Honeywell International Inc (HON) — Q3 2017 Earnings Call Transcript

Thank you, Christina, and good morning and welcome to Honeywell's third quarter 2017 earnings conference call. With me here today are President and CEO, Darius Adamczyk, and Senior Vice President and Chief Financial Officer, Tom Szlosek. This call and webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com/investor. Note that elements in 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 principle risks and uncertainties that affect our performance in our Annual Report on Form 10-K and other SEC filings. This morning we will review our financial results for the third quarter, share our guidance for the fourth quarter and full year 2017, and as always, we will leave ample time at the end for your questions. So, with that, I'll turn the call over to President and CEO, Darius Adamczyk.

Thank you, Mark, and good morning everyone. As we previewed last week, Honeywell delivered another terrific quarter with strong organic sales growth and margin expansion leading to high-quality earnings. Sales were up 5%, exceeding the high end of the guidance we provided in July. Our aerospace aftermarket business grew more than 7%, our Intelligrated business, which developed solutions for the warehouse automation market, continued to grow at a double-digit pace, and every business in performance materials and technologies grew considerably led by 25% organic sales growth in UOP. In addition, we saw continued strength in high-growth regions. Organic sales growth in both China and India was up more than 30% year-over-year, driven by strong catalyst demand in UOP and continued growth from our differentiated offering within home and building technologies and safety and productivity solutions. We expanded segment margins by 120 basis points this quarter, driven by strong operational performance in all businesses, leading to earnings per share that came in at the high end of our guidance range of $1.75, up 16% on a basis consistent with our guidance. During the quarter, we also funded about $120 million of restructuring and other projects. We remain on track to achieving our full-year free cash flow guidance. Free cash flow for the quarter was $1.2 billion, representing about 90% conversion. I am encouraged by the progress we made with regard to working capital, but there is much more we can do and all of our businesses are focused on driving improvements to our cash cycle. Overall, I am pleased with our organic sales growth momentum and the operational improvement each of our businesses continues to achieve. As a result of our continued outperformance, last week we raised our full-year earnings per share guidance to $7.05 to $7.10, up 9% to 10%. As you will hear shortly this morning, we also raised our full-year sales guidance to reflect the stronger top-line performance. Tom will walk you through those updates in a few minutes. As most of you may recall, last week we announced the spins of Homes and Transportation Systems. As independent companies, Homes and Transportation Systems will be better positioned to make tailored, strategic, and capital decisions that enable long-term value creation. At the same time, these actions will make Honeywell a more focused, growth-oriented, and synergistic company, putting us in a better position to continue to deliver the results you've come to expect from us. I am pleased with this quarter's results and looking forward to a strong finish to 2017.

Thanks, Darius. Good morning, I'm on slide 4. As Darius mentioned, we achieved 5% organic sales growth in the third quarter, which exceeded our guidance of 2% to 4% growth. We've met or exceeded the high end of our sales guidance in every quarter of 2017, and each of our businesses is contributing to the momentum. Segment profit was $1.9 billion, up 13% excluding the impact from our 2016 divestitures, and segment margin expanded 120 basis points from 2016, driven by our continued focus on effective selling and operational execution. We also had some favorability from lower OEM incentives in aerospace, which was contemplated in our guidance. Earnings per share was $1.75, in line with our preview on October 10th. Our third quarter tax rate came in at 23.4%, lower than originally anticipated, which enabled additional restructuring projects beyond what we had planned. These projects will improve our cost structure, drive further productivity starting in the fourth quarter, and begin to address the residual costs we expect as a result of the announcements. Excluding $60 million of this additional restructuring and earnings from our 2016 divestitures and normalized for tax at 26% in both periods, earnings per share was up 16% year-over-year. A number of people have asked about the impact from extreme weather throughout the third quarter. The impact from all of the weather issues was approximately $0.02 of earnings, which we were able to overcome with advanced planning and other mitigation actions. Each of our businesses was impacted in some way. We had to temporarily close six aerospace sites in the Gulf Coast and Puerto Rico; several ADI branches were closed, leading to lost revenues for Home and Building Technologies. In Process Solutions, several customers pushed third quarter projects into the fourth quarter, and SPS experienced lower demand for safety equipment, especially gas sensing products due to refinery maintenance push outs. We're proud of how our employees and management team responded and delivered despite these challenges, and are pleased that all of our employees made it through the event safely. We're in the process of assessing any ongoing impact to our business. Free cash flow continues to be strong, growing 18% year-to-date, despite about $200 million more in timing-related cash tax payments this quarter and about $500 million more year-to-date. As Darius mentioned, our focus on improving working capital is beginning to deliver results, and we expect this to continue into 2018 and beyond. Free cash flow conversion in the third quarter was about 90%, as Darius mentioned. Overall, we delivered high-quality results driven by strong operational performance in our businesses.

