Honeywell International Inc (HON) — Q3 2018 Earnings Call Transcript

Thanks Derrick. Good morning, and welcome to Honeywell's third quarter 2018 earnings conference call. With me here today are our Chairman and CEO, Darius Adamczyk, and Senior Vice President and Chief Financial Officer, Greg Lewis. This call and webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com/investor. Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and of our businesses as we see them today. Those elements can change, 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. For this call, references to adjusted earnings per share, free cash flow, free cash flow conversion and effective tax rate exclude impacts from separation costs related to the spin-off of our Homes and Transportation Systems businesses, and U.S. tax legislation except where otherwise noted. This morning, we'll review our financial results for the third quarter of 2018, share our guidance for the fourth quarter, and provide an update to our full year 2018 outlook. As always, we'll leave time for your questions at the end. So with that, let me turn the call over to Chairman and CEO, Darius Adamczyk.

Thank you, Mark, and good morning, everyone. This has been a very exciting quarter for Honeywell. In August, we raised our full year earnings outlook by an additional $0.05, the fourth increase in 2018 driven by continued momentum throughout the portfolio. We completed the spin-off of Garrett Motion on October 1, and are in the final stages of completing our second spin of the homes and global distribution business Resideo. We also announced our acquisition of Transnorm, our Europe-based supplier of warehouse automation solutions, which I'll talk about more in a minute. Most importantly, we continued to deliver on our commitments to shareholders. We met or exceeded our guidance on all metrics. For the third quarter, we delivered adjusted earnings per share of $2.03, up 17% year-over-year driven larger by strong operational performance. We saw organic sales grow by 7%, impressive top line growth across aerospace, safety and productivity solutions, and homes. Our long-range orders and backlog were up 26% and 17% year-over-year respectively, which positions us well for continued growth in 2019 and beyond. Our focus on maintaining our productivity rigor, especially in an inflationary environment, was relentless this quarter. We generated 70 basis points of segment margin expansion, 20 basis points above the high end of our guidance driven by sales excellence and strong productivity gains enabled by previously funded and executed restructuring. We will talk more about the steps we've taken to address the impact of tariffs later in the call. We also continue to see improvements in working capital performance coupled with profitable growth, which is driving increased free cash flow conversion. This quarter, we generated $1.8 billion of adjusted free cash flow, up 51% year-over-year excluding separation costs. Conversion this quarter was 119%, well above our long-term target. I'm particularly pleased with the progress we've seen, and I am confident there's more to come as we enhance our capabilities through the deployment of HOS Gold. We're focused on improving working capital management at every level of the organization. Lastly, as we've done throughout the year, we continue to exceed our aggressive and disciplined capital deployment strategy, committing more than $4.5 billion to share repurchases, dividends, and acquisitions through the third quarter. That number includes the dividend paid to date, the Transnorm acquisition, and approximately $600 million in share repurchase in the third quarter. The pullback in the stock in the first half of October allowed for traditional repurchases of Honeywell shares into the fourth quarter at attractive levels. And as you saw, we increased our dividend by 10% in September, which is the ninth double-digit increase since 2010. Our end markets continue to be strong, and we have a simpler, more focused portfolio following completion of the spins. As I said last quarter, we continue to execute well as evidenced by our sales margin and cash performance and with significant balance sheet capacity to deploy. I continue to be encouraged by what I see in each of our businesses, and I'm excited for what I know will be a strong finish to 2018. Let's turn to Slide 3 to highlight some of the recent exciting news in our businesses. In aerospace, Gulf Air selected Honeywell's GoDirect Flight Efficiency software to reduce fuel costs and lower emissions across its entire 32 aircraft fleet. The software provides Gulf Air with a clear analysis and real-time insights that address all flight variables, allowing them to unlock savings beyond standard efficiency initiatives. Gulf Air joins a growing list of airlines adopting GoDirect Flight Efficiency software, including Aer Lingus, British Airways, Etihad Airways, KLM, Lufthansa, and Turkish Airlines. In home and building technologies, Honeywell partnered with Dubai Properties to complete the installation of energy savings upgrades in all 11 Business Bay Executive Towers in Dubai. The project includes a fully digital building management system to monitor and control the tower's mechanical and electrical utilities, as well as fan coil units that integrate the software to provide visibility into electricity consumption. We anticipate that project will result in the same use of 3.3 million kWh or approximately $400,000 annually. In Performance Materials and Technologies, Jizzakh Petroleum selected Honeywell UOP technologies for a new refinery capable of processing 5 million tons of crude oil per year. UOP will provide licensing and basic engineering design services that allow Jizzakh Petroleum to convert crude oil into high-quality, clean-burning Euro 5 motor fuels. This is the 20th award for UOP’s diesel hydrotreating technology and the 33rd award for its gasoline and unit cracking technology in the last 10 years. Earlier this month, we announced the acquisition of Transnorm, a privately held European warehouse automation solutions provider that specializes in curved conveyor systems that quickly and efficiently move products and packages for premier e-commerce and parcel delivery customers. Transnorm has an installed base of 160,000 units in a large and growing aftermarket parts, and services business. The addition of Transnorm broadens Honeywell's Intelligrated product portfolio and allows SPS to participate in the fast-growing European warehouse automation market fueled by growth in e-commerce. Clearly, a lot of exciting things are happening across the portfolio as we head into the final quarter of the year. With that, I’d like to turn the call over to Greg, who will discuss our third quarter results in more detail.

