Honeywell International Inc (HON) — Q4 2016 Earnings Call Transcript

Thank you Sean, good morning and welcome to Honeywell's fourth quarter 2016 earnings conference call. With me here today are Chairman and CEO Dave Cote, President and Chief Operating Officer, Darius Adamczyk, and Senior Vice President and CFO Tom Szlosek. This call and webcast, including any non-GAAP reconciliations, are available on our website at www.Honeywell.com/investor. As a reminder, 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 and we ask that you interpret them in that light. We identify the principal risks and uncertainties that affect our performance on our Form 10-K and other SEC filings. This morning we will review our financial results for the fourth quarter and full year 2016 and share our guidance for the first quarter of 2017. As always, we will leave ample time for your questions at the end. So with that, I'll turn the call over to Dave Cote.

Good morning, everyone. While we finished 2016 with a strong fourth quarter delivering earnings per share of $1.74 and that’s up 14% year-over-year. The quality of earnings was strong driven by double-digit growth in our European sources portfolios within Performance, Materials and Technologies as well as continued strength in Transportation systems and the Home and Building Technologies distribution business. We also funded more than $30 million in new restructuring projects and absorbed more than $115 million in Aerospace OEM incentives. We finished the year by exceeding the segment margin and free cash flow estimates that we provided during December. Segment margins for the fourth quarter expanded by 90 basis points excluding M&A, mostly due to productivity and benefits from the significant restructuring actions we executed throughout the year. Free cash flow for the quarter was $1.7 billion with 126% conversion driven by improved working capital. For the full year earnings of $660 increased 8% year-over-year operationally, our segment margins improved by 80 basis points for the year. In 2016, we also completed several significant portfolio actions that will deliver attractive future returns for our shareholders. The spinoff of our resins and chemicals business not only reduces the cyclicality and improved the margin profile of our performance materials and technologies business but it also created nearly $800 million in share value. And at today's AdvanSix stock price that value is $1.1 trillion. We’ve sold our aerospace government services business and reinvested $175 million of the proceeds into earnings enhancing restructuring projects. We split the former automation and control solutions business into two new more nimble reporting segments that will deliver better growth, speed, and productivity. In 2016, we also funded more than $250 million in restructuring projects that will provide a significant tailwind this year and beyond. We also deployed more than $2 billion for share purchases, funded high return capital projects through $1.1 billion of CapEx, and refinanced our debt reducing our expected 2017 interest expense by about 8% while increasing our aggregate borrowings by $4 billion. Lastly, we successfully implemented a comprehensive CEO and segment leadership succession plan. Darius has hit the ground running and has worked extensively with our businesses on their 2017 operations and strategic plans. As Darius and Tom shared during our outlook call in December, we remain optimistic about 2017 and we are reaffirming our 2017 guidance of 6% to 10% earnings growth as divestitures and organic sales growth of 1% to 3%. For the first quarter, we are initiating EPS guidance of $1.60 to $1.64 which is a 6% to 9% increase year-over-year as divestitures. I’d like to share some of our recent highlights which includes some great trends and progress in our connected initiatives. Our long cycle backlog is improving in a number of our businesses including a double-digit improvement in building solutions driven by projects growth, a mid-single-digit increase in defense and space driven by U.S. defense and a mid-single-digit improvement in UOP driven by increased equipment demand. We are seeing continued strength in Intelligrated with backlog of more than 40% and in transportation systems where our win rate for 2016 was more than 50%. Also, the pipeline of orders for Solstice remains above $3 billion. Significant wins in the fourth quarter include a live utility energy service contract to modernize the Tinker Air Force Base in Oklahoma City. The upgrade in water and HVAC systems, energy efficient lighting, and other advances will significantly reduce their carbon footprint while saving the Air Force more than $3.5 million a year. UOP got two additional licensing agreements in China. We licensed our Unicracking