Let's turn to slide 5 for our segment results. Starting with aerospace, sales growth was two percentage points above the high end of our guidance. Strength in the commercial aftermarket continued this quarter with strong air transport and regional spares and continued demand for retrofits, modifications, and upgrades. The business in general aviation aftermarket was also up, primarily driven by the timing of customer demand. Overall, aftermarket sales grew 7%. OE sales for the quarter were up 10% driven by the impact of lower year-over-year customer incentives as expected. On the air transport side, we saw higher demand on key platforms including the A318, A320, and 737, with strong growth with certain regional OEMs as well. Sales and business in general aviation were better than anticipated, primarily due to the timing of engines and avionic shipments and accelerated new platform demand. While we are encouraged by the strong quarter in BGA, the market is not expected to fully recover until late next year or early in 2019. Defense and space sales were down 2% organic, with strong U.S. core defense sales more than offset by storm-related impacts, supply-based execution, and the anticipated continued weakness in the space and commercial helicopter markets. In Transportation Systems, we saw continued growth in commercial vehicles, particularly for on-highway turbos driven by increased vehicle sales in the U.S., new launches in Europe, and continued enforcement of vehicle weight regulations in China. Growth in light vehicle gas turbos in China was again strong. Aerospace segment margin expansion of 290 basis points for the quarter was driven by lower year-over-year customer incentives, commercial excellence including the impact of our investments in the sales force, the benefit from ongoing productivity initiatives, and the favorable impact of the 2016 divestiture of the government services business. Home and Building Technologies grew 2% driven by distribution and the smart energy business within products. The distribution side of the business was up 2%, primarily on the strength in our ADI business. Backlog in the Honeywell Building Solutions business was up over 20% in the quarter, with every region reporting double-digit increases and every line of business up year-over-year. Within the products businesses, we continue to execute several large smart meter program rollouts and saw continued strong demand for clean air and water products in China. Segment margin for HPT expanded 10 basis points, driven by benefits from commercial excellence and our ongoing productivity initiatives, partially offset by continued unfavorable mix both within the products businesses and between products and distribution. Performance Materials and Technology had another outstanding quarter with organic sales up 10% and 170 basis points of margin expansion. There is broad strength across the PMT businesses. UOP sales were up 25%, with every line of business achieving double-digit year-over-year increases including strong licensing, equipment, catalyst, and gas processing volumes. There was good growth in mega-projects in China, strong catalyst reload volumes in India and Asia-Pac, and new unit growth in the Middle East. In HPS, sales were up 5% with significant growth in the short cycle software and services businesses as well as in thermal solutions. Advanced materials had another quarter of strong growth driven by continued demand for Solstice, low global warming products. Orders and backlog were up high single-digits across the entire PMT portfolio. Margin expansion in PMT came in at the high end of our guidance range driven by the volume leverage from PMT's exceptional sales growth, results from our commercial excellence efforts, and the divestiture of the former resins and chemical business last year.

In Safety and Productivity Solutions, organic sales were up 3%. Intelligrated booked a record amount of orders in the third quarter and had another quarter of 20% sales growth driven by strong demand from large customers. Workflow solutions recorded double-digit growth this quarter, with significant demand coming from existing customers of our Vocollect voice solutions, as well as a large project rollout for a key European customer within our Movilizer software business. In Sensing and IoT, demand for our sensing controls and new sensor products remained strong, with growth in all regions, particularly in high-growth regions like China. In Productivity Products, we saw double-digit growth within our scanning business as well as robust demand for printers. And as Darius mentioned, we're working to address the Android-based gaps in our mobility product line. We anticipate that we'll see the impact of our new Android launches next year. Finally, Safety grew 1% on an organic basis driven by demand for our high-risk and general safety personal protective equipment offerings. Again, we were modestly impacted in Safety by the hurricanes in the quarter, mostly in the gas sensing lines, and fully expect a recovery in the fourth quarter. SPS segment margins expanded 190 basis points, excluding the first-year dilutive impacts from M&A, primarily driven by higher volumes, continued productivity and restructuring benefits, and partially offset by investments in commercial excellence. A great third quarter performance across all the businesses, as Darius mentioned, while overcoming unanticipated impacts from the weather-related disruptions.

Slide 6 walks us through earnings per share from the third quarter of 2016 to the third quarter of 2017. Earnings from our divestitures in the third quarter were approximately $0.04 per share in 2016. We exclude those amounts from the 2016 baseline consistent with our guidance framework. For comparison purposes, we have also normalized the tax rate for the third quarter of 2016 to the 26% effective tax rate we assumed in our third quarter guidance, the impact of which was $0.05 per share. As you can see, the overwhelming majority of our earnings growth is coming from segment profit improvement in the business, with all four segments contributing to the growth led by aerospace. This reflects the impacts from the strong top line in the quarter as well as our commercial excellence efforts in HOS Gold deployment and savings from previously executed restructuring projects. Below the line items were at $0.02 headwind this quarter primarily due to the absence of the third-quarter 2016 gain from the sale of our former aerospace government services business, partially offset by slightly lower restructuring expense year-over-year. In the third quarter, we funded nearly $120 million of restructuring, which was partially enabled by a lower than planned tax rate at approximately 23%. Other items including non-controlling interest, share count, and tax were roughly flat year-over-year.

