare victory on anything. And I would say in terms of products, ACS did much better in Europe overall. But again, I think some of that is driven by just being down so much last year and you get some of the, we can call it a dead cat bounce, I think it's better than that. But at the end of the day, it's not an indicator that Europe is turning around, in my view.
David Anderson
I think, Jeff, just to add quickly what Dave said is, it really, it continues to be an inconsistent orders pattern. Overall, slight negative organically that we have in terms of growth in the first quarter and Europe is really again [attributed] just to the balance of the portfolio.
Elena Doom
Both long and short....
David Anderson
Long and short cycle, we see that balance working. And so it's not, as we have sort of, the theme if anything we are really striking here again today is, we are not counting on any kind of improvement. And in fact what we are really counting on is just the continued opportunity to improve our cost structure, our productivity. That’s some of the repositioning that we have funded here in the first quarter.
Jeffrey Sprague - Vertical Research Partners
Yeah, actually on that point, I mean the restructuring size isn’t huge but very attractive payback kind of surprises me a little bit, given how far along ostensibly you guys are on restructuring. How are you finding such big payback projects and is there more of that that may happen over the course of '13.
David Cote
Well, I would go back to the process initiatives that we always talk about. The Velocity Product Development, the Honeywell Operating System, Functional Transformation. The evolution of that is going to continue for a long time to come. And as long as we continue to progress on that path, I would like to think there are always going to be high returns projects that are going to come available to us. And I don’t see that opportunity declining in the future. There is going to be good payback projects for us for a long time to come.
Jeffrey Sprague - Vertical Research Partners
Right. And then just maybe one final one and I will pass it on. The flip side of Scott's concern about the weak economy and spending CapEx, I mean maybe there is some vulnerable deal targets out there, people getting a little bit jumpier about their station in life. Are you seeing any pickup in your M&A pipeline, just the funnel itself or the likelihood that things maybe happen more actively over the course of the next six to 12 months?
David Cote
Well, it's always tough to predict Jeff. As we said before, we always maintain just a very big active pipeline. We conduct reviews with the businesses about every six weeks where we go through, what are the possibilities and how are things looking and what could be new or different. I can't say that we have noticed any big change in any of that. But again, we are not looking for any big changes. We have tried to really make this a very methodical un-cyclical process.
Operator
We’ll move next to the site of Steve Winoker of Sanford C. Bernstein.
Steven Winoker - Sanford C. Bernstein & Co.
I’ve got to tell you, after Steve's reaction to Scott's comment, I’ve just got to say I’m in the camp of nice quarter and there should be a few apples on your desk in Morristown.
David Cote
I look forward to it.
Steven Winoker - Sanford C. Bernstein & Co.
Now just a couple of things. First, the other side of the prior question on input costs or on the commodities is, what was the specific input cost impact on Advanced Materials this quarter that is a benefit from that? Was it broader also across the portfolio?
Elena Doom
Steve, if you don’t mind the net price growth brand for Advanced Materials was actually slightly favorable. However, where you’re really seeing the impact on rise is within resins and chemicals with increased prices on benzene and propylene specifically. But the remainder of Advanced Materials was a slightly favorable benefit in the quarter.
Steven Winoker - Sanford C. Bernstein & Co.
And you would expect that to continue?
David Cote
Who knows? Who can predict the commodities cost? I have got to overall to bolster Elena's point, there tends to be more of a capital question than anything else because the rest of the business doesn’t really get affected much by that.
Steven Winoker - Sanford C. Bernstein & Co.
All right. But it’s in your plan? You’re planning for that continuity?
David Cote
We always plan conservatively, I can promise you that. Whether it’s sales, cost price spreads, we try to be conservative because you just never know.
Steven Winoker - Sanford C. Bernstein & Co.
Just a higher level again, so here we have another quarter with limited overall volume growth, margins are progressing forward, you’re getting at that with the prior question as well, but as we start, again, thinking about longer term and assuming that you do not get or if your topline continues to be weak, and in fact we don't get the pickup and all of that, and you think about how much margin or how long you can sustain the cost and efficiency improvements, at least just thinking about the next few quarters, how are you currently thinking about that?