Thanks, Darius, and good morning, everyone. I'm going to begin on Slide 4. As Darius mentioned, we delivered another strong quarter consistent with the first half. Organic growth was broad across the portfolio, with about 65% of our portfolio growing 5% or more in the quarter, and over three quarters of the organic growth coming from increased volumes. A few highlights: commercial aviation OE grew 19% organically, led by business aviation, defense and space grew 14% organically, with double-digit growth in both the U.S. and international businesses, and safety and productivity solutions grew 12% organically, led by the Intelligrated warehouse automation business. The markets we serve continue to be strong, and we continue to leverage our leading market positions, new product launches, and investments in commercial excellence to drive profitable growth. We generated 70 basis points of margin expansion in the quarter while continuing our investments for growth and effectively managing the impact of inflation. A big part of our performance was driven by productivity enabled by our ongoing restructuring activities. This quarter, we funded approximately $70 million in new restructuring projects aimed at improving our cost structure and optimizing our footprint and supply chain. The majority of our earnings growth, $0.20 this quarter, came from segment profit improvement driven by enhanced sales volumes and sales excellence across the company. We also realized a $0.05 benefit from share repurchases, which resulted in a lower weighted average share count of 752 million shares. This year, through the third quarter, we've reduced the outstanding share count by more than 2% and have deployed more than $2 billion in share repurchases. Below the line items, we’re roughly flat for the quarter, with higher pension income offsetting higher repositioning and other funding. Finally, our effective tax rate of 21.9% was lower year-over-year, which generated a $0.04 benefit consistent with the outlook we provided at the beginning of the quarter. Also, we delivered adjusted EPS of $2.03. This figure excludes the net impact of an approximate $1 billion favorable adjustment to the 4Q '17 tax charge and approximately $233 million in spin-related separation costs in the quarter. Those include $117 million of tax costs incurred in the restructuring of our various legal entities in preparation for the spin-off. You'll find a bridge to 3Q '18 adjusted earnings per share in the appendix of the presentation posted on our website. Finally, we generated adjusted free cash flow in the third quarter of $1.8 billion, up 51% versus the prior year. We continue to see marked improvements in this area with stronger cash flows and better conversion enabled by a 0.6 churn improvement in working capital versus the prior year. This strong cash generation was most prominent in performance materials and technologies and safety and productivity solutions. So overall, another strong performance across the board consistent with our prior quarters. I'm now on Slide 5 to review our segment results. The growth we saw in aerospace last quarter continued as we benefited from our strong positions on winning platforms in a robust demand environment. We delivered sales growth of 10% on an organic basis, commercial OE sales were up 19% organically, led by engines, avionics, and auxiliary power unit demand in business and general aviation, air transport deliveries on the Boeing 737 and Airbus A350, and lower customer incentives, which added roughly one point of organic growth to aerospace in total for the quarter. Defense and space grew 14% organically driven by U.S. DoD spares volume, robust centers, and guidance systems demand and higher volumes on key programs including the F-35 and CH-47 Chinook. The aerospace aftermarket grew 6% organically primarily driven by strong airline demand and maintenance service program activity in business aviation. As a reminder, this was the last quarter that our transportation systems, now publicly traded as Garrett Motion, contributed to the aerospace business, and TS sales were up 7% organically in the quarter, driven primarily by new launches. Aerospace segment margins expanded 80 basis points driven by higher defense and aftermarket volumes, commercial excellence, and lower year-over-year customer incentives. In home and building technologies, organic sales growth was 3% for the quarter. Homes grew 5% driven by continued strength in ADI global distribution and residential thermal solutions growth in the Americas and Europe. Buildings grew organically 1% driven by continued commercial fire products strength globally, demand for our Tridium building management platform in the connected buildings business, offset by declines in our air and water business due to low demand for air purifying solutions in China. HBT segment margins expanded 10 basis points driven by commercial excellence and material and labor productivity, including benefits from previously funded and executed restructuring. This was largely offset by the impact of inflation and unfavorable mix. HBT did experience some short-term supply chain challenges and transition impacts related to the Resideo spin-off in the quarter. As you know, the home business was not a separate entity within HBT before the spins, and the separation as expected was complex with some significant changes in our organization, our systems, and our manufacturing footprint. With the Resideo spin-off slated for October 29, we anticipate that we will be able to address most of these challenges within the fourth quarter and get off to a good start in 2019. In performance materials and technologies, sales were 4% on an organic basis driven primarily by growth in advanced materials and process solutions. Organic sales growth in advanced materials of 6% was driven by significant demand for Solstice low global warming products. Process solutions sales were up 4% organically driven by continued demand in our short cycle businesses, principally in software, field devices, and maintenance and migration services. UOP sales were up 3% organically driven primarily by growth in engineering and new catalysts units in China. PMT segment margins contracted, as we had previewed, driven by unfavorable mix in UOP, and we continue to expect that to turnaround in 4Q as we previously communicated. Finally, safety and productivity solutions delivered another outstanding quarter with organic sales up 12% driven by broad-based growth across all lines of business. Intelligrated continues to outperform, rolling consistently at double digits driven by strong orders growth and major systems and a robust backlog of new wins fueled by growth in e-commerce. We saw continued demand for new Android-based mobility product offerings, as well as for service and scanning applications in the quarter. We also saw double-digit growth in our legacy sensing business. All in all, organic sales growth was 16% in our productivity solutions businesses. Within the safety business, organic growth was 6% with strong demand for new gas and general safety products. Additionally, the SPS China and India business delivered another quarter of more than 20% growth in sales. Strong segment margin expansion of 150 basis points was enabled by commercial excellence, higher sales volumes, and productivity and repositioning benefits. Now let's move on to Slide 6 to discuss our outlook for the fourth quarter. The fourth quarter preview reflects the absence of transportation systems for the entire quarter and the anticipated completion of the home spin by the end of October. So, only one month of operating results for homes is included in our guidance. You will see this reflected in the updated full year outlook as well. Throughout the year, we have seen strong long cycle order rates, and a growing backlog which in combination with our short cycle momentum, we expect to generate 5% to 6% organic sales growth in the quarter. We expect that segment margins will expand between 60 to 80 basis points reflecting a quarter-over-quarter and year-over-year margin improvement in PMT and SPS, as well as margin accretion from the absence of our two spun businesses. We anticipate adjusted earnings per share of $1.85 to $1.90, which excludes the segment profit contribution net of tax from Garrett for the full quarter and Resideo for two months as I mentioned, and it includes the benefit of the indemnification agreements we have with both companies. We’re moving the after-tax segment profit contribution from the spins in both periods. Fourth quarter EPS adjusted is expected to be up 17% to 20%. Expected EPS growth will primarily be driven by strong segment profit growth. Other key elements include a lower share count due to more than $2 billion in share repurchases we have done through the third quarter, and higher pension income, offset partially by a higher effective tax rate for the quarter at approximately 22%. This outlook incorporates our estimate of the tariff impact for what is enacted and known as of today. We continue to work on plans to address the impact of any other potential tariffs that have been discussed but not enacted. Turning to the segments, we expect continued strength in aerospace commercial OE and both air transport and business aviation, and in the aftermarket driven by flight hours growth. We continue to expect mid-single-digit aftermarket growth in the fourth quarter, and we expect that the momentum we have seen in defense will continue driven by demand for sensing and guidance systems and spares volumes into U.S. Department of Defense programs. This is supported by orders growth of more than 40% in the third quarter and backlog growth of more than 30% as well. Our outlook for home and building technologies for the fourth quarter reflects only one