technology for the production of diesel and naphtha to meet growing Chinese demand for transportation fuels. And we licensed our Methanol-To-Olefins technology which enables the conversion of domestic coal resources to Ethylene and Propylene the essential ingredients for making plastics. This is UOP's ninth MTO license in China. UOP continues to win in China because of our local expertise, local manufacturing capabilities, and our 80-year history of helping the Chinese petroleum industry address tougher challenges. Also, in UOP, we announced that our modular exceeds bioreactor technology; it’s helping a fresh cut, fruit and vegetables company in the U.S. to treat wastewater. The unit treats roughly 150,000 gallons a day to meet local standards. Wastewater regulations are getting increasingly strict and we have unique technology to help our customers meet these requirements more efficiently and cost-effectively with simple, modular equipment for fast installation and low maintenance. This is our first XCeed facility for the food and beverage industry and growth in segments outside of oil and gas will help reduce the cyclicality of UOP in the future. In Home and Building technologies, we finalized a $250 million advanced meter project with Entergy to help improve electricity service and reliability for utility customers across Arkansas, Louisiana, Mississippi, and Texas. Our HBT business continues to make advances in high-growth regions providing connected security solutions like a new municipal surveillance system and our new line of INNCOM elements, Guestroom Controls for our hospitality customers. We are also making significant progress on our connected initiatives, which are powered by the Honeywell Sentience platform. Within connected aircraft, our equipment is available for use on all Airbus platforms and system integrations are in process on the Boeing 737 MAX, 787, and 777X. In the business jet market, Bombardier and Gulfstream will be offering JetWave on selected models of new aircraft and we are certifying the system for aftermarket upgrades on over 30 models. We are nearing a milestone of 500 JetWave deliveries and we continue to receive significant orders. It will be a big part of our growth story in 2017 and beyond. We have JetWave on our planes and it is fantastic. While I was live streaming a TV show on my iPad, I got a phone call on my iPad, answered it with no noticeable latency, completed the call and returned to the show. It is incredible, really simply awesome. For Connected homes, we made some exciting announcements at the consumer electronics show. We introduced new Lyric do-it-yourself Security cameras which let homeowners monitor motion and sound while away from their homes. We also announced compatibility of the Lyric Home security and control system with Apple HomeKit giving homeowners control of their security system through Siri or the Apple Home app. The ever-expanding suite of Lyric connected products now includes cameras, a Water Leak and Freeze Detector, Thermostat, and security products to keep homes safe and comfortable. Within connected plant, we announced new INspire partnerships in Honeywell process solutions with Dover Automation and Aereon. It will help manufacturers leverage the industrial Internet of Things to improve the safety, efficiency, and reliability of operations across a single plant or several plants across an enterprise. We currently have four partners as part of the INspire program which fosters collaboration between customers, equipment vendors, process licensors, consultants, and Honeywell experts. We expect that number to grow considerably throughout the year. We also continue to gain traction for our family of cloud-based services for the oil and gas industry that anticipates operational complications, offering real-time solutions to overcome them. In the last few months we’ve announced agreements to help PetroVietnam produce more gasoline, and help Delek Refining avoid downtime and improve its operations. Lastly, a few weeks ago we announced the collaboration with Intel to develop IoT Solutions for the retail industry. Honeywell and Intel will jointly develop solutions that utilize the two companies’ technology offerings including our sensors, handheld computers, processes, bar code scanners, RFID tag readers, and cloud-based software. These solutions will help retailers and supply chain firms gain greater visibility into in-store inventory, enhance customer service, and ensure items ordered online are available for in-store pickup. A number of these technologies will be on display at our annual investor conference which will take place on March 1, at the Plaza in New York City. Darius and I look forward to talking with you more about our progress then. So with that, I will turn it over to Tom.

