Honeywell International Inc (HON) — Q4 2017 Earnings Call Transcript

Thanks, Eric. Good morning and welcome to Honeywell's fourth 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. As a reminder, 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 principal 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 fourth quarter and full year 2017, share our guidance for the first quarter of 2018, and discuss how the recent US Tax Reform impacts Honeywell. As always, we will leave time for your questions at the end. So, with that, let me turn the call over to President and CEO, Darius Adamczyk.

Thank you, Mark. And good morning, everyone. Honeywell delivered an exceptionally strong fourth quarter with earnings per share of $1.85, enabled by organic sales growth of 6%, which reflects a renewed emphasis on commercial excellence, revitalization of the velocity product development process, and the benefits from growth investments. In 2017, we expanded our sales force in key regions and businesses, and on all our sales teams the newest digital tools that are helping us win in the marketplace. We also revitalized our new product development process to ensure that the products we're selling are delivering value to our customers. Our order rates continue to grow and our backlogs are strong as we head into 2018. Cash was a highlight as we generated $4.9 billion in free cash flow in 2017, above the high end of the guidance range. In Q4, we achieved 123% conversion, which brought full year conversion to 90%, or 109% excluding the effect of pension. Our efforts to improve working capital discipline are working. While I am encouraged by our progress in this area, there is still significant opportunity in each of our businesses to take the necessary steps to improve our working capital performance. Full year earnings per share were $7.11, up 10% year-over-year. This growth excludes the impact of separation costs for the spin and charges for the fourth quarter 2016 debt refinancing, pension mark-to-market and Tax Cuts and Jobs Act. Our EPS exceeded the guidance we provided in December, driven by 4% organic growth and 70 basis points of margin expansion. We also continued to aggressively deploy capital for our shareowners in 2017. We increased our dividend by 12% this year, which marked the 8th double-digit increase since 2010. And we bought back $1.6 billion of shares in the fourth quarter and $2.9 billion for the full year. As a company, our total shareowner return was 35%, far exceeding the S&P 500 return of 22%. Today, we are raising our full year 2018 EPS guidance to $7.75 to $8, which reflects a lower expected tax rate as a result of the Tax Cut and Jobs Act. Tom will walk you through the Tax Reform detail later in the call. But I am pleased to announce today that our 2017 performance, coupled with the anticipated benefits from this legislation, has enabled us to increase our 401(k) employer match for Honeywell employees in the US. This change represents a sustained long-term commitment to provide enhanced financial security in retirement, which we believe is extremely valuable and important to employees. Honeywell remains committed to being an employer of choice. Let’s turn to slide 3 to highlight a few of our recent commercial successes. In Aerospace, United Airlines selected Honeywell avionics for its new fleet of more than 150 Boeing 737 MAX airplanes. The flight deck package will include a first-ever installation of Honeywell’s SmartRunway and SmartLanding on a Boeing 737 MAX and will feature Honeywell’s integrated multi-mode receiver and IntuVue Weather Radar System, which can enable connected radar out of our connected aircraft offering, allowing Honeywell to download weather hazard data and provide pilots and dispatchers immediate information through the GoDirect weather app. Honeywell solutions work in tandem to greatly improve passenger safety and comfort during takeoff, landing, and potentially hazardous weather conditions. We are excited about our continued partnership with United Airlines. In Home and Building Technologies, Honeywell designed a new contemporary and state-of-the-art connected home solution and we signed a long-term agreement with ADT, a leading provider of security and automation solutions in the United States and Canada, to sell it exclusively through ADT's direct and professional dealer network. The solution includes security, smoke detection, carbon monoxide detection, innovative long-range battery-operated motion viewers, and home automation as the core price of ADT's and Honeywell's user experience. We are excited to continue our long-term partnership with ADT, providing our customers the most innovative products for their connected home. In Performance Materials and Technologies, Honeywell process solutions leverage connected plant offerings to position Honeywell as a specialized software and industrial partner, ultimately winning three strategic projects with Kuwait Oil Company to enhance crude production in the Southeast Kuwait fields. Honeywell provides software and services to help KOC visualize and optimize the production and operations in the field and will supply an integrated control and safety system based on our experienced PKS and safety manager technology for the gathering station. This project enhances the capacity and capability of the existing facility in East Kuwait to manage excess water while keeping crude production at the facility's designated capacity. In Safety and Productivity Solutions, we achieved major wins with two global packaged delivery companies to provide more than 100,000 Android-based handheld computers that will aid in delivery operations. We're seeing strong adoption of our new Android-based offerings and have significant new launches planned for early this year that will drive growth for the productivity products business in the second half of the year. A number of these technologies we have on display in our Annual Investor Conference, which will take place on February 28 at Honeywell's Headquarters in Morris Plains, Jersey. And looking forward to talking to you more about our progress there. With that, I'd like to turn the call over to Tom, who will discuss our financials.