month of operations from homes and a full quarter of the remaining buildings businesses. We expect continued strength in homes from ADI global distribution and home products in the month of October and flattish growth in buildings for the quarter. For buildings, we anticipate continued strength in the fire business where we have been growing mid to high single digits, offset by slower energy conversions and building solutions as we have discussed previously, as well as declines in China in air and water. The team is launching new buildings products and we expect growth to accelerate into 2019. In performance materials and technologies, we're anticipating healthy growth in each of our businesses, with UOP likely the strongest driver of demand across equipment, engineering, and catalysts. UOP's long cycle backlog is up more than 10%. We expect continued short-cycle demand in process solutions, software, and service offerings, a trend we have seen throughout 2018 supported by 11% orders growth in the third quarter. In advanced materials, we expect continued strength from customer adoption of our Solstice low global warming products and flooring products. Given the anticipated strength in refining catalyst reloads coupled with continued strong margin expansion in process solutions and advanced materials, margins in PMT will be up sequentially and year-over-year in the fourth quarter as we had mentioned previously. Finally, in safety and productivity solutions, the story remains robust in the fourth quarter. We anticipate broad-based strength across all of the businesses led by Intelligrated, safety, and China and India. We are really pleased with SPS's performance this year and expect this to continue into 2019. Now let's turn to Slide 7 to discuss the bridge to our full-year EPS guidance. Slide 7 presents a walk through the moving pieces in our earnings bridge for the full year. In August, we raised our guidance to $8.10 to $8.20. This primarily had a stronger outlook for the second half of the year with a small contribution from our change in asbestos accounting. With the performance in the third quarter approximately $0.03 above our expectation and anticipated strength in the fourth quarter, we are raising the low and high end of the full-year guidance before consideration of the spins to an updated range of $8.22 to $8.27, which is a raise of about $0.10 at the midpoint. The expected dilution for three months of Garrett's earnings and expected two months of Resideo earnings will be approximately $0.31. There is an approximately $0.04 contribution from the spin-off indemnification agreements related to Honeywell's legacy liabilities, which nets the spin impact to about $0.27. As a reminder on a go-forward basis beginning in the fourth quarter, 90% of the expenses net of recoveries related to the covered liabilities will be reimbursed by Garrett and Resideo. When we take into account the estimated dilution from the spins, net of indemnification agreement reimbursement, our new range for adjusted EPS is $7.95 to $8 per share. That equates to growth of 16% to 17% for the full year, removing the segment profit contribution from the spins in both periods. Our guidance continues to reflect a weighted average share count of 754 million shares and an effective tax rate between 22% and 23%. Now let's turn to Slide 8 to summarize the details of our full-year guidance. We've seen significant momentum throughout the year. On the left side of the page, you see the original guidance on our key measures which we provided back in December. In the middle of the pages are our latest guidance reflected strength in our end markets, three quarters of outperformance, and a dilutive impact from the fourth quarter spin-off. We now project organic growth of about 6% for the year, which is two points higher than the high end of our original guidance. Our segment margin range of 50 to 60 basis points starts at the high end of our original range, adjusted EPS of $7.95 to $8 per share, which is $0.40 higher at the low end and $0.20 higher at the high end of our original range and adjusted free cash flow of $5.8 billion to $6.2 billion, which is substantially above our original projections and represents conversion between 97% and 103% for the year, all representing very robust performance. The difference between our reported and organic sales growth is three points in our guidance. We anticipate an approximate one point impact from foreign currency translation offset by an approximate four point impact from our two spin-offs. On the segment guide, aerospace and home and building technologies reported sales figures have been revised to reflect the lost sales and segment profit from the spins. In aerospace, we also narrowed our organic sales outlook to the high end of the range based on the strong performance to date and our strong backlog. We have narrowed the PMT sales guidance to the midpoint of the previous range. PMT's margin guidance remains the same. In SPS, we raised our organic sales guidance by two points on the high end to 10% and raised its segment margin guidance to a new range of 122 to 130 basis points or a 20 basis point improvement on the high end. This business has performed well all year long, and we expect a strong finish based on the oil rates, the backlog, and the momentum in our short cycle products businesses. As you can see, our current guidance is significantly higher than our original guidance and accounts for the 2018 dilution from our two spin-offs in the fourth quarter. As Darius mentioned in his opening, we have delivered substantial operating results while executing a major portfolio change. Now let's turn to Slide 9. We wanted to provide a little bit of preliminary framework for 2019, giving all the moving parts with the spins, the liability indemnity, and the other below-the-line items. First, starting with the macro environment, we feel very confident in the strength of our end markets. We see continued demand in growing industries including e-commerce, which we address with our warehouse automation offerings from Intelligrated and soon to be Transnorm. Commercial aviation, where we hold a strong position on the right platforms that will lead to healthy aftermarket growth, defense, where we see robust budgets and clarity on defense spending for the year ahead, and process automation, where we expect to see an eventual pickup and large projects coupled with continued demand for software and services. As we mentioned last quarter, we’re proactively managing both the direct and indirect impacts from the Section 232 and Section 301 tariffs. We're making necessary changes now for the additional tariffs enacted under List 3, as well as any potential retaliatory impacts. While we are hopeful there is ultimately a resolution for the situation, we're planning for the worst and making structural changes, including modification of some sources of supply, seeking alternative sources, and taking other commercial actions as necessary to position us for 2019 and beyond. Given that, we continue to expect inflation to accelerate within the business and we are working to minimize those impacts with the help of our procurement, marketing, and commercial excellence teams. We expect the impact to be minimal and manageable in 2018, as we previously discussed but now anticipate that the impact of 2019 prior mitigation actions will be significant. We have established a robust MOS across the company to ensure that we stay ahead of the situation though and will continue to rigorously address any cost increases throughout our supply chain and adjust prices as necessary. It is our expectation that we will be able to effectively manage the situation and still deliver strong results as we have done through 2018. As you will know, this will put some pressure on margin rate expansion. Moving on to our spin-offs, we estimated the total associated stranded cost to be approximately $340 million across the business, with more than 50% of these costs eliminated by the end of this year and the balance eliminated in 2019, and we feel very good about where we are in that regard. We have made significant progress and we are managing this smartly, and it’s a big focus now that the spins are done. We expect that the full-year dilution on a go-forward basis from the two spins, net of the indemnity reimbursement and excluding those remaining stranded cost, will be approximately $0.90. In terms of other preliminary figures for 2019, at our current level of buybacks, we are anticipating at least a 1% reduction in share count. Due to the measures we took earlier this year to derisk our pension plan investments, pension income will be approximately $300 million lower year-over-year and our funded status is expected to remain well above 100%. Repositioning funding, we expect to be approximately $325 million next year. Based on our planning for the fourth quarter and the repositioning we have funded to date in 2018, this represents approximately a $150 million decline year-over-year. We will continue to take the opportunity to deploy repositioning funding to improve our supply chain, optimize our fixed costs, and manage our remaining stranded cost reduction plans. Finally, with the impact of the legacy liability indemnity reimbursements from our two spin-offs, we expect that asbestos and environmental expenses will be lower by approximately $425 million. As a reminder, this reduction represents the 90% of expense that is covered by the indemnification agreement and is included in the $0.90 of dilution we mentioned earlier. We will provide you with more details about our expected 2019 performance during our fourth quarter earnings report and 2019 outlook in January. Now with that, I'd like to turn the call back over to Darius, who will wrap up on Slide 10.