Thanks, Dave. I’m on slide four. Earnings per share of $1.74 for the quarter increased 14% from 2015 as Dave indicated, and now this excludes the charges for debt refinancing and pension mark-to-market we talked about in our guidance, and also from 2015 it excludes the divestitures that we did in 2016. To reemphasize Dave’s point, the double-digit increase was achieved even while absorbing the impact of $48 million in incremental year-over-year OEM incentives. The fourth quarter reported earnings per share were $1.34, the lower amount reflects that $0.12 for that debt refinancing as well as the pension mark-to-market of approximately $0.28 a share driven by lower discount rates in the U.K., Germany, and the U.S. The 2015 pension mark-to-market charge was about $0.05 a share. Segment profit for the quarter was $1.9 billion, and we expanded segment margin by 20 basis points to 19%. Now, that’s 90 basis points to 19.7% excluding the first-year dilutive impacts from M&A. Productivity and restructuring benefits along with higher catalyst and Solstice volumes were the key drivers of our margin expansion partially offset by the higher aerospace OEM incentives I just mentioned. Sales of $10 billion were flat on a reported basis and declined by 1% on a core organic basis. In PMT, we delivered double-digit core organic sales growth in UOP and in Solstice. In addition, our transportation systems and home and buildings distribution businesses continue to grow nicely. However, we did see declines in Defense & Space and business in general aviation similar to what others are seeing. We had unanticipated supply chain delays within our safety and productivity solutions business at the end of December, which modestly diluted our performance in SPS. Free cash flow in the quarter was $1.7 billion, up 8% with conversion of 126% largely driven by improvement in working capital. Our CapEx reinvestment ratio for the quarter exceeded 190% as we continued to invest in high ROI projects. This is the third consecutive year of reinvesting in over 150% of depreciation, but we expect the reinvestment rate to normalize to around one times depreciation as we complete this investment cycle. CapEx is expected to decrease by about 5% in 2017. Overall, the fourth quarter was a very nice finish to the year. And now on slide five to discuss the segment performance. Starting with Aerospace, our core organic sales came in at the high end of our December outlook with softness in business and general aviation and prior year program completions at international Defense & Space leading to an overall 5% decline. Turbo continues to be a great story driven by our penetration in light vehicle gas application. For the year, core organic sales in our gas business were up more than 20% and over 30% in the fourth quarter and we booked more than 5 billion in new platform wins bringing our 2016 win rate for all of TC north of 50% as Dave indicated. Our Aerospace segment margin came in above our forecast driven by stronger productivity and slightly lower OEM incentives than we anticipated but still higher year-over-year. Home and building technology delivered 2% core organic growth led by building solutions, global distribution, and our high growth regions where we grew more than 10% both in China and in India. Growth in our smart energy business improved driven by smart meter program rollouts in Europe. HBT margins excluding the first-year diluted impact of M&A expanded by 60 basis points driven by benefits from previously funded restructuring and commercial excellence, and that was partially offset by the impact of higher distribution sales in the mix. In PMT, core organic sales grew by 5%. UOP was very strong growing 10% in the fourth quarter driven by catalysts, licensing, and equipment. Process solutions finished the year with strong sales on software migration services. Now the positive sentiment in our oil and gas businesses continues, and we signs of improving activity with our customers around the world, including a 5% increase in the UOP backlog driven by equipment, engineering, and services. In the fourth quarter, growth in HPS of 8% driven primarily by global megaprojects and the industrial thermal business. Finally, Solstice, low global warming refrigerant volume in fluorine products drove 8% core organic sales growth in advanced materials and we expect this trend to continue in 2017. PMT margin expanded by more than 500 basis points driven by those strong volumes as well as productivity and higher catalyst and licensing volumes in the mix. In SPS, we ended the quarter slightly below our expectations as I mentioned earlier. Intelligrated continues to perform quite well, its order rates have been strong increasing by double digits in calendar year 2016 and the business is exceeding its income targets despite the acquisition and integration costs we’ve incurred. SPS segment margin expanded by 100 basis points excluding the first-year dilutive impact of M&A. This was driven by benefits from restructuring and commercial excellence.

Hi. Good morning, guys.

Hey, Scott.

Dave, this is your last conference call?

It is. This is the last one, and I can promise you I’m really going to miss it.

Okay.

That wasn’t a joke. I was serious.

It’s good for everybody, right. You will be missed, but I’m sure Darius will do a great job.

I am confident.