Thanks, Darius, good morning. I'm on slide 4. As Darius mentioned, we achieved 6% organic sales growth this quarter, concluding a very strong year. Our growth improved sequentially every quarter in 2017, beginning with 2% in the first quarter. This reflects the investments we've made in the sales organization, our mergers and acquisitions, capacity expansions, and new product development, combined with an improved economic environment in many of our end markets. We generated over $2 billion in segment profit in the fourth quarter through our consistent focus on effective selling and operational excellence. We experienced strong volumes mainly in aerospace and safety and productivity solutions. Our margin rate rose by 30 basis points to 19.3%, better than we anticipated in December, mainly due to stronger demand in the air transport and regional aftermarket. Earnings per share was a penny higher than our December forecast and includes a $0.19 contribution from segment profit. Our tax planning actions resulted in a lower than expected tax rate for the fourth quarter of 16.5%, before the impact of the Tax Cuts and Jobs Act. The lower tax rate and reduced share count due to the share repurchase activity Darius mentioned gave us a $0.22 benefit, more than offset by a $0.30 headwind from restructuring and other progress reported in the quarter. We funded $150 million in appealing restructuring projects aimed at improving our cost structure, driving further productivity, and addressing potential residual costs from the upcoming spin transaction. On a reported basis, we had a loss per share of $3.18 because of the $3.8 billion charge related to TCJA. That reported loss also includes an $87 million pre-tax pension mark-to-market adjustment due to discount rate changes and $16 million in pre-tax spin-related separation costs. Our free cash flow in the fourth quarter was strong at $1.8 billion, reflecting a 123% conversion rate. We are pleased with the progress made so far and the opportunities we plan to pursue in 2018. Overall, it was another strong performance ending a great year with high-quality earnings. Let’s turn to slide 5 to discuss our segment results for the fourth quarter. In aerospace, sales rose 5% organically, exceeding the high end of our sales guidance by 2 percentage points. In commercial OE, we experienced improved air transport deliveries on key platforms such as the Airbus A320, A330, and Boeing 737, along with the benefit of reduced OEM customer incentives, partially offset by expected slow demand in business jets. The grocery and aftermarket sector performed better than expected, primarily due to air transport, repair and overhaul activities, and spare parts sales in business aviation. In defense, we observed ongoing strength in U.S. core defense driven by demand for spares and deliveries on the F-35 and Apache platforms. In Transportation Systems, demand for commercial vehicles remained strong across all regions, and we noted continued growth in light vehicle gas turbos in China and South Korea. Aerospace margins increased by 270 basis points, driven mainly by higher volumes, productivity gains net of inflation, slightly lower OEM customer incentives, and improved commercial performance. Aerospace margin performance was significantly better than we expected. In Home and Building Technologies, organic sales growth was 3% for the quarter. We realigned the smart energy business from HPT into PMT in the fourth quarter, so HPT results for this quarter and onward now exclude smart energy. Organic growth in products of 2% was primarily driven by the commercial fire business and environmental and energy solutions in Europe. We continued to see strength in global distribution, especially in the fire sector. Our businesses in China reported high-single-digit growth across all HPT segments. HPT segment margins reduced by 40 basis points due to lower residential security volumes, growth investments, and changes in regional contributions. Performance Materials and Technologies saw a 9% organic sales increase, fueled by growth in UOP, process solutions, and advanced materials across the PMT portfolio. In UOP, there was strong demand for our modular equipment, notable initial catalyst loads in the Middle East, and significant growth from natural gas project wins in Russia and North America. Strong growth continued in the short-cycle businesses with HPS, backed by high demand for thermal solutions and field instruments. In advanced materials, we again achieved double-digit organic sales growth led by mobile air conditioning refrigerants with low global warming potential. PMT segment margins decreased by 180 basis points mainly due to an unplanned plant outage we flagged in November and a different year-over-year mix of sales in UOP. The lower margin performance was also affected by the integration of smart energy, which was not part of our original fourth quarter guidance. In Safety and Productivity Solutions, sales rose by 12% organically, surpassing the guidance we provided in October, largely thanks to another strong quarter at Intelligrated, which built upon robust orders and backlog growth throughout 2017. We saw a significant increase in retail business sales as our direct selling strategy matured, along with ongoing strength in China. There was also strong growth in the safety business as refinery maintenance resumed, increasing demand for our full range of safety products, along with strong continued demand for our legacy sensing controls and workflow solutions, including those from VocalAct and Mobilizer. Although the mobility business remains soft, we secured several large orders for our new Android-based products. As a result, robust volumes in SPS led to a 140 basis point expansion in margins, also exceeding the high end of our guidance, helped by ongoing productivity efforts and prior repositioning investments. I'm now on slide 6. I’ll be brief since we’ve discussed these measures before. This slide compares our original 2017 guidance to the final results, and for all categories, the final outcomes met or exceeded the original guidance. The results for long cycle orders and backlog, while not included here, were also impressive, each growing by double digits in 2017. Let’s move to slide 7 to discuss the recent U.S. tax reform and its impact on Honeywell's financials in 2018. Honeywell has long supported corporate tax reform to enhance our global competitiveness and facilitate efficient movement of our capital. On December 22, the U.S. Tax Cuts and Jobs Act was passed. This legislation significantly changes the U.S. corporate income tax landscape by reducing corporate income tax rates, implementing a territorial tax system, and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. As a result, we recorded a $3.8 billion provisional charge in the fourth quarter, consisting of three components. The first is a mandatory transition tax or deemed repatriation charge on the $20 billion of previously unremitted earnings from our foreign subsidiaries. This non-cash charge was entirely recorded in the fourth quarter of 2017, but we will pay it over eight years following the legislation. The second component is also a non-cash charge; it’s an adjustment to deferred tax liabilities to reflect the lower U.S. corporate tax rate on our deferred tax balances. The third component is for the implementation of the territorial tax system, including withholding and local taxes related to the future repatriation of cash back to the U.S. These taxes will be paid as the cash is repatriated, and this portion of the charge reflects our current tax structures as required by