Let's turn to slide 7 for our expectations on the fourth quarter. In aerospace, organic sales are expected to be up 1% to 3%. In commercial OE, we expect roughly flat sales growth in total, driven by strong air transport deliveries, partially offset by the impact of declining shipments on legacy air transport platforms and slight declines in BizJet OE. We anticipate modest growth in the business aviation aftermarket on the timing of customer demand for spares and expect the air transport aftermarket to be roughly flat, driven by increased repair and overhaul activities, offset by the timing of spares demand. In defense, we have a healthy backlog and expect continued strength in U.S. core defense, partially offset by ongoing space weakness. Demand for gas turbos in Europe is expected to drive low to mid single-digit growth in transportation systems. Aerospace margins should expand by 70 to 90 basis points this quarter, driven by volume leverage, commercial excellence, restructuring benefits, and productivity net of inflation. In HPT, we anticipate organic sales growth of 2% to 3%. Within the products businesses, growth in smart energy will continue, albeit at a slower pace as we move past the large smart meter rollout we executed in the second and third quarters. We also anticipate improvement within security and fire; security has improved each quarter in 2017, and we expect that to continue as a result of new product introductions and commercial excellence. In distribution, the strong Building Solutions backlog I mentioned earlier, combined with the continued strength in the global distribution business, will drive low single-digit growth in the fourth quarter. HPT segment margins are expected to contract 10 to 30 basis points, driven by continued headwinds from product mix, partially offset by savings from prior restructuring actions and ongoing commercial excellence and productivity initiatives.

As a reminder, Smart Energy was recently moved from HPT to Performance Materials and Technologies, and their results will be included in PMT's results beginning with the fourth quarter earnings. Before our December outlook, we expect to file Form 8-K with the SEC to restate the 2016 and 2017 quarterly segment results to reflect this movement of the Smart Energy business. In Performance Materials and Technologies, sales are expected to be up 10% to 12% on an organic basis, driven by continued conversion to sales of our strong backlog. UOP is expected to deliver another quarter of strong growth driven by natural gas recovery projects in the UOP Russell business in Russia and North America, as well as strong initial catalyst loads in the Middle East. We expect mid single-digit growth in HPS with significant demand for our thermal solutions and field instruments. In Advanced Materials, we expect double-digit growth fueled primarily by our Solstice refrigerants for mobile air conditioning. PMT segment margins are expected to contract 110 to 120 basis points, driven by an unfavorable mix of equipment versus catalyst sales in UOP year-over-year. In the fourth quarter of 2016, PMT had catalyst growth of 17%, which fueled expansion of more than 500 basis points of margin. Even so, for the full year, we expect PMT will still generate 140 basis points of margin expansion, truly an outstanding year.

In Safety and Productivity Solutions, sales are expected to be up 5% to 7% on an organic basis. In the safety business, we expect robust growth as refinery maintenance resumes following the hurricane-related impacts in the third quarter, which will drive demand for our entire range of safety products. We expect the retail business will return to growth this quarter as we execute the new direct selling strategy in that business and expect we'll see normal elevated seasonal demand. Growth in productivity products will be driven by another strong quarter at Intelligrated, building on the robust orders and backlog growth throughout 2017, as well as continued strong demand for the Sensing and Controls business and Workflow Solutions, including Vocollect and Movilizer. SPS margins are expected to expand by 110 to 130 basis points, driven primarily by higher volumes and the results from our ongoing productivity and repositioning efforts. For Honeywell in total, we expect another strong quarter of organic sales growth and 30 to 50 basis points of margin expansion, leading to earnings per share of $1.79 to $1.84.

We expect that our fourth quarter effective tax rate will be about 21%, with a full year closer to 22%. We intend to undertake additional restructuring projects as we have the past two quarters, enabled by this expected low fourth quarter effective tax rate. The difference between the organic and sales projections you see on this page is primarily due to the stronger U.S. dollar. On M&A, we have lapped the impacts of our two big divestitures, the aerospace government service business and the resins and chemicals business, as well as the impact of the Intelligrated acquisition. Our fourth quarter and full-year guidance does not contemplate significant costs to prepare our Homes and Transportation Systems businesses for the spins we announced last week. We're working to define those costs and workstreams and will provide more details as we progress.