Anyway, well, we know where you live, if he doesn't do a good job, let's put it that way.

What you do now?

I have a detailed question about JetWave. It sounds interesting and has been discussed for the past couple of years, but is it primarily introducing new platforms, or can it completely replace some of the existing slow WiFi provided by GoGo?

You can absolutely retrofit. And that’s one of the comments that I had made, because we’re in that process and I think as consumers start to see what’s possible when you’re using this JetWave service, they’re going to be demanding it. I mean, it really is incredible. I was on the plane, I wanted to test this stuff myself, so I started live streaming the show. It worked perfectly. I got a phone call through the iPad while I was watching the show, answered the phone, almost, in fact, I noticed no latency in the call at all. And then when I ended the call, the show resumed exactly where I left off. It was quite impressive.

I’d add, Scott that we have over 1000 aircraft that are committed to JetWave. We got over 20 airlines wins to date. It’s selectable on the airbus we’ve been certified on the platforms that we mentioned earlier. We are working with Boeing to get certified as we said. So it looks pretty good. The growth is very strong double digits for us in 2017.

So what’s – how does the profitability on this stuff work? I mean, I assume this is some sort of monthly charge, but when do you start making money on something like JetWave? Is it a couple of years of investment then it really starts to kick in or on day one are you shipping out units that are profitable?

Yes. We make money now.

Is that a monthly charge, Dave, or is it – how does it work?

It’s going to vary on some of that depending on the segment, so I don’t know if we’ve shared all that on the business model, but it will vary between large planes and biz jets.

But to be clear, Scott, I mean, there is a significant amount of equipment that goes along with it, which is a sell and install model for us, so that is also helping the growth and creates that profitability for us immediately.

This is a good one.

Okay, good. That’s all I asked. Good luck guys. Thanks.

Before you go I will always remember that you were our first supporter back in those dark days when I first started here, so that’s not something I’ll forget and I’ve been obviously pleased that we could prove you correct for the 15 years, but thank you for that.

You’re welcome. I was just fortunate, that's all. But not the one.

It was a bold move at this time and I appreciate it.

Hi. Good morning.

Hey, Steve.

First of all, congrats to Scott for getting the call right early, it was a good one, and so, congratulations to him. First question what TV show were you watching?

It was the American. I don’t know if you’ve seen it. I’m only in the first season, so don’t tell me anything.

Glad to see you’re still working out hard out there.

I got to test the system. You don’t want me flying the plane?

I can picture Darius in the same jet just doing something different on his iPad. So just a question on tax, can you maybe just talk about what the dynamics are around, how if repatriation come through border adjustments, just give us some color on your kind of net export position, if the Brady bill does go through I'm sure you guys have done some analysis, what should we expect?

We’re a net exporter, so on balance it would benefit us from a tax standpoint. When it comes to repatriation, it depends on what the final deal is. If there is really high tax that’s put on that, well, that makes it a lot less interesting. So, we’ll have to judge it when we see it.

And again how much – if it was a very low rate on repatriation, I mean would you be able to do something pretty quickly?

Sure.

There’s going to be some latency between when some things enacted and there is some work that we have to do on earnings and profits, but it’s nothing that’s...

It won’t take years.

Right. Okay. And then just kind of an annual run rate on Intelligrated, just kind of back of the envelope I’m getting something for this year kind of close to, you’ve given us the eight months contribution, getting something close to that of a 1 billion, is that around the right number and what was the annual revenue that it's finished out in 2016 for Intelligrated?

Yes. It’s a little bit less than that, I mean around 900 what we’ve called the annual run rate, but it is growing at that 20% flip, so you can see that you could get pretty quickly the numbers you mentioned, Steve.

Okay. So, the 900 is kind of where it’s growing today in first 2016?

That’s an annual rate.

Okay. And the margin there was relatively low this quarter, I think it was kind of low single digits. How do you kind of see that margin, I know it’s not going to be one of your best margin businesses here in the near term, but what’s kind of the trajectory of getting that to at least to double-digit range, I know it’s a growth story. I’m just curious to when the contribution really kicks up?