accounting rules, without anticipating benefits from future tax planning. It has only been a month since the tax reform was passed, and we continue to receive guidance clarifying the legislation. Our accounting reflects our best estimate with the information available, and the amount of the provisional charge may be adjusted throughout 2018 as more clarity emerges. We will keep you updated on any changes to the charge amount, our effective tax rate, and other aspects of the tax legislation that are material to Honeywell. At our upcoming Investor Day, we will also provide a more comprehensive update on cash repatriation opportunities and our expectations for using those repatriation proceeds. Initially, we anticipate that at least $7 billion of the $10 billion held by our foreign subsidiaries can be repatriated within the next two years. Additionally, we will continue to generate overseas cash that will contribute to that potential repatriation pool. However, extensive tax analysis and planning remain necessary to execute repatriation effectively. This enhanced global mobility of our cash enables us to keep investing in our U.S. businesses, pay competitive dividends, actively pursue M&A, particularly within the U.S., and repurchase our own shares. Our preference is for attractive bolt-on acquisitions in our core markets, but if M&A opportunities don’t arise, we will gradually increase our share repurchases as we did in 2017. In 2018, due to the reduction in the U.S. corporate tax rate, our effective tax rate is expected to range between 22% and 23%, compared to our normal historical rate of 25% to 26%. Given the remaining uncertainties surrounding Tax Reform and the ongoing analysis, we are conservatively estimating a tax rate of 23%, which raises our EPS guidance for 2018 by $0.20, bringing it to a new range of $7.75 to $8 per share, reflecting a 9% to 13% increase from 2017. As Darius and I mentioned, we are pleased with the tax reform legislation, especially regarding the capital mobility and global competitiveness benefits it provides to Honeywell and our shareholders. Let’s discuss our expectations for the first quarter on slide 8. We finished the year with strong order rates and backlogs, which we expect will continue driving organic sales growth throughout 2018. Segment margins are anticipated to expand by 30 to 60 basis points due to volume leverage, commercial excellence, and productivity improvements net of inflation, resulting in earnings per share of $1.87 to $1.93, an increase of 9% to 13%. This is based on a projected first quarter tax rate between 22% and 23%. As previewed in December, our first quarter and full-year guidance excludes costs related to the home and Transportation Systems spin-offs as well as any adjustments to the fourth quarter tax legislation provision. For Aerospace, we expect low single-digit organic sales growth. Our air transport OE business will face fewer deliveries on the Boeing 777 and a reduced production rate at some regional OEMs, but this will be partially offset by increased A350 deliveries. In business aviation, we expect organic sales to improve as production rates rise across most OEMs, offset by higher customer incentives. For aftermarket, we project robust spare sales to airlines across the Americas and Asia Pacific, along with demand for maintenance in business aviation. In defense, we anticipate continued growth supported by demand in U.S. defense, although space may see declines. In Transportation Systems, we expect ongoing light vehicle gas turbo penetration in regions like China, North America, and Europe, and continued growth in the commercial vehicle segment. We expect slight growth in Home and Building Technology sales, with ongoing strength in global distribution, the commercial sector, and our businesses in China. However, we observe improving order pipelines in our main products offset by weaker volumes in U.S. residential security. In Building Solutions, growth will be modest, as strong growth region activity is counterbalanced by slower progress on large projects in the Americas. As we prepare for our spin-offs, we've restructured Home and Building Technologies for better alignment with future operations. Instead of showing results from products and distribution, we will report outcomes from the two newly organized business units, Home and Building, starting with our first quarter earnings release. For Performance Materials and Technologies, we expect sales to rise low to mid-single digits organically due to continued strong backlog conversion. As we enter 2018, PMT long-cycle backlogs are up 8% compared to 2017. In Process Solutions, we also foresee ongoing demand for our short-cycle software and service offerings and field instrumentation products. In UOP, we expect significant catalyst deliveries for new units in China and sustained equipment and engineering growth. Growth in advanced materials is likely to continue, though we face tougher year-over-year comparisons in the first quarter. Finally, Safety and Productivity Solutions are expected to see sales growth in the mid-single digits organically, primarily due to large project wins at Intelligrated and strong demand exiting the year in sensing, IoT, and workflow solutions, including Mobilizer's cloud service application. In Safety, we anticipate growth across the gas vertical in China and all lines of business in the Americas, driven by new product launches, sales investments, and improved market conditions. Additionally, we expect an upturn in retail business. Regionally, the SPS China business should grow over 10% fueled by sensing IoT safety and productivity products. Let’s turn to slide 9 to address our revised full-year guidance. We have updated our full-year margin guidance to reflect our better-than-expected performance in 2017. Full-year segment margins are now projected to be between 19.3% and 19.6%, indicating an expansion of 30 to 60 basis points in line with our December remarks. The segments have been updated accordingly. Our earnings per share guidance has also been revised, as Darius mentioned, to reflect a lower anticipated full-year effective tax rate between 22% and 23% due to tax legislation. Full-year EPS is now expected to reach $7.75 to $8, representing a 9% to 13% year-over-year increase, excluding separation costs, the fourth quarter 2017 charge related to tax reform, and any 2018 adjustments for that charge. I will wrap up on slide 10. The fourth quarter was an outstanding end to 2017, showcasing strong sales growth, continued margin expansion, double-digit earnings growth, and exceptional free cash flow conversion. Concurrently, we maintained aggressive capital deployment with more than $1.5 billion in share repurchases for the quarter and $2.9 billion for the full year. We also allocated over $350 million to restructuring in 2017, which is helping us proactively address standard costs ahead of our two-plant spin-off, both of which remain on track for completion by the end of this year. We're pleased with the passage of U.S. tax reform and have raised our 2018 EPS guidance by $0.20 as a result. We anticipate that the tax reform will yield sustainable long-term benefits for Honeywell, rather than just a singular quick boost. Additionally, we believe that the benefits shared with our employees should provide a sustainable advantage long-term, so we’re increasing the employee matching contribution in our U.S. 401(k) plan. Our strong order rates and increased backlog heading into 2018 give us confidence in our first quarter guidance. We are well-positioned for continued success in 2018. With that, Mark, let's move to Q&A.