David Cote
I'm sorry, Steve. How are we thinking about what exactly?
Steven Winoker - Sanford C. Bernstein & Co.
How much margin expansion you get in the absence of any volume growth?
David Cote
Well, as you know we're believers that margin expansion is a fundamental based on how good your processes are and your process improvement. This is where I'm going to come back again, the Honeywell operating system, velocity product development, functional transformation and our overall margin rate versus some of our peers. When you look at it that way, you say, okay, there's still lot of upside here. I prefer not to do it this way for the next five years. I'd like to think that there's some economic growth, sales growth in there at some point, but at the end of the day, we’ve still got a lot of room to progress just becoming more efficient every year.
Steven Winoker - Sanford C. Bernstein & Co.
But at least not going negative, right? You can at least maintain it?
David Cote
Well, I don't think going negative.
David Anderson
Steve, you can see that in our forward guidance. You can see it in our 2013 numbers, what we have as we’ve communicated at Investor Day for 2014. And again as Dave said, that's against the backdrop of the – modest to low revenue growth, depending upon the business. You're going to see some lumpiness quarter-to-quarter. For example we had just very, very terrific as expected UOP margin contribution in PMT this quarter. PMT, as I indicated in my comments earlier is going to benefit from again revenue growth from UOP in the second quarter, but it's not going to have the same favorable mix that it had in the second quarter of 2012 where we had very strong licensing revenues and obviously very high -- and conversion. We also have Intermec that's going to happen. It's going to dilute the margins. So there's things that influence it, but the overall general trend will continue to be positive.
Steven Winoker - Sanford C. Bernstein & Co.
Great. Just finally, a little bit more color about how Defense & Space is currently thinking about sequestration playing out and the impact on their model versus where they've been over the last nine months?
David Cote
The smart call is to just assume that it continues and that's the way we're going to keep thinking about it. This is not a time to be bullish. We are better off staying conservative and if they change the spend profile in defense, great. If they don’t, we are fully prepared.
David Anderson
And we have added additional sequestration impact in our full year revenue forecast. That’s one of the key reasons, as we said on a full year basis we were bringing our total revenues down a little bit, partly as a result of now reflecting that full sequestration.
Operator
And we move next to the site of Howard Rubel of Jefferies.
Howard Rubel - Jefferies
A couple of quick items, Dave. First, when you talked about HPS large projects ramp down, could you kind of characterize the geography and what you are doing to see maybe, talk about stabilization of the business or how the patterns sort of flow as you look out over the next 12 to 18 months?
David Cote
Howard, I would say, one of the things that we are doing in process solutions and that’s important, is the guys are doing a very good job of going after the installs that we won. So think of it as the same sort of thing that we talked about in aerospace of being selective about the platforms that you decide to go for. Our process solutions guys have been doing the same thing and as a result of that, we are seeing much better margin rates in the backlog then what we saw before.
As we look around the world, I would say it's pretty well mixed in terms of where you see the big projects. But in general, it's got more of a focus on high growth regions, if you will, and what you are going to see in developed markets.
Howard Rubel - Jefferies
And then just as a follow up. On new products, you talk about a lot of things playing about the way you want. Are there one of two things you would like to call out where as you have developed new products across the portfolio, where things are playing our maybe a little bit better and they can accelerate as you look forward?
David Cote
Well, I could tell you some of the stuff that I am pretty pumped about. We just went to the ISC West show for security and unveiled three or four really, pretty cool now products for both on the video side and the overall integrated systems side. And if any of you were in Times Square yesterday and happened to look up at the Reuters board, you would have seen an earned media, in other words we didn’t pay a thing for it consistent with our, kind of tight watch spending. But you saw our new thermostat, our new Wi-Fi thermostat, put you there by PR Newswire as being the greatest thing since slice spread. They might not have put it that way but that was certainly the message. So, yeah, I am pretty excited about all that stuff. ACS has some really great new products already out there and as you might imagine, a lot more good stuff to come.