Let's move to slide 8. Last week we raised the low end of our full year EPS guidance by $0.05 to $7.05 to $7.10 per share, up 9% to 10%. This growth excludes the impact of 2016 divestitures, fourth quarter 2016 debt refinancing charges, and the pension mark-to-market adjustment. Based on current discount rates and asset return assumptions as of September 30th, we do not expect the 2017 pension mark-to-market adjustment to be significant. We're raising our full year sales guidance to a new range of $40.2 billion to $40.4 billion, up 3% to 4% organic and up 2% to 3% reported. This new range reflects stronger sales performance and outlooks in aerospace and performance materials and technologies. You can see the revised sales guidance on the right side of the page. We remain within the initial guidance for the segment margin and have narrowed our estimate to about 19%, which is up 70 basis points year-over-year. There's no change to our full year free cash flow guidance. The year-to-date free cash flow performance has been good and each of our businesses continues to remain focused on improving our working capital execution.

Let me turn to slide 10 for a quick wrap up. The third quarter marked another strong performance for Honeywell, each of our segments meeting or beating their commitments. We had outstanding sales performance and robust orders and backlog growth across the businesses that will help fuel continued growth. We expect to finish the year strong, with fourth quarter organic sales growth between 4% and 6% and earnings per share of $1.79 to $1.84. For the year, we raised our sales guidance to a new range of $40.2 billion to $40.4 billion and reaffirm the new earnings per share guidance range we provided last week, $7.05 to $7.10 per share. We continue to make investments to drive future profitable growth as well as to begin to eliminate the residual costs we expect as a result of the announced spins of the Homes and Transportation Systems businesses. At Honeywell, we're committed to driving shareholder value, which means optimizing our portfolio as we announced last week but also remaining focused on delivering outstanding results on growth, productivity, and cash flow every quarter of every year. With that, Mark, let's move to Q&A.

Thanks Tom. Darius and Tom are now available to answer your questions. So Christina, if you could please open the lines for Q&A.

Thank you, good morning everyone, and I'm sorry I signed on late, so you may have covered some of this before. One of the follow-up points I had on the spin announcements, divestiture announcements earlier was the potential for and the use of the Honeywell brand for the divested businesses, just a clean-up question on that announcement. I will start there, please?

I think regarding the Honeywell brand, decisions haven't been finalized about its direction for the Homes or Transportation Systems businesses. We plan to provide more clarity as we progress, and there are various options available to us. This will be part of our deliverables, and we will communicate the details as they become clearer in the first and second quarters of next year.

And how about just a broader question on a progress report and goals for the transformation of Honeywell to the software industrial that you envision, just in terms of portfolio shaping the way you're looking at M&A emphasizing perhaps some software as a service opportunities within the portfolio?

You're right. Overall, I’m very pleased in terms of how our Connected Enterprises is progressing this year. It is up double-digit, which is very much in line with expectations. Margins are up even higher than that. In terms of acquisitions and landscape, we continue to look at all segments of the business, including our software plays. We've made one acquisition in the software area in Q3, which is pretty exciting cyber technology that, although the business itself is relatively small, we have very, very big growth opportunities for it and it's actually exceeding our expectations. So the software acquisitions in general will be more of the bolt-on variety, those are the kinds that we're looking at but overall we continue to make progress both on the P&L on Connected Enterprise and on the build-out of our Sentience platform, signing up more partners as we go. So we continue to be very excited about what we're doing. And the most important part of that is generating the right kind of results.

Got it, and just last question, I know we're going to hear more of this in your outlook call, but broad strokes, the outlook on 2018 in terms of the macro environment where do you think you're particularly well positioned, both U.S. and outside the U.S.?

Yes, Deane, this is Tom. We are in the throes of our planning right now. We'll go through the details as we get into November and December. We're looking at trends continuing in most of our businesses. I mean you see the strength in aerospace, a lot of good flight hour activity, and defense is looking up. With any luck at some point at the tail end of 2018, we will get some help from the Business Jet side. Although Business Jet usage remains strong, so we expect those trends to continue. PMT, we really are encouraged not only by their performance but by the strength of the orders and backlog, and it's been in all lines of business. I mean, not to denigrate last year, but we had great orders last year than they were in the aftermarket side. We're seeing a lot of front-end orders type business in PMT, particularly in UOP and HPS, which bodes well for building installed base and building our service business. So really strong trends there. In SPS, Intelligrated continues to perform very well. We expect that backlog, which is well over 20%, to fuel excellent growth, and we expect the trends in that vertical to continue with the e-commerce. The safety business continues to do well. We've got the Android products on productivity and the software businesses and SPS so good trends. You saw our fourth quarter expected growth, and I think we'll see that continue into next year. So overall, I see some trends, some growth trends continuing. Deane, as you saw every quarter of this year the organic growth rate has improved, and if our guidance holds up into the fourth quarter, that should at least be equal to the third quarter, and hopefully that continues into next year. So overall, pretty strong conditions ahead, and we are encouraged.

Thank you.

Thanks, and good morning all.