Thanks, Tom. Darius and Tom are now available for answering your questions. So, Gary, if you could please open the line for Q&A.

Just a couple of things. First, I just wondered if you could elaborate a little bit more on aero margin; it was very strong. Was there any unusual timing and incentives or program close outs or anything like that? First question.

I wouldn't say there's anything unusual. We obviously had a very favorable mix as reflected by the commercial aftermarket. And that was probably a little bit even more favorable than we had anticipated. But I wouldn’t say there's any kind of one-time charges other than the impact of a more favorable mix of business than we had originally projected. That's really the function.

Yeah, you might be thinking about an incentive comp, Jeff. But the 270-basis points expansion was mostly the combination of the volume mix and productivity that we generated. I think the incentives were probably 0.5 of the 270, so a small piece of that.

Okay, great. And then just to try to kind of wrap up just the cash flow outlook overall. Could you just update us on what you're thinking about CapEx as pension income moved around at all here at year-end? And does the outlook you anticipate any additional share repurchase in 2018 at this point?

We're looking at capital expenditures, which peaked between 2014 and 2016 at over $1.1 billion. We're projecting that to decrease to around $900 million or less in 2018 and continue to decline. We're also focusing on our working capital and aiming to improve it by another half a point. Our toolset is contributing to that effort. Regarding pensions, our plan was about 105% funded at the end of the year, and it's currently estimated at around 110% or higher. This means those assets are generating additional income. From a cash standpoint, this is not a concern since the plans are fully funded and we don't expect any contributions in the near future. We'll keep working on enhancing our cash conversion. In 2016, our cash conversion rate was 86%, and we aimed for 100%. We achieved 90% in 2017, and we see good potential to improve that further in 2018.

Yeah. And Jeff, it's reflected in the cash guidance for 2018. I think even if you only take this midpoint of our guidance, it’s a fairly healthy increase and as we discussed at length last year, we're going to continue to make progress on cash generation and cash conversion. Just like we showed in 2017, we've reached the magical 90% level, and that’s kind of where we want to start from.

Great. And share repurchase, and I’ll cede the floor. Thank you.

Yes, and share repurchase, Jeff, right now, the plan is to do what we normally do as I said. So, we will be offsetting any dilution that comes up as a result of option exercises and contributions of employee benefit plans. But as I also talked about on the repatriation, there’s an opportunity materializing and the timing needs to be further analyzed. Our priorities overall remain the same and we prefer to prioritize bolt-on acquisitions that can be accretive to our businesses. But like in 2017 when the market was a bit more frothy for us in terms of opportunities, we chose to deploy it towards share repurchase; we did $1.5 billion in the fourth quarter alone, $2.9 billion for the full year. And we were able to take the share count down for the year over 2%. So that’s the kind of approach that we’ll continue to head into the year with.

Thank you. Good morning, everyone. Good morning, guys. So, can we start with the core volumes? You gave the update on December 13th; Tom, you thought core growth would be 7 to 8, it’s 6. But your numbers are solid with great cash flow. And I guess my question is, did something happen at the end of the year with December? Normally, at the very end, it caused the core growth expectations to shift lower, kind of by 1.5?