Operator
We will move next to the site of John Inch with Deutsche Bank. Your line is open.
John Inch - Deutsche Bank
Just on the point of sequestration. Do we think, assuming that nothing changes, now this down 5% is about the new norm for that business, which obviously can be managed, but is that run rate or is this something about the second quarter that makes that a little bit worse?
David Anderson
I think it's just really timing in large parts, John, of some of the projects phase outs, wind downs. We had a little more favorability in D&S in the first quarter and we will have a little less favorability, a little more decline in the second quarter. So it's really just timing there. And then the other thing as we indicated is just the continued progress and performance that that businesses leadership is making in offsetting U.S. DoD budget declines, just in terms of pursuing opportunities elsewhere. So that’s coming through the numbers as well. So basically, I would say.....
David Cote
Yeah, particularly international.
David Anderson
Exactly. But for the full year it's a modest tweak down from roughly 3% previously guided down for D&S to now more like 4% down.
John Inch - Deutsche Bank
And does that imply that the U.S. piece of the defense and space is down more but you are making it up internationally, is that part of the mix or?
David Anderson
Yeah.
John Inch - Deutsche Bank
Okay. All right. So that makes sense. What about turbo? This is prospectively the worst European auto build quarter. What is the – what do you think the runway is for turbo and particularly on a growth rate basis given the easier compares, as you exit the year because you’ve got all these new platform wins. That business should be ramping up I would think pretty nicely heading into the second half, no?
David Cote
I would say there's that opportunity, but I'm certainly not going to predict what the Euro auto industry build is going to be. We're going to stay conservative even with what we get some kind of EDI global insight forecast. And I certainly hope what you're saying is correct and we do believe that there is that strong possibility. But we're going to continue to be careful.
John Inch - Deutsche Bank
Well, let me ask it this way. Does new platform wins in Turbo based on what you've been able to achieve over the past couple of years, does that materially impact growth rate this year? Or is it more of a tailwind into next year?
David Cote
Both. We certainly see the impact this year. We saw it even this quarter where the Euro auto industry was down about 10% and we were down about 4%, largely because of the impact of new launches. That's why with any kind of just market stabilization, never mind growth, we end up in a really great place.
Elena Doom
I would add that the new launches in the second half are also expected to accelerate over the levels that we saw in the first quarter and what we'll see in the second quarter.
David Anderson
As we indicated, I think we actually have a shot and that's going to work here, actually having a volume increase in Turbo in the second quarter at the high end of our range and launches together with some other favorable macros, commercial vehicle, better comps, all of those should support the improved performance, John, over the course of 2013.
Elena Doom
And some modest low-single digit growth in the second half.
David Anderson
Yeah.
John Inch - Deutsche Bank
Was this contingent on some a framework of European auto build? I can't remember if you said that this is based on European auto build this year doing X?
Elena Doom
Yeah. We're assuming that light vehicle production is down low to mid-single digits for the year in Europe.
John Inch - Deutsche Bank
And then just lastly, Dave Anderson, I thought we historically have been talking about several hundred million of NARCO Trust funding. Why is that -- how have you been able to possibly accomplish this in such a lower rate? Is that because you had prefunded it before and it really still is that number? Or maybe a little more color on the NARCO and why now and, it seems like you've done a better job of being able to fund this. Just what happened here?
David Anderson
Well, I think what we're seeing now is we're seeing a calendarization if you will, the phasing of the anticipated claims payment for those that have not been processed and executed since the beginning of the stay that goes back to 2002. So I think number one, we have a better read on what the timing of that could be, John that claims processing through the trust. And I think number two, what we're showing here is a little precise numbers given the insurance recoveries and also tax affecting those cash outflows. So it's a combination of those and then something that's consistent obviously is the future period look in terms of the enforcement of the caps 2015 and beyond, but again including and what've shared with you today, the after insurance recovery and after-tax impacts to Honeywell. So I think it's really just those, a combination of those updates and refinements.