Thanks, Greg. The fourth quarter begins a new chapter for Honeywell. Our two spin-offs leave us in an even stronger position for a more focused and growth-oriented portfolio in industry-leading businesses across attractive end markets. Each has multiple levers to drive inorganic and organic growth as well as continued margin expansion. Our cash performance this year has been outstanding, and there's still room for improvement. Year-over-year, the free cash flow growth has exceeded 20% each quarter and our free cash flow conversion has also improved significantly. We are rapidly approaching 100% conversion as we demonstrated this quarter. Our financial condition is best-in-class with a healthy balance sheet that provides us with significant capacity to deploy dividends, share repurchases, and M&A. Our commitment to deploy cash both smartly and aggressively has not changed. Importantly, we have a strong performance culture. Our say will continue to equal our do, and are focused on continuing to outperform for our customers, our shareholders, and our employees. We’re looking forward to sharing more exceptional results, as well as our 2019 outlook during our fourth quarter earnings call in late January. With that, Mark, let's move to Q&A.

Thanks, Darius. Darius and Greg are now available to answer your questions. So Derrick, if you could please open the line for Q&A.

So maybe I’ll start with a couple of higher-level questions. With the benefit of such a global business that you have with so many different end markets, maybe you could just talk through what you’re seeing around the world particularly with respect to emerging markets. We are hearing some concern from investors about potential project push-outs, slowdown in short cycle activity, etc.

Yes, I’ll take that one. I mean certainly, we’re seeing a little bit of a slowdown in China which has to be the highlight, and certainly Q3 was not as robust as some of the quarters that we saw in the first half. So you know there is - we did have some tougher comps that we expected. We had some challenges in our air and water business which has been throughout the year. So I'm not alarmed yet, but certainly Q3 was a bit slower in terms of growth. I mean we grew the Chinese market but not at the double-digit pace that we saw earlier in the year. So that's probably my number one area to watch. I wouldn’t say I'm concerned about it yet but certainly an area of focus. On the flip side of the coin, the U.S. was extraordinarily robust, showing about 9% to 10% growth rate in the U.S. and was probably at the other end of the spectrum. We continue to be very bullish in the U.S. markets and I expect that to continue. And then sort of the rest of the global landscape was a little bit of a mixed bag. I mean some Southeast Asia business was good. We had a really nice recovery in our Latin American business that was really good to see, that’s been our focus for business activities throughout the year and we see that coming back. The Middle East was okay. India was a bit slower than we anticipated but we expect a pretty good recovery in Q4. So all in all, I mean there are certainly some puts and takes, very encouraged by what we're seeing in North America with our focus on China as we head into Q4.

Thanks, Darius that was really comprehensive. And I guess just shifting to capital allocation, could you share some thoughts as you head into 2019? It was good to see Transnorm come through recently. But how robust is the pipeline? And I guess if M&A doesn't come through as you expect is there scope to go higher than that 1% reduction in share count that you're kind of earmarking for 2019?