Yes. As you can appreciate the first year is always a tough one for M&A particularly one of that size. So that’s why we’ve referenced those lower margin rates. But when those first-year charges goes away as well as when the synergies kick in, we’ll be low double-digit kind of a margin rate. The interesting thing though is that the installed base that we’ve built really gives us a platform for other offerings particularly on the software side, and that's one of the main reasons we bought the business is to be in the supply chain and distribution arena from a technology perspective. That’s going to help that margin rate as well.

Okay, great. And then one last quick one, Dave and Darius at the March Investor Meeting I think Dave you’re still going to be around for that one, how prominent of a role will Darius play as far as presentation and what should we expect to hear in March from Darius?

Well, they made room for my walker so I should be just fine. Darius?

I think we just kind of laid out in the finalization of laying out the agenda, but you should expect me to do the majority of the presentation that Dave normally does. Obviously Dave will have a role at the beginning of the conference, but the expectation should be that I’ll be leading most of the presentations that Dave led in the past.

Okay. Well, then I’ll save the congratulations in farewell for them. Thanks a lot.

Thanks, Steve.

Hey. Thanks and good morning. I’m glad everyone in such good spirits.

But I kind of tell you, Steve, I really enjoyed your headline this morning. It’s always nice to wrap up on a good quarter.

You’re the best Dave. I can always count on you. Listen, I want to go back to the meetings that we had in December when you and Darius talked about, you have used the word, animal spirits a lot and maybe the best describer of what you were seeing globally with your customer base. Could you maybe you know, it’s been a month or so since then, how has that changed?

I would say, it’s changed become more positive. I’ve really been impressed to see that improvement in animal spirits, small company CEOs, big company CEOs, small banks that I’ve talked to, really quite surprising, so the animal spirits are real. And hopefully if we can just get a few specs here with some actual actions that could be enough to really start turn the herd. I don’t think it takes us to crazy levels; the GDP growth and if it did that would be a problem. But I think we are going to see an improvement here, not ready to bid on it, we’re going to continue to plan for a slow growth global economy but it still feels more positive than it has in a while coming off of worst recession since the great depression.

Just to maybe add one other comment about, I certainly would agree with Dave’s commentary regard what we’re seeing, maybe the one offset to that and I think our clarity sooner rather than later would be particularly helpful would be on a lot of discussions and that’s really what they are at the moment. Our discussions around the trade policies as they relate to both Mexico, China and some of the other trade partners that we have, so I think in our view that sooner that gets cleared up and resolved I actually think there could be a further uptick.

Sure. It’s really goes around some of the issues were primarily around some of our voice and product lines especially it was due to a supplier issue due to a transition. We do expect those issues to be cleared up in Q1 and right now we’re seeing a recovery plan that’s in place. So it did impact us. Think about an impact in their tens of millions of dollars, hundreds, but nevertheless it had a meaningful impact by Q4, we expect the whole recovery in Q1.

Okay. And just if I could, Solstice, the big backlog, how do you see that, I think you said, $3 billion, how do you see that playing, or how do you see that sequencing out over the next few years?

We see it obviously accelerating this year and continue next year as particularly with all the European new cars having Solstice in them or competitive offering, and then the further acceleration in the U.S. So we continue to seek tailwinds for that product as we move forward and continue to expect that double-digit growth rate both in 2017 as well we head into 2018 and beyond.

Okay. And sorry, just quickly on Steve’s question and you said, your net exporter on tax, you guys report $5.5 billion I think on gross export, so there have been some guesses out there. Could you just put a final point on the size of the import just to give folks some idea of the order of magnitude here in the delta?

I don’t think that’s something we report today. So I’d just say, it’s a goodly amount, I’m not worried.

Thank you. Good morning, everyone.

Hey, Jeff.

Hey, Dave, feeling a little nostalgic, this is your last call. We’ll see in March, but good work, congrats.

Well, thanks. And I was going to wait till the end of the call, but you were, while you took some convincing you were also an early supporter and I’ll not forget that either.