John Inch - Deutsche Bank
I’m sorry, the reason this is costing so much less today is why, because of actuarial precision or something?
David Anderson
No. I don’t think it’s costing less. I think what we’re doing is we have the payments for claims that if you will catch up, the historic claims processing spread over two years, 2013 and 2014 as well as 2013 includes trust formation funding, trust formation spending, that’s about $45 million after tax. We have those now calculated we think more accurately or a little more precisely is probably the best way of saying it. It’s still very much estimates in terms of how this is going to play out and we’re showing all those numbers to you on an after insurance recovery after-tax basis. What you may be recalling is some communications that we’ve made on pretax dollars and some of those communications probably also did not factor in some of the direct insurance recoveries. So what we’ve done is sharpened the pencil and our communication today, to show what really the net impact and our best judgment of the timing of those outflows.
Elena Doom
Leo, we have time for just one more question.
Operator
We will move next to Deane Dray, Citi Research. Your line is open.
Deane Dray - Citi
Thank you, good morning everyone.
David Cote
Yeah, I hope you like the amount of cabbage this quarter.
Deane Dray - Citi
You know I think you have done some good harvesting there. So I can also say I was at that ISC West Trade Show in Las Vegas and did see a number of those new products. Especially the integrated security systems that combine security, HVAC controls and energy savings. And there were a number of blue ribbons that you have all won as best in show. So congratulations on that.
David Cote
Thanks. We are pretty -- ACS has a lot, just a great new product pipeline on all the stuff that you saw. Pretty excited about where that’s going to go.
Deane Dray - Citi
And the question I had is on, in ACS, on the process side. The comments about the backlog converting at higher margins. I mean that’s all good news but hopefully you could break out, how much of this is the result of your better pricing going into backlog? Is there a mix benefit and how might there be some new products in there as well?
David Cote
Well, I think you touched on all the items, I would also, I guess maybe to bounce through the first part of that, it's just better discipline in how we price, how we understand what our cost is going to be and how do we manage that. And what do we decide to go after. But in addition, they have done a great job on new products and moving up the value chain into the kind of simulation and operator training type products that others can't really do. And that always gives you just a better margin overall. Dave, I don’t know if there is anything you want to add to that?
David Anderson
Yeah. No, I think that’s exactly right.
Deane Dray - Citi
So just lastly on that is, where are we in that cycle? Is the push back I here from some investors as, hey, this is the peak and you are going to see diminished spending in these areas. But it just doesn’t seem like that would be the case with the amount of retrofits and upgrades. But just can you comment on where we are on that cycle?
David Cote
Yeah, I guess I have a tough time seeing that myself. If we remember, about these sales go into the petrochemical and oil and gas side. And we have a good insight to that from just what's going on in UOP, and that looks pretty robust. And for the same reason we said before, the world needs energy and there was a long period of time where there was disinvestment. We are starting to see that churn within the refining industry that while it only grows 2%, there is a big shift that’s going on and high growth regions are building more capability. And, well, I just have a tough time seeing that being a declining industry.
Elena Doom
All right. I would like to hand it over to Dave Cote for any final comments.
David Cote
Thanks, Elena. We are obviously pleased with our performance in the quarter and we are able to raise our margin rates substantially even on low sales growth. And for me anyway, it's exciting to think about what we could do if we just got some sales growth. It's exciting to think about the possibilities. We will continue to go to plan on a slow macro environment really because there is no percentage in planning otherwise. And I think it's important to think about this performance as a result not just of conservative planning, which we talk about a lot and we do every year, but it's also that relentless seed planting that we do. Whether it's products, technologies, process, geographies, we want to do a great job not just with this quarter but this quarter next year, three years from now, ten years from now. And as the planning continues and it's just a part of who we are, and I think that’s why you can continue to expect us outperform in the future. So thank you for listening and I hope you are pleased as we are. Thank you.
Operator
Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.
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