Yes, I think that's why we’re very careful to pick our wording in the press release, which is that you should expect at least 1% share count reduction. The 1% is roughly measured against $3 billion that are already committed to but your comment is exactly right, that's the way we think about capital allocation. And depending upon what happens in M&A, we'll potentially do buybacks. There are a couple of things that we think we could get done and announce, maybe even possibly in Q4, probably not close in Q4. But I never really count the M&A transactions until they are signed and done. So I want to monitor that closely. We have been in the market early in Q4, as we pointed out in the press release. I thought there were some attractive price points for us and continue to be, but yes - the framework you're thinking of is exactly the one we use, which is, we kind of toggle this between M&A and buyback. As I said, I would prefer M&A, but it's, as I’ve said on multiple earnings calls now, it continues to be a challenged environment and unfortunately, it's kind of becoming the new normal. Although we were thrilled to pick up the Transnorm acquisition, and I think it was an attractive entry point, but from a price standpoint, it is a really important entry point into Europe for our Intelligrated business. Not only is it a terrific acquisition on its own, it also gives us that really nice foothold in Europe, just an outstanding business.

I was wondering if we could get just a little bit more help on the bridge. Greg, I think you said the guide reflects 16% to 17% pro forma growth for 2018. Could you just baseline us on what that implies for segment OP dollars in 2018 for Aero and HBT, as if the spins were out on a full year basis?

Jeff, in terms of the absolute dollars, I don't think we're going to highlight specifically those numbers directly. But the $0.31 represents, you could think about that as close to linear but not exactly because of the stub period that we got in homes, as we are getting only one month of the homes results in that $0.31. So, you could think about it as almost linear but not quite. I mean, we've got full fourth quarter high degree of profit that we're losing in December and November. The Resideo side is going to be a little bit less clear from that perspective. But it's - the $0.31 is close to linear but not exactly.

And then just on the $0.90, so it sounds like stranded costs would be an incremental headwind on top of that, if you could clarify that, but is there any deployment of the spin dividends of $2.8 billion in that construct?

No, the $0.90 is just simply the lost segment profit on an after-tax basis and net of the reduction in our below-the-line expenses associated with the indemnity. As we talked about the $340 million of stranded costs, which we feel very good about our progress in terms of eliminating that so far, is not included in that number. And we'll update you more on that as we get into the January guidance and we finish the year out. You know, you can imagine that, as we said, we've taken out by the end of this year greater than 50% of that and we feel like we're in a good position, we're turning our attention from a spin perspective to getting the deal done to the sustainability side. And we'll have a lot of focus on that but that is not in the $0.90 at this point in time. And in terms of the usage of the spin dividends, Darius talked about the capital deployment framework, and we'll utilize that as firepower for executing around that framework but it is not precisely included in any way in that $0.90.

I'm sorry, just one other for clarification. When you say 'net of indemnity' do you mean only kind of the $315 million or so that Garrett, Resideo? And then we've got incremental tailwind to get to that $425 million that you're talking about on lower asbestos and environmental?

Yes, no. Again, think about that as asbestos and indemnity for 2018 and the knock-on effect of the 90% reduction on a year-over-year basis for those two particular line items. Obviously, in the asbestos side, NARCO has nothing to do with that. So we have to take that out. But that's the way to think about it.

And Jeff, this is Mark. If I could, just to be clear, the caps, the $350 million cap that we cited in August, that is the cash payment cap. And as we had said in August, the expenses, whatever they are, could be higher and that from a P&L perspective could be closer to the $0.40 we cited in the release. So, I think that's where you're getting tripped up, there's a $0.40 expense, and separately, there's an annual cash payment cap in respect of any year that's $350 million.

Yes, so that's when we gave the $0.40, again, that was a - call that a framework. But the actual value of what's going to be in the P&L may be higher or lower depending on how things go. And the $425 million known is reflective of where we see 2018 expense in those two categories.

Just maybe to dig into PMT on a couple of questions. First, with the recent ruling out of SCOTUS on some of the HFC stuff, how does that impact maybe some of the trajectory for Solstice from here? And then, I guess a follow-up on that on some of the refinery comments.

Yes, it doesn’t because as you may recall, despite that ruling there are quite a few states that are still adapting the HFO regulation and greenhouse gas emissions. So, as of right now, we don't see much of an impact yet. We're continuing to work with the regulatory bodies, both at the federal and the state level. At the present time, we don't anticipate substantial impact and frankly, a lot of the companies that we're working with are on that path anyway. And again, obviously that's only a U.S. issue. What was your second question on PMT?

Yes, I guess more broadly in - with some of the environment going on there particularly IMO 2020 and refiners starting to redeploy, I think UOP is set to have a good shipping quarter in 4Q. How much of that are you seeing in the business today versus may be extended visibility into 2019? Just trying to calibrate as refiners spend when it helps Honeywell specifically.

Yes. I mean, typically refiners have to wait till the last moment. So a lot of that investment is what sort of surprised us. So we expect 2019 to be a good year. But the numbers speak for themselves with UOP's backlog up double digits. That gives me a good sigh of strong booking rates. The margin challenges that were evident in Q3, we very much expected; we communicated those in Q2. We knew that they were going to be dilutive. But by the way, that reverses in Q4 based on the mix of products that we ship. So, overall, we're very bullish on UOP and what they're going to do. And like I said, at the end of the day I look at the numbers and when I see backlog up double digits like it is, I'm very encouraged as we head into 2019 and beyond.

And then just one quick one for Greg on free cash. I think you guys talked about a lot of moving pieces on the pension side and then on the indemnity side, maybe some P&L head that doesn't come quite through on the cash payments. How should we think high level about free cash conversion for 2019 inclusive of the spins and the moving pieces there?

Again, I think you should think about cash conversion next year as approaching 100%, even expense. We feel like we're getting into that neighborhood this year. And with the continued opportunity that we do have in working capital, we made really nice strides as I highlighted, 0.6 of a churn improvement year-over-year. And this quarter in particular was sequentially better than last quarter by two to three times as well. We feel like we still have more opportunity to go. So, we're still going to be targeting something plus or minus a couple of points to 100%, as that number will move a little bit over time depending on specifics, but we feel very good about our ability to live in that range.