All right. Well, you put it up, that’s great. By the way I was guessing you might have been watching celebrity apprentice to try to get a read on who the next President could be?

I think they already had that argument, six or seven years ago, so I think you still got to be a citizen, I mean, born here.

Just a couple of questions, can you – perhaps to Tom, but just put a final point on anything we should know on the timing of aero incentive quarterly in 2017, you just kind of avoid any confusion or surprises to the extent that you do have visibility on timing?

Yes. The way I characterize it, Jeff, overall it’s a modest tailwind for the year. But the first half will be different than second half. In the first half it’s actually headwind as we talk about for the first quarter. That does moderate in the second half, into result that overall modest impact year-over-year. I’m talking less than 50 million or so.

Okay. And then I’m sorry if I missed it in the kind of the preamble, but also just a final point on commercial aero aftermarket if you could, large OE versus business jet and how flight hours track for you in the quarter?

Yes. We expect in 2017 to be on aftermarket side to be largely aligned flight hours on the air transport side and that shows up in both the spares as well as repair overhaul businesses. I would say that there is a somewhat of a shift into the newer platforms that we talk about with the extensive build-ups on both air transport and business jet side. And that changes the install base, the character of the installed base. It freshens it. It has more units under warranty. So particularly on the business jet side that can have a timing impact while you still under warranty in some of the new platform. So, we’ll also on the business jet I hopefully track the flight hours but you could see some little bit of a softness as a result of that fact that I explain.

But the actual performance in Q4, Tom?

Actual performance overall on the business jet side was low single digits for both the spares and the remainder of operations.

Thank you very much. Good morning gentlemen.

Howard, how you’re doing?

I’m all right, Dave. You’ve always watched headcount and you’ve always been conservative in your forecast and there’s a little bit have to in your numbers. Have of you gone back to the business units and made sure that there are some real confidence in that? I mean sometimes you have short cycle businesses and some there’s obviously backlog, but what have you done to test your managers?

Well, I’ll let, turn the bulk of the question over to Darius but what do you mean by have-to?

Well, the second half of the year is where you expect a bit more of the performance than in the first half.

Okay. Well, aero incentives play into that as Tom mentioned and just comparisons.

Yes, exactly, and I mean.

So, it’s not like it’s ramp up or anything like that you have got to have you got to believe in, it’s not that bigger deal actually, but Darius has spent a lot of time on 2017 plan with the businesses so I’ll turn it over to Darius.

I think as always we plan and invest cautiously, so I think we certainly play in some investments particularly in the front end of the business in terms of sales and marketing and R&D but we’re certainly not going to spend all of that in the first quarter because sometimes you can certainly get ahead of yourselves and we’re going to be monitoring to see the growth is coming in and whether or not we can afford to make those investments and that going to phased throughout the years with triggers that will align with the kind of growth that we’re seeing. So this is not a situation we got to kind of spend the full investment budgets in Q1 and then hoping that things happen, it just not the way you operate and won’t now either.

No, I understand. But what are you doing in terms of headcount for the year? Are you planning a modest increase, or are you planning on keeping that relatively stable?

All-in-all given the restructuring activities that we have planned, we think those going to be stable.

We are definitely adding on the commercial side, I mean, it’s across the portfolio in aerospace, PMT and other places, we are adding headcount both in developed regions as well as high growth regions.

And just to add and I think you’re going to also see a mix change because particularly in former ACS organization but really throughout, we took our couple of layers of management to increase organizational speed and decrease bureaucracy and we took some of that money that we saved and reinvested it back particularly in sales forces.

And then one last question sort of talking about expansion in general and sort of two parts to it. One is you fixed a big chunk of your debt going forward, is the reason you still have the amount of CP outstanding, you are anticipating some benefit from cash that you can repatriate. And how are you thinking about deals for the year? I know it's always Dave reminds us every time, it’s all about timing and that’s not predictable, but within the context, can you talk about possibly some of the areas you’d like to enhance?