No, I mean, as you can imagine, the fourth quarter is a big volume quarter for our businesses. Aerospace in particular, you have a lot of OEM customers and we’re kind of partnering with them to meet their delivery schedules. Those change, and sometimes their deliveries push out, which was the case for Aerospace; most of that slight moderation of growth rate was due to Aerospace OEM. But as you saw, the growth in aero and Honeywell for the fourth quarter organically was still very strong and we had better mix in Aerospace at the aftermarket, as I said.

Yes, so aero was the primary factor then, that's the message.

There was a slight impact in the lower margin areas of PMT, but overall, there are no significant trends to report, just more binary situations typically involving large transactions.

The shift from Windows to Android, you guys have called out increasing traction, right, in terms of orders? How does that dynamic work? Are you still selling the Windows-based products? Do you have to write down inventory? What’s actually going on here? I am trying to understand how that prospectively impacts the financials probably in your margins I am assuming in 2018 for that segment?

Yes, I mean, we’re selling both types of products, and as a matter of fact, the majority of the installed base in productivity products is still based on Windows-based code. So, we foresee continuing robust sales on the Windows product offering. But as we discussed on multiple calls last year, Android is becoming a much more prominent part of our portfolio offering. We launched some new products in Q4, we launched some in Q2, and then we have a big launch coming up here also in Q1. The great news for us, as we highlighted in the announcement, is we’ve already secured some major wins with these new offerings that are Android-based. So, it gives me a lot more confidence around the future of the products business. But rest assured, Microsoft-based mobility offerings, we’re still selling those fairly aggressively and they still make up more than 50% of our sales.

And is the customer, Darius, right that incurs if they want to shift from Windows to Android, it's their problem; it's not as if Honeywell is somehow on the hook to pay migration costs or something like that, right?

Yes. Exactly. They have to convert their software from Microsoft-based to Android-based. And we’re offering our customers a choice; some of them are making that conversion, others are maintaining their current platforms.

And cash was very strong in the fourth quarter despite obviously the business putting up very robust growth. How do you manage the ’18 cash in terms of growth and acceleration in the economy and the demands in working capital, but then trying to get working out of the system? I guess, I understand you want to keep a conservative guide, but do you think there is upside to cash given the backdrop of kind of macro improvement or was do a little bit of anomaly in the fourth quarter given how strong it was?

John, I’m going to be optimistic. So, I always believe there is upside, but I think there are a couple of factors going first. Number one is working capital has been a point of emphasis; we saw, we had our senior leadership meeting kick-off already in January, and I can tell you it was one of the two major, major highlights that we talked about. Number two is, Tom talked about the reduction in CapEx and I think it’s important to note we’re not constraining CapEx, it’s just that we have gone through a substantial investment cycle. And we just see that waning a bit, but if we see great projects, we’re going to continue to invest. But nevertheless, we anticipate CapEx never being lower this year and even potentially next year. And then three is just it will be, we’re looking at all these working capital levers and all the businesses have, what I called pretty aggressive targets in terms of working capital. But then also the last thing to add is, we’re still assessing many of these moving pieces when it comes to the new tax legislation, particularly as it relates to cash taxes, because as you know, we have kind of 8 years to pay back that one-time fee. So, that offsets somewhat by the reduction. So, we still had some work to do in terms of the overall impact for the year and Tom and his team have been working through all those details.

Got it. One last one, as inflation, Darius, comes back into the U.S. economy, how are you thinking about managing the company in terms of say pricing, the trade-up between pricing and costs, that sort of thing?

No. That’s a good question because that can be a very, very dangerous phenomenon. I can tell you that every one of the SPGs, and that’s something we already implemented last year, they’re really watching their inflation in the impact on their product costs. And I am very confident in saying that all of our businesses have a very good process to monitor that inflation of products and making sure that they’re passing that through to the marketplace. And frankly, the inflationary environment for our goods, it’s not new; it’s really been in place over the last year as well, particularly in the second half. So, we’ve been watching that one carefully and for the processes in to make sure that we monitor it proactively.

So just to follow up on John's question on cash flow just to be clear. You raised your net income guidance to reflect the tax rate but you are basically not raising the cash number because of the uncertainties around the cash going out the door on the transition. Is that kind of how we should read the lack of guide on raise for free cash?

Yeah. I mean, our original guide that we gave you in December, Steve, was under the provisions of the old law. And every year we anticipate some cash benefit from the tax planning that we do. In fact, in 2017, we did realize some benefits there. So, it's not as if we had just put off the brakes on tax planning and the cash management around tax planning in that original guide. When you look at 2018, there will be some benefit certainly on the U.S. side from that lower cash tax rate, but it's offset by the payment of the mandatory toll charge. And we need to continue to study the developments in legislation before we step out and say it's going to be a huge impact. I mean the guide range that we gave was fairly wide in any case, from $5.2 to $5.9 billion. So, I think we're still comfortable at this early point sticking to that range. As you know, we had substantial overseas cash and retained earnings, so at least for the next 8 years that is going to be a bit of a cash drag because we got to take that one-time tax hit.