And Josh, I think we're extremely proud of what we've been able to achieve on the working capital side. If you recall a couple of years ago, I've made this a priority for the business for us to really monitor the balance sheet as much as we monitor the P&L statement. And with this kind of a growth rate that you're seeing, 7% top line, our working capital is now more than $600 million. I mean, that's - I'm very proud of the Honeywell team in terms of what they've been able to accomplish from that perspective, and it's coming through in our cash performance.

Darius, never heard you this excited. It's a bit of a change, we would have expected it from Dave, but you've been a little more balanced. So, good result.

If Michigan loses tomorrow, I could be more excited, but you know…

So, just on the orders, you kind of threw out defense, you threw out the HPS orders, Intelligrated obviously. When you think about kind of the long cycle businesses, what were total orders up for the long cycle businesses for the quarter kind of in total or if you just want to kind of list maybe a couple of ones we didn't hear like UOP or something like that I don’t know what were total orders up for long cycle businesses?

Yes, to give you a specific, they’re up 26% year-over-year. Our backlog is up 14% for long cycle, and then just to give you a couple of the specifics, HPS projects up 27%, HBS projects up 22%. Intelligrated was actually flat, but keep in mind they are up 40% year-to-date, so this was tough comps. We’re not - trust me I’m not worried one bit about the growth in the Intelligrated businesses. So that’s why I’m pretty excited today. I mean when I always worry about tomorrow, and when I see those kinds of numbers come through, I have good reason for optimism. I think it points to a very bright 2019 and beyond.

And just kind of attacking kind of the base question in a little bit of different way and again this is nearly just kind of like math on actuals. Just using the kind of prior Aero guide of about $3.7 billion and stripping out kind of $500 million number last nine months or for the year for Transport gets me down to kind of around $3.1. Is that kind of the right Aero pro forma roughly? I mean that's just basic math on what you got already given.

I think you’re in the neighborhood.

And then just for HBT, kind of similar math gets me to around $1.1 type of number - does that sound right?

Let us check that one and make sure that one is obviously a little bit less precise given the Homes and building split but we’ll come back to you on that one particular.

And then just one last one for you - the restructuring next year is a little bit higher than I would have expected. I don't view that as necessarily negative, but what is when all is said and done given that it seems like everybody wants to ignore restructuring in other companies these days. What is kind of the normal run rate restructuring number for you guys in this kind of new constructs going forward do you think longer-term?

Yes, I don't know if there is such a thing as a normal number. It is dropping significantly year-over-year by more than $100 million. So it’s coming down with us being a slightly smaller Honeywell. But we still have as you recall back the EPG one of the things we have plenty of runway for and what Torsten's number one mission in your head integrated supply chain is to really reduce our fixed cost base. So that's where most of that funding is going to be going next year and it's a fairly substantial change in terms of the cost structure of Honeywell. And A) reducing it and B) making it - converting it from being much more fixed oriented to variable oriented. So we’re going to need some continued restructuring funding, I don’t know if I can give you sort of a normal number. I would think that it still going to be elevated at kind of the levels we projected for 2019 and probably for 2020, and probably after that come down a bit more as we get some of that heavy lifting done. So that’s the way to frame it up and think about it.

Hi, it’s not much to pick on for sure, but one of the things that was thrown out there when you're doing the spins was potentially doing buildings with the Resi business and you didn't - you kept all things. But what gets you excited about buildings turning? I mean this has long been really kind of a three percentage growth business, not really much better than GDP probably not better than GDP. But you said in your prepared remarks some new products and things like, so give us kind of sales pitch if you will on why you kept that business?

Yes, first of all, let’s start with connected buildings. I think our technology offering in connected buildings is maybe as further along than any of the other connected. I mean we have ready to go technologies that we're currently offering and selling and you heard an example of that in our pitch this morning. So I'm very excited that we really need to be much more commercially savvy to clearly explain to our customers what that will do for in their building in terms of energy consumption, comfort, security, well-being of the occupants, and so on. So I'm very excited about their technology and it's not futuristic, it's here now. I think we just have to get through the commercial challenges that we’re facing. Number two, the market dynamics between the Resi and the commercials are very different. The competitors are different, I feel good about our position, I feel good about the installed base we have. I think it's a business that can and should do more. Three, as I think we also have to remember that we created this Homes P&L from scratch, I mean think about this Scott, I mean we did more than 20 manufacturing transitions in a course of the year. If I didn't have that kind of hard deadlines that we’re going to get this done in a year, that would have probably taken three. So that team has been done a tremendous job in executing that kind of heavy lift and I think they performed pretty well given that kind of a distraction. So now that that’s basically behind them, I’m going to monitor it, I’m continue to be optimistic about what we’re doing. I was with Vimal Kapur and his team earlier this week and they got their hand on the post, and I think that could be a very successful business for us.

Transnorm seems interesting, but I don’t know the company very well. Can you just give a little bit sense of what other than the installed base that you are getting? I mean what you’re getting from a standpoint of technology, is that something you can leverage synergies at least within Intelligrated is that something you can take more Intelligrated Europe and more Transnorm with U.S. or does it not work that way?

No, it doesn’t work that way. In fact, Intelligrated was a customer of Transnorm, so we know the product. It is IP protected. It is actually technology differentiated as a high aftermarket services component, which I always look for in any business. It has a very enviable position in Europe and frankly, I was looking for a beachhead to land in Europe Intelligrated. We’ve been spending a lot of organic dollars in what I call just part of their R&D and sales and commercial build-out to have a broader presence in Europe. Our U.S. customers have been asking us to really have a broader presence in Europe, and I frankly wanted to add a business that gives us a much broader foothold. On top of that, I really like the business. We were able to pick it up what I view as a very appealing price in this kind of a market environment that we're in. We’ve differentiated technology and IP protection. So, I think it's - I’m thrilled, and as you know Scott, I really like the warehouse automation space.