Well, first, I’ll turn it over to Tom. But right now CP is cheap, and we’re well covered without credit lines. So it just makes sense to use it that way and we do. And you’re correct, you foretold the answer on acquisitions, depends on what becomes available and is it a price that we’re willing to pay. And Darius is not New Hampshire cheap, but he is cheap, so he’s going to be, I don’t know what adjectives he wants to put on it, but you’re not going to see it diminishing in the discipline here.

Yes. I would echo what Dave said on the debt that’s outstanding. Dave used the word cheap, I would say, CP is actually profitable and I just kind of leave it at that, but we do have an extra amount of cash on the balance because of that and we’re trying to maintain the flexibility to expand opportunities come as Dave said, it’s a good time to be taking advantage of that.

Thank you.

I want to emphasize what Dave mentioned. It's important for us to be selective rather than just cheap, and we will continue to conduct thorough diligence on the end market, including its growth prospects, competitive landscape, its future evolution, and any disruptive technologies. We are committed to investing what we have and dedicating even more time to these factors to ensure that our M&A strategy remains accurate, predictable, and aligned with our financial goals.

And Howard, I suppose that before you go, I should add, I’ll always have great memories of going to Red Sox games with you. But I’ll also remember that you blew me off at a meeting at TRW and I just want to make sure I publicly stated it.

Yes, but there was a cheesecake that was made up in homage for that, if you remember?

So I forget it, I’ve going to be public of it not just private any more.

Thanks. Good morning, guys, and Dave you will be missed.

Thank you.

My first question is for Darius. It was interesting to hear that there may be potential benefits for you as policies are established. You're in an export position, but I'm curious about how concerned you are regarding trade wars, especially since China has been a significant growth driver for you. Additionally, there has been considerable discussion about defense pricing declining. What are your thoughts on your position in that regard?

To echo what Darius said earlier, yes, a trade war is a concern. If it escalates, it won't just negatively impact trade but the economy as a whole. It's challenging to be isolated economically, especially for the world's largest economy. The outcome depends on how the situation is managed, and it is certainly a worry for us. Regarding defense, as I've mentioned before, defense functions more as a sales channel for us. We rarely offer a product exclusively for defense; rather, it tends to just be another avenue for sales. Much of our work is already priced commercially, which I believe cushions us against any potential negative effects.

Got it. Go ahead Darius.

Just to add to that, I think obviously lot of the discussion and I would put it very much there from a discussion and kind of back and forth. It’s a obvious concern, because I think any of trade disputes particular as it relates to Mexico and China which are large key trading partners could be a detriment not just to Honeywell, but to the broader economy. But firstly I remain optimistic and I think that this is going to get resolved in a manner which is constructive for all parties involved and right now we don’t have anything definitive anyway other than pure speculation, so we do remain optimistic that it will evolve that way.

And Joe, just to add to Dave’s point on the defense side, many of our positions are not directly with the government. We are working with primes, and we’re not a prime. And so, they are good at negotiating with us. And we’re commercial ranges with them as Dave said. And for the platforms that are getting all the attention recently, I mean we’re very well aware what’s going on. I mean we’ve been on-going even well before this of commitments around cost with primes that we serve is our primary customer. So, don’t want to dismiss their concerns, but it’s something we’re accustomed towards in an environment that we operate in for years and we expect to continue.

Got it. No, that's good to hear. And I guess, maybe as my follow-on question, it was nice to see the cash flow come through this quarter, and fully recognize that 2017 appears to be a little bit of a transition year on the cash flow. Maybe kind of talk us through again, kind of what's driving the kind of two point difference between your cash flow growth and earnings growth in 2017? And then, what's kind of the framework to think about 2018 and beyond for cash flow?