Good morning.

Darius, could you elaborate on your thoughts regarding PMT and UOP in the context of the refining cycle? Considering the overall top-line tailwinds, I understand there are equipment challenges, but how do you view the cyclical versus structural aspects of this, especially in light of Tom's comment about the expected duration of these tailwinds in such a crucial segment?

Well, Steve, as Tom pointed out, one of the most important things for that business we always watch is the bookings. It is very much a long cycle; our backlog is up — it's going to — we know for a fact that it's going to be up probably double digits by the end of this year versus the end of last year. We continue to be bullish, we are winning a lot of work. We are particularly winning a lot of work in our high growth regions, which I find to be really important because as you think about where PMT needs to be strong and has to be strong in the development and progress of a lot of the developing regions, and that's exactly where it is winning. So it's win rate in China, India and markets such as this give me a great deal of comfort that it's going to continue to perform. Our backlog position is strong, and we expect another strong quarter of booking in Q4 and go into 2018 with a strong position. And the good news is we're kind of seeing it across all the segments, whether it's our gas processing business or whether it is the catalyst business, all of those have been particularly strong, which by the way enjoyed the biggest order ever in Q3 in terms of our catalyst orders. So overall, things are very much moving in the right direction for all of PMT but especially UOP.

Thanks, that's helpful. On SPS, I think you had about a month of Intelligrated in that 3% organic; let me know if that's about right. So ex-Intelligrated, which you say was up more than 20 so the rest of that business must have been down, I don’t know, low to mid single-digits or something. Can you give a little color on that and maybe it is on the mobility productivity side but just a better understanding of the organic performance ex-Intelligrated there?

Yes, it's actually good, and you see there's growth in every business. The only business where we didn't see growth was productivity products, and the depth due to some of the challenges we previously communicated around the mobility platform. Because if we look at the scanning side of the business, it was actually up close to 20%. So we have one small area which is challenged, and the productivity product business is challenged, but as we just announced, we had exciting new product launches this week. We have more coming in the middle of November, and another set of new product launches in the mobility segment coming in the middle of February. So we're not where we want to be on mobility and productivity products, but I'm very confident that business as we have in 2018 in Q1 and Q2 is going to start to turn their performance around as it launches these new offerings. But overall, a very strong performance across the board by SPS, other than the one issue you about, and we aren’t particularly surprised about the outcome.

Yeah, not to mention overcoming the storms and hurricanes in the safety business in particular. I mean, as you know, the oil and gas vertical is a big sector, and there was a lot of push-outs of projects and activity that affected the — particularly the gas monitoring business and safety. But overall, the trends there are really strong as Darius said.

Just numbers are — it's up 1% though right; ex-Intelligrated, Tom, so it was positive still?

Absolutely, yes.

Yes, okay.

No, no, Steve, I'm not saying that the numbers ex-Intelligrated were up 1%. I mean, as Darius said, every one of the businesses wasn’t just Intelligrated that was contributing more than 2% or 3%.

Hey guys, thanks for having me on the call this morning. It's nice to be able to get on calls and ask questions. Just the first question, you guys recently raised your dividend by how much?

12%, Steve.

And the commitment has continued to do that and drive that faster than earnings going forward for the next few years?

Go ahead, Tom.

Yeah, the commitment that we've made, that Darius talked about at our Investor Day was continuing for the five-year plan with the idea of raising the dividend faster than the earnings growth. And we're coming up to the end of that. As we look forward, we'll watch that, but what the minimum we're committing to keep the dividend growth in line with earnings growth, and it will track earnings per share.

Yeah, and Steve, so as we said, as they've committed for the five-year period which ends in 2018, we're going to grow dividends at a pace that is faster than earnings. We're committed to that, it is consistent with what we set five years ago. The period after that, what I would say is going to be equal to or greater than earnings. We are going to provide greater clarity on that in our February Investor Day. But I'd expect to be equal to or greater than that.

Right, and you guys have free cash flow. So we can talk about that, have you seasonally kind of suggested that your cash should be kind of towards the higher end of the range. Well, just remind us what the target is? 100%, is that for 2018 or 2019?

Yeah, Steve, the way I talked about that at the Investor Day and largely sticking to it is that by — at run rate 2018 but really in 2019 we expect to be at 100%.

Okay, and then just one last question. You know math is clearly not a strong suit, there are prerequisites for being on the sell side. But the math around safety and productivity solutions, I was getting something a little different like maybe 1% or 1.5% growth in the core business, and with your new Android products that are coming in would you expect that kind of core growth? I mean not that it really matters because Intelligrated is an organic grower that has tremendous orders, so I'm not sure why we are picking that apart in the first place. But would you expect that to get better next year with some of these new products coming into fray and changing productivity?