Yeah okay. And just on the EPS guide. A little bit of a higher operating base and you guys clearly beat up this quarter. I think you tweaked up your margin assumptions yet you are, and I think share count is coming out a little bit lower than we expected exiting the year. You're only waiting for the incremental tax benefits. Is there something else that's kind of below the line or anything else we have to be aware of, anything you're concerned about that has slowed down as to why the raise wasn't a flow a little more through there? Or just building a little bit more contingency and hedging in the plan?

I believe not much has changed since December. We actually anticipated a stronger fourth quarter in terms of revenue, as mentioned earlier. Overall, the momentum across all business segments remains strong, and we expect it to persist. There may be some potential upside in revenue, but regarding major concerns, we haven't identified any new issues; our previous assumptions from December still hold.

Yeah, and Steve, just to maybe add on to that. I mean first of all, 60% of our business is short cycle versus longer cycle. And we're in New Year, so I think only on the year it's best to be prudent and just really be a little bit more on the cautious side to really see how the business evolves. But having said that I can tell you that I'm a lot more bullish on the year heading from '17 into '18 versus '16 into '17. I think the comps are a little bit tougher. But nevertheless, as I look across the entire business portfolio, I can't think of a single business where I would view as a down arrow versus '17. So overall things look good. But we have to see how the business materializes and comes through on the P&L; I think in the first quarter we will see how things go and after that we’ll be back to discuss it with you and see what adjustments we need to make for the year.

In your March investor meeting, could you share whether you will provide a refreshed longer-term financial outlook? I'm curious about the framework and format you plan to use for that.

Yes, I feel like I provided guidance last year in the low to mid-single-digit range, specifically between 30 to 50. Moving forward, you can expect something similar as we give an update on that outlook. However, I may not be able to provide exact numbers for every year since predicting several years ahead can be tricky, especially during a recession. Nevertheless, the margin framework I shared last year should set your expectations for this year.

Hi, thanks. And good morning, guys. Close enough, right, I’ve been called worse things. So, Darius, maybe just talk a little bit about the key messages and the difference for managers, the HS element, the leadership meeting that you just had. I know you mentioned CAD. But just a little more on sort of how you’re trying to steer the ship and give folks priorities as they think about 2018?

First of all, I want to express my gratitude for a great 2017. It was a successful year overall, and I believe it’s important to acknowledge the outstanding effort from the team. Regarding our priorities for 2018, there are a few main points. The first is working capital; we aim to enhance free cash flow and its conversion. I want to stress that our well-funded pension plan is affecting our cash flow conversion, which often gets overlooked. The second point focuses on software, not only in our connected enterprise but also in incorporating software into all our products. This includes our strategy with sensors for every new Honeywell launch. The third priority revolves around innovation; we need to utilize the latest and greatest technologies in the market and ensure they are integrated into our new product development pipelines. Lastly, we are working on instilling and promoting certain behaviors across the company and ensuring these are reflected in all our activities. These were some key messages from our senior leadership meeting.

That's helpful. Secondly, as you consider the follow-on effects of Tax Reform on your customer base and their spending decisions, as well as how this influences your growth rate and decisions, I'm noticing mixed signals from corporations regarding their customers and their potential for increased spending. This seems to relate to both macroeconomic factors and tax impacts. Could you share some thoughts on this and its potential for acceleration?

I think for us undoubtedly, this is a very constructive outcome. I mean we were supportive of tax reform; we’re very pleased with what ended up happening, and I think it’s going to be good for U.S. business. For us, certainly see a much greater level of bullishness on the part of our customers, which should translate to continued investment. And you’re right, their CapEx is our revenue, and we do expect some level of investments to accelerate. Now, I think it’s a little bit early and I think we sometimes forget that the details of this are still becoming clear; it’s only 30 days old and what the implications are for us. I mean for us, we’ve been bullishly investing in the U.S. already. I mean, if you think about our elevated CapEx that’s been in place for the last two to three years, a lot of that investment went into manufacturing jobs, particularly in states like Louisiana and others. In addition, we’re aggressively hiring a lot of software engineers, particularly in our Atlanta COE, and we’re going to continue to do that. So, we haven’t and we’ll continue invest in the U.S. Now this is longer-term as we assess further investments with this, does this make the U.S. a more appealing place to invest? Absolutely, we think that this makes the U.S. a much more appealing place to invest and as we may contemplate further investment. U.S. will be near the top of the list.

Just to add a little color on that. When you look at the momentum that we have in the U.S., overall, we closed the year with 3% organic growth or so in the region. But it was the fourth quarter that was pushing close to double digits. So, I think there was some anticipation of what was coming possibly and we’ll see how that goes. I mean so far, so good at this early point and in January as we look forward. But it’s hard to make that direct connection between the benefits from the legislation including expensing in the CapEx and our order rates, but we’re looking forward for sure.

We know you have more difficult growth comparison scenario moving forward. But you did 5% growth in 4Q and you averaged over four in the second half of the year. We heard some more positive commentary on business jets; you guys have talked about potential turn for the end of this year and next year. So how do you look at the business at this point? The 1 to 3, I am sure, there is some conservatism for the usual suspects like space and maybe TS. But is the overall environment actually still getting better would you say?