Yes, I mean, it’s been an interesting year for us as far as cash is concerned, I mean we’re clearly had some headwinds in the markets that we serve and the conversion, the first couple of quarters was not what we want it. But in the third and particularly in the fourth quarter with the continued focus particularly on working capital we’re able to get that conversion that you saw, that was north of 100%. Overall for the year 86%, we think that will improve as we head in 2017, that’s going to come from better working capital performances, it’s not just in our supply chain and inventories but we have opportunities in receivables and in payables, so we’re working all of those areas as well the CapEx that we’ve talked about and it begins to moderate in 2017 and that moderation accelerates into 2018, so if we go from $1.1 billion which is that reinvestment ratio we talked about over 150%, we moderate that down to 110 or 104 or 105 in 2018 that gives us a nice boost as well to the free cash flow. So that should enable the conversion to continue to improve from 2017 into 2018.

Okay, great. Thanks guys.

Thanks. Good morning, everyone, and thanks for going along on the call.

Dave, I'd like to hear your thoughts on the increase we observed in December. We've noticed this growth across the board. The pro-business signals we're receiving from Washington are encouraging, but the speed of this turnaround has taken us by surprise. Do you think this increase is simply due to the lack of uncertainties surrounding the presidential election, Brexit, and other factors? Or do you think it's related to the oil and gas sector? What do you believe has driven this uptick? Well, I do think and I’ve said this for several years that I don’t think economists really understand what happens after a severe financial recession, it was true in the 30s and it was true of this one. Overall confidence was just really, really strong, really hard, and when you have the whole herds thinking about slow global growth and that’s just the way it is and that’s just the way it’s going to work, well, it becomes self-reinforcing because we all act that way. If you take a look at the conditions for recovery, they’re actually pretty good for while. They were talking for number of years about how good consumer balance sheets were in the U.S. You look at capacity utilization, it’s in good shape, unemployment down 4.5 or so percent, you can argue underemployment, but still employment in good shape, our bank balance sheets in the best condition they’ve ever been, most companies’ balance sheets are in really good shape and I really think it just need to spark. And the election, assuming that we – the right things gets follow through and we don’t end up with some unintended consequences, provides that spark, and I’m really encouraged by what I’m seeing. Now it’s got to turn into something, but right now the feelings are better than I’ve seen them in a long time and that could be enough to get the herd moving in the direction of saying, I’d better not miss this moment as opposed to just hunkering down and keep waiting it out. And that’s another simple short explanation but I think that’s probably the case overall.

Just to maybe add one other comment about, I certainly would agree with Dave’s commentary regarding what we’re seeing. Maybe the one offset to that, and I think our clarity sooner rather than later would be particularly helpful would be on a lot of discussions and that’s really what they are at the moment. Our discussions around the trade policies as they relate to both Mexico and China and some of the other trade partners that we have, so I think in our view that the sooner that gets cleared up and resolved I actually think there could be a further uptick.

Sure. It’s really goes around some of the issues were primarily around some of our voice and product lines especially it was due to a supplier issue due to a transition. We do expect those issues to be cleared up in Q1 and right now we’re seeing a recovery plan that’s in place. So it did impact us. Think about an impact in their tens of millions of dollars, hundreds, but nevertheless it had a meaningful impact by Q4. We expect the whole recovery in Q1.

Okay. And just if I could, Solstice, the big backlog, how do you see that, I think you said, $3 billion, how do you see that playing, or how do you see that sequencing out over the next few years?

We see it obviously accelerating this year and continue next year as particularly with all the European new cars having Solstice in them or competitive offering, and then the further acceleration in the U.S. So we continue to seek tailwinds for that product as we move forward and continue to expect that double-digit growth rate both in 2017 as well as we head into 2018 and beyond.

Thank you. Good morning, everyone.

Hey, Jeff. After 15 years at the helm, this is my last earnings call as some of you pointed out. It’s been an honor to lead the Honeywell team for this many years. And all of us are proud of what we’ve accomplished. I’ll have to say we are even more excited about what’s coming. Our outperformance will continue because we’ve invested heavily in people, processes, and portfolio to do the seed planting that we’ve always done. We do well today not just because of what we are doing today, but also because of what we did three and five years ago. That our performance will continue under Darius. He is just as driven as I am and he’s smarter. We have many, many terrific years ahead of us. This is an exciting time to be part of Honeywell and you’ll all benefit from it.