Darius, Aerospace has continued strength in here this cycle and obviously you do have more difficult comparison to 2019 but it’s hard not to notice the momentum that Honeywell has given its share on the new business jet platforms that are coming to the market. You've talked about connectivity, defense obviously strong. So as you look at the continued product revenue in 2019, does it seem like the visibility here toward call it above normal cycle growth and Aero was higher than usual in 2019 and maybe beyond?

Well, we continue to be bullish in Aero, and as you look at our backlog position, there's no reason not to be. But your initial point is correct to which our comps get a little bit tougher given the kind of growth rates we have seen. If you look at - a little more detail in the numbers, the two that really pop out at you especially here in Q3 is one is the growth in the business jet market. That hasn't been a high-performer for quite a while, and now it is starting to really pop as a lot of the new platforms are being introduced into the marketplace. And two, the used equipment inventory is down significantly, which is always a good sign in terms of new equipment sales. And defense and space, defense is continues to be very strong. We don't think that that's going to change as we head into 2019; potentially it could be a slight downturn in terms of OEM momentum, I don't really expect that to be the case. But all in all, I continue to be pretty bullish on the aerospace segment because all three of these tracks that we always kind of talk about which is the commercial, the business jet, and defense are all kind of pointing either strongly up or up. So 2019 looks very promising based on what we’re seeing today.

And maybe Darius or Greg, you mentioned the tariff impact so far but manageable. You continue to work to mitigate all the tariff impacts. But maybe could you elaborate in your comments, I think Greg, you said the tariff impact in 2019 could impact margin. How much more ability do you have to price increase in tariffs? You talked about changes that you might make, you talked about sort of looking at your supply chain. So maybe more color there if possible?

Yes, so in our last discussions we talked about the fact that what we're seeing in 2018 in terms of pressure was in the $10s of millions. And as you bring List 3 and List 4 into play, and you layer that on over the entirety of 2019, that starts getting into more like triple digits, $100s of millions. And we still feel good about our ability to price in the market. We've been successful and continue to take aggressive approaches in that regard. And then as it relates to changes in supply chain, we talked about the fact that we're local-for-local and that's been very helpful for us, but we are making a few small moves. You're not going to see us make big overhauls to the supply chain, but there are certain spots where strategically we are going to make a couple of changes in those flows. So, again, the challenge the hill gets steeper but the level of rigor and attention to this has been at a very high level for the last eight months and is going to continue as we go into 2019.

And if I could just add, I think there's a lot of unknowns, right. I mean, you have List 3, which potentially that - that rate goes up at the end of the year, and then you have a potential List 4, we have timing which isn't particularly clear. So, there's a lot of - there's a lot of unknowns here. We're working through all the norms and I feel very confident in the process that we're building in our - all of our businesses are all over this in terms of taking any and all levers they can. But still a lot of unknowns in terms of what's going to happen at the end of the year, what's on List 4, the level of List 4 and timing. So, we're prepared, we're ready to act and we're trying to mitigate the best we can.

Darius, it seems you're building a very focused Aerospace Company but maybe in a more measured manner. Just looking at Aerospace post Garrett, it looks to be somewhat accretive to margin and maybe eliminate the business that wasn't a perfect fit within that group. What sort of opportunities arise for the Aerospace segment in terms of profitability and maybe how are you thinking about the rest?

Well, I think the Aerospace Group has been very good at a couple of things, especially last couple of years. Number one is, they're certainly continuing to drive productivity and becoming much more efficient. There's a high level of expertise in terms of what they can accomplish, and I think they're far from done. So, there's a further opportunity to do that. Number two is, they're much more installed base focus in terms of the upgrades, enhancements, software enhancements and so on, which obviously continue to build accretion to the margin rate. Overall, I like how their team is executing. They had great wins in a lot of different platforms and the execution is strong and I particularly like the progress on the commercial side of the business. And connected aircraft continues to be a very big opportunity, which we realize longer term. And I pointed this out, we look for a 25-plus kind of a margin rate. We think that that's very possible in that business and we're going to continue to make much forward as Tim and the team continuing to make progress there.

When was the last time that the U.S. grew faster than China for you guys?

It's a very good point. It's been a while, but it's interesting how the global markets are evolving right now. And as I look into 2019, kind of an early take is, I think the U.S. is going to be a very robust market again. Now, there's a lot of moving pieces in the geopolitical environment right now, but right now it continues to look strong.

And I guess a follow-up question on that. How does your strategy, you had a strategy really focusing on high growth regions; the U.S. going to be a key market but not really a growth market. How are you thinking about capacity availability in the U.S., for example, some of your competitors are talking on process specifically of a shortage of engineers; they're sort of at the limit not really able to take more projects, and are we seeing contagion from China in high growth regions? So just a follow-up question.

Yes, I mean, I think I'm very encouraged and thrilled to see that kind of growth rate, GDP growth that we're seeing in the U.S. I think it's been terrific. But as you look at, overall if you look at the GDP growth in some of the high growth regions, over the long term they're still likely to be higher than the U.S. I mean, obviously, U.S. has increased its rate, but so have high growth focus strategies, I think is still spot on and needs to be. And we're going to stay committed to growing in high growth regions as well as the U.S. In terms of investment and profile and so on, I mean, I've always said all along that I believe in being local-for-local, meaning that I want to be able to serve North America from North America, I want to be able to serve China from China, and Europe from Europe. To me, that just makes perfect sense. I want to have people that have a mindset for their local markets from R&D, manufacturing, sales, marketing, all these perspectives. And now as we kind of restructure and look at our fixed cost base, that's exactly the model we're going to. We are pretty mature along the path already. But the short story is, to the extent I continue to see this kind of growth in the U.S., we're obviously going to be continuing to invest in creating our capacity here in the U.S. to make sure we properly serve the market. And based on what we're seeing this year, we're going to be investing in 2019.