Yes. I think as we discussed, we think the environment is still getting better. But I think what is also important to know is that we’re coming off a much stronger year ’17 than a weaker year, which is ’16. So all-in-all, we’re still very bullish and I’m very excited about our prospects, more excited than going into ’17. But nevertheless, the baseline is a little bit different in terms of specifics for your question on aerospace. Yes, I think the framework there on the business jets is similar to what we’ve been saying; we expect some level of acceleration, but more likely in the second half of ’18, not early, particularly some of the new platforms we're launching and deliveries taking place. So that's a cautious optimism reflected in the growth rates for probably more later rather than sooner given the year.

Thank you for that. You mentioned that you're experiencing short cycle growth in performance solutions. In December, you indicated that there hadn't been evidence of larger projects returning, but you've also mentioned that tax reform and other factors are at very high levels. Do you think there's a possibility that larger projects could start to come back? Are you noticing any indications of that as we speak?

Yeah. I mean overall, our pipelines are very strong. I think you have to remember that our PMT backlog is up 10% on a year-over-year basis. And we had positive orders growth in both UOP and HPS in Q4. But I would tell you also the pipeline and the project pipeline are strong. And I think what's important in terms of the price of oil is sustainability; we don't like to see it bouncing around. So, to the extent that it stays at this level is right around is a very healthy environment for investment. So, as long as this is sustained, I become that much more bullish on our outlook in PMT, particularly UOP and HPS.

I asked this question a couple other corps; I haven't really gotten an answer that seems helpful yet. And I'll throw to you guys, I mean this new Tax Act thing seems to have somewhat made it simpler to do tax planning globally. That maybe creates an opportunity for you guys to unwind some structures that were created in the past that whether it's supply chain related or otherwise. Is there a cost benefit at all from the simplification? I mean you guys probably have like 700 different corporate entities, something crazy like that, right? So is there any chance you can unwind some of that stuff?

That’s insider information now. Scott, I think it's funny. You can see us in the room; I am actually smiling. I believe your point is accurate. I think what is often underestimated is the chance to simplify many of our legal entities. We have already initiated this effort, and I am leading it. However, I also think that the complexity of the new tax structure, in comparison to where we are currently, is often overlooked. I commend the new tax code, as we find it extremely beneficial for U.S. businesses. However, it will necessitate a restructuring on our part, and we believe that this new structure will, in the long run, be simpler, cost less, and facilitate easier business operations. Can I provide specific numbers for you right now? I can’t, as we just started this work a couple of weeks ago. But I do expect this will create value for Honeywell and our shareholders.

Okay good. That's the only good answer I've gotten so far. So, thanks for that. I wanted to ask about business jets in the context of this tax act too. And then you know the money is coming back; and it doesn't seem like anybody has brought a business jet in a while. I mean you guys have always had really good forecasters; you were known for a long time as being the best source for the business jet forecast. What are your guides saying? And if you touched on this earlier, and I missed it, when I went out for coffee. Sorry. But what are you guides saying as far as the potential impact on guys having a few extra bucks around buying some planes?

Yes, I think probably the right answer is it’s a little bit too early to tell because we would like to see that reflected in kind of the order rates on the part of our business jet customers. But one would have to believe that this should have a positive impact on the overall demand. I think from now we are kind of sticking with what we said before; we anticipate some uptick in the second half of this year and a stronger environment in 2019. But like I said, I think it’s just a little bit too early to tell the real impact; the new tax code is 30 days old and difficult to project at this point the impact it has. But sort of logically tell you, it should be an up arrow for us.

Yes, the only other thing we have going with is the mandates and some of the software aftermarket offerings that we do on the business jet side. So, we might not be clicking away at the double-digits; we certainly are getting new technology investments for existing platforms.

Yes, thanks. Good morning, guys. Two questions. First, I just wanted to ask, given Tax Reform, how does it change, if at all, the profile of the types of acquisitions you are looking at? Does it encourage you to go bigger? Does it do anything to the criteria that you’ve set out earlier?

I’m not sure it dramatically changes anything. The ability to bring back more cash in the U.S. certainly helps, making U.S.-based acquisitions easier to pursue since we now have better access to cash. However, in terms of our focus and financial metrics, adjustments in tax rates will be reflected in the metrics we analyze. So, while it may not significantly alter our approach, it does provide us with more resources in the U.S., which is crucial and offers us valuable flexibility.

Yes, I would add to that though that we have not really been constrained in where we’re looking; our M&A team and the businesses haven’t been saying, 'Well, let’s not look into the U.S. as we don’t have cash,' as we’ve always been able to accommodate that with our capital structure and that will continue to be the case even more so now.

Okay, I appreciate that. I have one follow-up. Darius, how do you keep the potential spin curves focused ahead of a spin? What kind of strategies are in place to ensure that everyone stays engaged as they transition into this new phase?

Yes, I believe we have a strong focus on both our attention and our business operations before and after the spin. It is crucial for us to ensure that these transitions are extremely successful. We have dedicated management teams overseeing both businesses post-spin, and they are doing an excellent job managing their operations while preparing for the spins. I am very confident that these teams are committed to achieving results now and after the spins occur. Additionally, we have established appropriate incentives that align with our goals for success during and after the spin process.