Yeah, absolutely. I mean we expect much improved growth rate in productivity products next year as these new product launches gain traction. I probably expect it to accelerate a bit through the quarters because the bulk of our launches are coming in Q4 and Q1, so obviously it takes time to generate the orders. But the short answer is yes. And I think we have continued to talk about productivity products, it is one segment of one business where we had a little bit of a struggle, but across all of the other businesses it has been a really nice story of both top-line growth and margin expansion.

Yeah, I guess people just can't live without adjusting numbers everywhere, so I can understand why we would do that for a first segment like that. Congrats on a top-tier organic growth and keeping your eye on the ball.

Thanks, Steve.

Yes, thank you guys. I was wondering if I could provide early perspective on any competitive implications of UTX Collins, and have you given any more thought to the whole Boeing Avionics initiative and their stated goal of kind of moving into the aftermarket on the aerospace side? Thank you.

Sure, yeah. So, I mean, I think starting with Collins and UTX, obviously something that we have analyzed, but the way we look at this is the capability that we currently have both on the mechanical systems as well as avionics are on par greater than anything that UTX or Collins would have in creating that merger. And I am particularly excited as it relates to our vision of connected aircraft because having both front-end and electronics as well as the mechanical systems really gives you strengthened capability to implement and deliver that vision of a connected aircraft. And it's not theoretical for us; it's something that we already have and are delivering. It's growing double-digit, and we're marching through the aircraft to get all of our systems connected. We already have APUs, launched wheels and brakes this quarter, and we're going to be marching through. So I'm not sure that that merger puts us in any kind of a disadvantage vis-à-vis UTX or Collins. And maybe most importantly, I never viewed the aerospace segment as one where scale matters. What matters for us is technology differentiation, and that's going to be our basis for competition.

Thanks, Darius. Maybe just a follow-up on M&A, when you look at the pipeline and some of the portfolio actually you've announced, are there any larger properties that are attractive to you, or should we expect more in the kind of couple of billion or Elster-sized bites going forward, or are there some things…?

Well, you know, there are always things that are attractive, but I would expect more of the bolt-on variety. That's really our sweet spot and that's where we are looking. And I would say our pipeline is built more bolt-on variety type of acquisitions. But, you never know; anything could happen. But I would say I would be more expectant of bolt-on.

Thanks a lot, guys. Good luck.

Thank you, good morning everyone, and I would also like to echo Steve Tusa's commentary; it is nice when companies allow questions.

We aim to please, John.

So, is there any noticeable trend in pricing? There's still some debate among different companies, and I'm curious about your perspective. I understand you’re not primarily a company focused on large price spreads, but there seems to be some impact. Are spreads improving, and how should we consider this?

Yeah, no, I mean obviously we're in a bit of an inflationary environment for some of the commodities, but one thing I'm very proud of all our teams and all our businesses, they have really stayed on their toes, made the adjustments, understand what the impacts are, and really are capturing the value that our services and products provide from our customers. So I think overall, we've probably been more challenged on the cost side this year than we've seen in a while. But I also think we reacted quickly, made the right adjustments, we have a very active value engineering program as well that produces substantial productivity. And we also understand the value that we bring to our customers and make adjustments as required. So all in all, done a nice job here.

Yeah, so that kind of almost leads to the question of cash, and given all the investments you guys have been putting in, the new products and so forth and the growth that you anticipate, it's clearly what is picking up in PMT and aerospace. I forget, Darius, you had mentioned this in the portfolio review call, but what's your sort of line of sight to Honeywell getting to 100% free cash conversion if not higher than that and where does that rank in your strategic priority list of things you're trying to accomplish?

Yeah, it's important and we're — that's exactly what we're aiming for, is 100%. It is consistent with the message we have been giving. You know, we're marching towards that goal where we did roughly 90% this year; we expect to see improvement next year and then further improvement in 2019. And it's a very conscious call, and I can tell you that we've never had more focus on working capital than we do today. We are seeing some progress being made there, and there's more to go, but it's a very important goal, the goal that both Tom and myself and the rest of the business leaders take very seriously, and we are committed to it.

Regarding capital allocation, we are focusing on the near term and considering potential future bolt-on acquisitions, though the current market valuations are quite high. Additionally, many of the improvements you are looking to incorporate, such as software and industrial aspects, are also likely to come with a significant cost. So, are we thinking that for the intermediate term, we might not pursue much M&A? How do you evaluate or find the right balance here? You want to avoid overpaying, but also don’t want to remain inactive if the market prices dictate otherwise.

Yeah, I think that's fair, and we've been very cautious. We've been very active, by the way, in the M&A area, but we're going to — the one thing we're known for is doing deals there, and that is going to be the same for us. And we are going to stay disciplined in terms of M&A. But if you're selective and you're active, which we're going to be, both of these things sometimes you can find the gems at the right price. So, we're going to continue to try and we have a robust pipeline, and we're not marching off the field because things look expensive; they do. But we believe that there are opportunities out there where we can participate in appealing valuations. Now, having said that, if there's nothing that happens, we're obviously going to also be looking at buybacks as another way to distribute cash back to our shareholders. So there's always a balance; we'd like to have some ability to stay balanced. Our preference is for bolt-on M&A, but it's got to be smart, and we've got to pay the right price. And if we can't get that done, then we are obviously going to be a little bit heavier on buybacks.