And if I could slip one more, you sort of highlighted that productivity was a contributor to strong cash flows, it's just very impressive that despite very robust growth, this business is generating working capital. What about the business model that enables this generation, is there a payback or is this a kind of business that can actually generate robust cash flows as it grows?

Well, I think it can. Number one is, sort of the business profile and the timing of payments particularly for projects business, they are very favorable. Number two, they've done a terrific job in managing their working capital. It's a point of focus and emphasis. Three, and this is something we've done across our business, which is, we're really looking at standardizing some of the terms and conditions. That's been frankly I would say it wasn't sort of the cleanest structure that we had, and now we're really standardizing and cleaning that up and it's generating benefits. And it's not just for us; yes, it's really true of all our businesses. So a lot of things are moving in the right direction there, certainly for SPS, but all of our businesses as well.

So just more of a comment than a question. You got two same prices this quarter. So, you seem like you're in good shape to manage the extra inflationary pressures from tariffs. But you're the only to potentially for the companies that are so far. So, I'm wondering, are you sort of working on the base case assumption that the 25% goes in place in January and that we get less full and are you taking preemptive actions to anticipate and get ahead of those potentials?

Yes, I mean, the short answer is, yes. I mean, we are getting ready. I'm not saying we have started pulling the trigger on all those actions but I think always the way we kind of think about things as we always have to assume the worst-case situation and then be prepared. We haven't pulled all the levers for the 25% yet, but we're going to be ready. Frankly we think that that probably is obviously increasing as more time goes by, and we have to be ready. So I would say, not all the levers have been pulled yet, but we’re certainly preparing them and feel very good about our ability to mitigate most of that impact.

And then quicker follow-on, going back to free cash flow because to my mind that was the real highlight and a great quarter. You call out SPS and that PMT as particularly strong contributor of cash. Is that because Aero and the HBT were with the spins, we're introducing quite a bit of conversion or was there some catch-up here? I mean maybe any commentary in terms of free cash conversion by business would be helpful?

Yes, I’ll start and maybe turnover. I think you nailed I mean from an HBT perspective when you have to do two spins and you have to do this many transitions, there is some level of inefficiency, particularly in the inventory situation because you were doing a lot of plant separations and so on. And as I stated before, I think the team has done just an incredible job to get us ready. Aero has done a great job on receivables, payables, and so on, but inventory is still an opportunity. I think we all know about some of the challenges that the aerospace supply chain is facing, so there are probably further gains to be made there. But they've done a really nice job. And then SPS has been tremendous across the board whether we talk about all three elements of working capital advances and so on. And then PMT really picking up the pace particularly in receivables they got lot of pass-throughs that are now coming in and really nice momentum building into Q4, and we think that there is even more upside there.

Yes, Aero is up, so they had a good performance too. I think they just have a head start in terms of the disciplined aspects as Darius talked about with things like terms and so on. So, in many ways, we’re actually modeling a lot of the aerospace processes and behaviors into what we’re trying to do elsewhere. So you should definitely not take that comment as Aero is not doing well; they actually are growing their cash flow quite nicely also.

Maybe just a quick question on the HPS, I think in process you talked about a lot of the strength still being a short cycle driven. So just wondered what you're seeing in terms of Greenfield projects and large orders there. Is there obviously some movement in the LNG area, but maybe some offset from a macro uncertainty on large projects in general. So maybe just how you see the Greenfield demand?

Yes, I mean Julian, I think the highlight number for me for HPS is projects. We’re up 27% year-over-year in Q3, I mean that's - I think that number speaks for itself. So it's a very impressive number, it gives you an idea that that business continues to win in the marketplace. And I’m very bullish that’s a couple on top of the short cycle growth, they are particularly in services and our software businesses, and overall it continues to do very well. So, there is not really much other than good news coming from the HPS world.

And then my last one would just be around buildings, you talked about the expectation of an improvement in growth there in 2019 and probably beyond. Do you anticipate needing much of a step up in R&D or CapEx or M&A to help drive that growth, or do you think the run rate of investment is sufficient right now?

Yes, I think in R&D I think it's - I would say it’s not necessarily a need to increase the R&D level but really to streamline and optimize that investment around things that really matter. I think that there’s frankly - there is a little bit of an opportunity around that area. And Vimal and team are making sure that we’re investing in the proper things and really on things that move the needle and not kind of the incrementalism which require a lot of investment that really don't generate great returns. I think it's certainly an area of opportunity but I think some of their really high performing businesses like fire which have continued to do very well, it's not all bad news. And I think there are a lot of good things going on in the buildings part of the portfolio ready. But certainly, like in any large business, there are a couple of things we also need to improve. So I'm very confident that that team is going to get it done.

And just again, back to the spin taking away the distraction of having to split the company in two fundamentally, that took the effort of the entire organization to go do and now having that done. They’re going to have a lot more time and attention to be able to drive some of that growth as Darius highlighted, which we feel very good about the end market and our position there. So it should be good.

Yes, and just to echo what Greg said. I think we all probably underestimated the amount of time, effort, and organizational focus it takes to do two spins at the same time particularly when you really are creating a new P&L called homes. So I am thrilled with the execution that the team has exhibited.

Yes, I mean you talked about the supply chain changes, but we also had to clone ERP systems. This was definitely a heavy lift to go do so that team did a great job.

Thank you. Before I end, I want to thank the Honeywell employees and leaders that will begin new careers at Garrett and Resideo for their contributions to the company. Both businesses are starting with a strong foundation, a great heritage, and I'm confident both will be very successful. We look forward to watching their accomplishments as new public companies. I have full confidence that the strong performance Honeywell will deliver for our shareowners in the first three quarters of 2018 will continue through the year-end. Our order rates are strong, our backlogs are growing, and we're realizing the benefits of our continued efforts to drive software and connected growth, productivity, commercial excellence, and improved free cash flow. It is an exciting time to be at Honeywell, and we look forward to sharing more on our progress as we head into 2019. Have a wonderful weekend.