Gautam, this is not an effort that’s being done in some far-flung part of the company. The team, the spin code team is executing on the transactions, actually reports into Darius and I directly. We do involve the business as being spun. But we want them focused for the most part on executing on their operating plans. And that’s the way we’ve structured it. The two objectives of the spin team are, one, Day 1 readiness for those organizations, and we have a very strong cadence and operating system around that in terms of systems, in terms of people and staffing and doing all the regulatory filings and so forth. So, that’s very rigorous. Secondly, its stranded costs, and with 20% of the revenues from the remain co going with the spin, we need to right size the company. And so that SpinCo leadership team is also in the process of managing that cost structure. So, Darius and I get regular weekly visibility to it. We put on some of the most senior people in Honeywell to do this, and we’re encouraged by the progress we’re making.

And I think just add to it, we have a full-blown, what we call de-integration team, which is staffed by senior leaders, whose full-time job is nothing but the focus on making certain that we have a successful spin in place and execute the business in the near-term. So, we have the right level of focus on this.

Just a quick one, sticking on the aerospace. Obviously, the United Airlines selection was certainly very favorable for you guys. But just kind of talking about the competitive landscape. We’re months into this deal with one of your bigger competitors, certainly the headline reads that it would be more competition for you. But at the same time, seems like there is going to be a lot of opportunity. What are you guys hearing in terms of your sense of post this merger that you will see other opportunities for growth?

Yes. I mean, Peter, we haven’t been really focused on the merger of others; I think what we’re really been focused on is executing our strategy. I continue to be extraordinarily excited about our division for connected aircraft. I think it’s been just relating, it’s reflected in our rates; certainly been a factor in the United win, and we’re getting more and more traction every day. And I feel good, because we have. If you think about the real estate in the scope on an aircraft, we have the avionics, and we have the mechanical systems and we have an integrated plan and integrate our offering. I think we have a very compelling vision for the kind of value we can create for aircraft owners, maintainers, passengers, pilots, creating a more efficient and safer experience for everybody. And that’s not visionary; that’s not a dream. That’s something that we’re executing, selling, and generating revenue today. And we feel that’s a very unique place to be in the aerospace industry and frankly we are the only ones that are executing it. I think probably our biggest opportunity or challenge at the same time is just being able to communicate that clearly and add value to end customers. But as you can tell by some of these wins, we’re doing that more and more effectively.

Okay. That’s helpful color. And just a quick one, Tom, on the sensitivity around your defense business with the CR impacts. How do we think about that? Is there any near-term impact or what's the right way to think?

Well thankfully, we got another reprieve. It's kind of one of those things that’s more timing than anything else. There is a slight risk at volumes pushout depending on the shutdown and so forth. But I don't think we are anticipating any significant adverse impacts from those activities.

Hey. Just a question, the focus on economy was all in the U.S. but European macro metrics actually looking better than the U.S. right now; so is China. Can you just talk about what you guys are seeing in Europe and what you guys are seeing in China and other emerging markets? And specifically, on China, if you're seeing any signs of deceleration? We have getting a lot of questions from investors on that?

Yeah. We're extremely bullish on China. It was an absolutely terrific year for us in China, being close to a 30% organic growth rate in China last year, and it could be a slight down tick from that rate maybe. But we continue to see double-digit growth rate in China for us. So, we're bullish there, and that was in every business. Every business grew and I think we really kind of figured out the calculus as to how to be successful in China, acting like a local company. Our whole value chain now is localized. And the great news and the one that I'm really excited about is we make similar progress in India. So, I think we're really firing on all cylinders in China and India. Back to your Europe question, we're also bullish on Europe. Europe has continued to grow; we're seeing growth in Western Europe, not seeing a lot of trouble spots here. So, as we head into '18, as I said, I continue to be bullish on a global basis in terms of our prospects for growth. So overall, strong environment.

And just to follow up on your Aero '18 outlook. You said on the call that none of your businesses are going to be negative, but just sort of these 1 to 3 growths does imply that perhaps commercial OE is negative on the wide-body deliveries. How should I think about sort of subsegments within Aero?

I believe that the aftermarket and services sector will remain robust, driven by both proactive initiatives and effective repairs. We discussed the business jet original equipment, and our expectation is for growth to accelerate as the year progresses. Regarding narrow bodies, we anticipate significant growth for our customers. This serves as a general outline for our plans in 2018.

So not all of that within your framework, not all the subsegments are negative into '18?

No. And on the OE side, we'll continue low-single-digit kind of growth all in. is the plan. I mean that could change quarter-to-quarter and very quarter-on-quarter based on customer delivery schedules. But I think we're planning on an overall commercial OE growth rate in that range.

So just similar level of conservatism across your guidance. Thanks.

Thank you. We’ve begun 2018 with significant momentum including strong order rates, a growing backlog, and favorable US tax legislation. We are excited by our prospects both in the near term and long-term as Honeywell continues to outperform. I am looking forward to speaking to you next at our annual investor conference on February 19th here in Morris Plains. Thank you.