Thank you, and by the way, you guys better hold onto Mark; good investor relations are hard to find.

I think the check is in the mail, John.

Any check would be welcome, trust me.

Thank you; it just feels like there's a lot of passive aggressiveness on the call today.

Okay, I will keep this one simple. Good morning everyone. Regarding SPS, there is no passive aggressiveness; maybe some aggression but nothing passive. SPS organic growth in the fourth quarter has been under discussion, and while math isn't my strong suit, Intelligrated would contribute about 2 to 2.5 points to that figure, so we are anticipating a core growth of around 4% to 5% excluding Intelligrated.

I think I will have to do the math, but each of the businesses is at least low to mid single-digit that you put in the productivity product side. So for example the safety business, Nigel, I mean where it was, you know, low single-digits in the third quarter, that's going to be good mid single-digits in the fourth. And industrial safety will be well into the mid to higher single-digits; high-risk businesses is doing well. We also will have really strong results expected on the retail business. As you know we've changed the business model, that's going to be well into the double-digits. Productivity, even with the productivity products, overall will be high single-digit in productivity. As Darius said, the scanning business is doing fantastic; workflow is going to be north of 20%. Our software and sensing business will be mid to high single-digit. And Intelligrated will be up like we said it would be, but it's everywhere and globally as well. I mean it's in the U.S., it's Europe, China, so it's not just a pull from Intelligrated that's doing this, nor is it the productivity product pulling us down. These are all really good growers given an organic growth range we have talked about.

It sounds pretty broad. One of your competitors dramatically dropped to surprise warning in that warehouse business, I think it was yesterday or day before; seems to imply that leaves us some share. I mean, maybe you could just touch on how you're seeing the front-end and the warehouse business as you go into 2018?

Yeah, we continue to be very bullish, and we had a very strong orders quarter in Q3; we anticipate another one for Q4. And as I said, I think this is really well positioned because what's really growing the fastest is the e-commerce, high-throughput type of warehouses. And that is exactly the sweet spot of that business and customers are seeing the value, and we're generating the orders. As you can imagine, it's a very quickly growing playing field in warehouse automation given the expansion in warehouse and distribution, and we don't see that pausing. We are bullish on our Q4, and we are bullish on 2018.

And we did take note of the competitor announcement you talked about, but our, as Darius said, our fourth quarter — our third quarter was just fantastic in terms of orders growth and Intelligrated. I mean, strong double-digits. And as he said we expect that to continue. Backlog is really good; I mean compared to last year, and it is all organic growth. I mean well over 50% backlog growth. So it's positioned very well.

And then just a quick one—Tom, on the margin expansion in 4Q, obviously the FX hedge we got in place for this year is margin dilutive given the dynamics of stronger revenues from weaker dollar but no impact to EBIT, so I am just wondering, will that be about 20 bips or so, that's what my math tells me?

You mean for Q4?

For Q4, yeah.

Yeah, I mean the translation and that will be about flat for us. I mean year-over-year. I don't think that's going to be a big impact overall FX for 4Q. When you consider the hedges, the movement in the rates and everything, it's basically flat.

Okay, got it. Thanks a lot guys.

Thank you, good morning, guys. Hey, just a quick one from me. You guys covered a lot of ground. I just want to get to hone in a little bit further on this free cash flow question looking forward and I'm just wondering perhaps it is for Tom, but Darius, you are certainly welcome to chime in, just what is the big bridge items next year when we think about free cash flow. I'm assuming CAPEX might be down a little bit; I don't know if you expect help on working capital; you've got growth that are mitigated against it, right, so maybe your churns improve but maybe absolute working capital doesn't, pension, etc. Just what are the really the big items next year that kind of puts you on the path with 100% in 2019?

I mean, when you look at 2017, Jeff, I mean we're looking at about $1 billion of CAPEX, although that could be a little heavy. When you look at that as a reinvestment ratio, expect that to come down in 2020. There will be at least $150 million to $200 million less of CAPEX, which is a big driver for us. We do have incremental cash tax spending this year, and it's mostly timing related. We will have probably by the end of the year incremental $500 million year-over-year. I don't expect that to repeat next year, so that should give us some tailwind. And then most importantly operationally, Darius talked about is working capital. We're kind of improving our trends, which means kind of treading water this year, not necessarily adding huge amounts to working capital. The churn is kind of staying flat, but as he said, a lot of business is focused on driving that going forward. We're going to need $200 million to $300 million out of our working capital next year to drive towards that 100%. I would say those are the big three things that we're looking at.

Great, I will leave it there. Thanks, guys.

Yes, good morning guys.

Good morning.

I have a couple of questions. Regarding aerospace, as we consider the defense portfolio of programs and the improving defense budgets, how should we view your portfolio of programs in relation to the budget? Do you believe you can meet the budget requirements? Is there a significant difference in how Honeywell's programs will be structured?

Yes, I think it's going to be aligned. I mean, we're seeing really good growth particularly in the U.S. defense budgets, where we have obviously greater clarity and a much greater density. And that segment of the business is doing well. We anticipate to continue to do well, and it will be aligned or higher than the growth. When it comes to international, it's a little bit more hazy because obviously we are talking a lot of different countries, a lot of different programs, and we have some programs that are ending, some that are continuing. But overall, it's kind of an up Aero given what we're seeing in the geopolitical arena. We anticipate slightly greater spending by NATO as a whole and some recovery in the Eagle markets in the future, which as you know is in that segment. So overall, constructive comes to defense.

Right, so that should be a nice tailwind to aerospace. And another question just talking about China and emerging markets visibility. A) what are you guys seeing on the ground with this party congress? Is everything on track? And the second, how should we think about your China exposure going forward, given the portfolio changes that you guys have made? Now that your China business is really driven by Aero and UOP, do you sort of disconnect from the underlying China macro to a certain degree going forward? Thank you.

No, I mean China and India, as we pointed out this quarter, have been up 30%, and that success is not isolated to PMT or Aero. That's for every one of our business segments, and as you can imagine, as Comac gets going even further, Aero actually that revenue potentially is still way ahead of us, not behind us. Secondly, UOP and HPS are continuing to win across the board in China and India. Tremendous successes there this year. Buildings and Home, we approach those markets a little bit differently than we do in some of the developed markets, but again double-digit growth in both. So, we are very well aligned with the urbanization trends. So whether it is the independent Homes business or the remaining buildings portfolio, we are going to do very, very well. Warehouse automation now moving on to SPS; again early days, but it's a maturing segment and one which we're going to participate in. And then finally, industrial safety, another segment that's evolving, we're still in kind of their early days but clearly worker safety is very much on the forefront of the agenda of both China and India. The regulatory environment there is changing much more worker-oriented. So across our portfolio, we're excited about our potential in both China and India. Both of those are great markets; we have great management teams and have both a local perspective. The results speak for themselves. I mean, 30% growth in Q3, I think is tremendous.

And to add to that, Andrew, I think your inference was that we're dependent upon HPT for growth there, but if you look at the third quarter, HPT was our slowest grower among all the segments in China. So it really does not support that notion.

Terrific; thanks a lot, guys.

Thanks, guys. Good morning.

Good morning.

Tom, last quarter you stepped up restructuring and talked about $150 million of benefits, and those seemed like you would do a fair amount of restructuring here in the short term. I know you talked about $150 million of benefits from that last restructuring, but do we have greater than normal restructuring tailwind as you enter 2018? I mean how do we look at that?

Yeah, I mean I don't think it's necessarily greater than what we would have had going into this year. In fact, if you remember, Andy, we did the significant restructuring when we divided up ACS into HPT and SPS; there was a fair amount of delayering that took place. It gave us some pretty good tailwinds as we headed into 2017. So in 2018 I agree we put a lot of capital to work on restructuring, and there is clear momentum coming. But I wouldn't say it's a multiple of the tailwind that we had coming in 2017. And we'll give you more color on that as we get into our earnings outlook in December.

That's helpful. And then Darius, Aero has been on pretty big positives, surprise. I can tell you really the whole year so far. How much do you think the surprise has been the early year reorganization versus just you had a confluence of events last year that were kind of negative that have gotten better here in 2017? And maybe what's been the biggest surprise in the performance here in 2017?

I'm really pleased with the performance. While I wasn't surprised by it, I am very happy with the advancements in commercial excellence, capturing the aftermarket business, the RMUs, and the growth in connected aircraft. Last year, we invested in around 200 salespeople in Q4, which has led to a significant increase in new sales. We monitor this closely. The business is also improving productivity, achieving the goal of growing the top line while becoming more efficient each year. Last year was challenging with more obstacles in concessions, but the reorganization helped by streamlining decision-making, allowing the business to move more quickly. I am very satisfied with their execution and optimistic about the future.

Thanks, Darius.

Thank you.

Thank you. I am pleased with our continued performance in the third quarter, especially with our continued organic sales acceleration, our improved profit conversion, and our year-over-year improvement of free cash flow. We remain focused on delivering sustained financial results you would have come to expect from Honeywell. There will be no distractions even as we work to spin the Homes and Transportation Systems businesses. I look forward to sharing more Honeywell successes with you and our plans for 2018 over the coming months. Enjoy the rest of your fall. Thank you.