Honeywell International Inc (HON) — Q4 2018 Earnings Call Transcript

Thank you, Margaret. Good morning and welcome to Honeywell’s fourth quarter 2018 earnings and 2019 outlook call. With me here today are 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, adjusted free cash flow, and free cash flow conversion and effective tax rate exclude the impact from separation costs related to the two spin-offs of our Homes and Transportation Systems businesses as well as pension mark-to-market adjustments and U.S. tax legislation except where otherwise noted in 2018. With regards to 2019, references to adjusted free cash flow guidance and associated conversion on this call exclude impacts from separation cost payments related to the spin-off. This morning, we will review our financial results for the fourth quarter and full year 2018, share our guidance for the first quarter of 2019, and discuss our full-year outlook. As always, we will leave time for your questions at the end. With that, I will turn the call over to Chairman and CEO, Darius Adamczyk.

Thank you, Mark, and good morning everyone. Let’s begin on Slide 2. We are extremely pleased with our results in 2018, made progress both from a portfolio and financial perspective, continued smart investments in our businesses and our people, and took steps to position the company for the next 20 years. This quarter, we successfully completed our second spin-off of the year, Resideo Technologies, launching our new stock exchange in October. We also continue to advance our software spread toward growing our core businesses in attractive end markets. Most importantly, consistent with what we have done all year, Honeywell delivered on its commitments to our shareholders. We met or exceeded our financial commitments on all metrics, delivering adjusted earnings per share of $1.91 in the fourth quarter, driven by 6% organic sales growth and 80 basis points of segment margin expansion. We continue to see strength in our long cycle businesses, most notably in commercial aerospace, defense, and warehouse automation, where the Intelligrated business is a global leader. Furthermore, we are aggressively planning and mitigating the impacts of the tariffs dispute in all of our businesses, as evidenced by the strong margin expansion we generated this quarter. Based on what we know today, we do not expect any material impact to our results in 2019 related to tariffs. For the full year, we achieved 100% free cash flow conversion and a 105% conversion in the fourth quarter. We generated over $6 billion of free cash flow for the year, excluding spin cost payments, up 22% even after spinning nearly 20% of the company in the fourth quarter. This was principally driven by profitable growth, higher net income, and continued efforts to free up working capital, all the while funding smart growth investments through $800 million of CapEx. Our free cash flow as a percent of sales is the highest it’s been in at least 15 years, and we expect to continue to grow from here. Importantly, our U.S. pension is funded over 105%, and we do not expect any cash contributions in the near term. The financial health of this company heading into 2019 is as strong as it’s ever been, and we still have ample resources to deploy. Lastly, we continued a steady cadence of capital deployment with an additional $1.7 billion of Honeywell share repurchases in the quarter, bringing the full-year total to approximately $4 billion. As a result, we now expect the fully diluted share count to be down at least 3% in 2019 based on our plan to reduce share count by at least 1% from 2018. Continued return of cash to our shareholders through $2.3 billion in dividends followed another double-digit dividend increase in 2018. This was a particularly good year for Honeywell. We have a simpler, more focused portfolio after the spins and continue to execute on our initiatives as we look to the future. We see strength across several end markets and have significant balance sheet capacity to deploy. While we are not planning for a recession in 2019, we are taking steps now to ensure we deliver on our commitment in an uncertain economic environment. Let’s turn to Slide 3 to review some of the progress from last year. As I mentioned, we took significant steps throughout 2018 to transform the business. One of my key priorities from the outset was to accelerate organic growth. As we have seen by our results, we are making good progress on this front. We were encouraged by the fact that nearly 60% of the portfolio grew by 5% or more organically for the full year of 2018, with several businesses growing about 10%. If the spin-offs complete, we now operate a more focused portfolio in a smaller number of attractive end markets. Portfolio optimization is central to and will continue to be part of Honeywell’s operating system. We plan to continue effectively deploying capital by funding high return CapEx and returning capital to shareholders through dividends and share repurchases. We have had nine consecutive double-digit dividend increases since 2010 and still have a strong and flexible balance sheet with the ability to deploy over $14 billion of cash to M&A, CapEx, dividends and share repurchases. The combination of strong sales growth, favorable end market exposure, and significant balance sheet capacity positions us well as we head into 2019. We are now on Slide 4. Continuous transformation is part of Honeywell’s operating system. On this slide, we highlighted three key transformation initiatives to establish Honeywell as a premier technology company for the future. Earlier this year, we established Honeywell Connected Enterprise (HCE), a strengthened and centralized organization that will serve as the software innovation engine for all of Honeywell. HCE operates with the speed and agility of a startup, working closely with our businesses and our customers across the entire portfolio to build the world’s best software solutions rapidly and efficiently on a single platform. Our transformation to a premier technology company requires us to look beyond just the spin-offs. Our Chief Supply Chain Officer, Torsten Pilz, is leading Honeywell’s efforts to improve our supply chain and optimize our global footprint. We are seeing a lot of opportunities here to drive margin expansion and operational efficiency, and you’ll hear much more about this from Torsten at the annual investor conference in May. We are making similar enhancements to our capabilities internally with Honeywell’s digital initiative. This requires people, processes, data, and technology elements to come together, which will allow for more effective and efficient decision-making throughout Honeywell. This effort includes a continuation of our progress to centralized ERP systems. Thus far, we have eliminated 35 unique systems in 2018, growing from 106 down to 71 and we are on track to just 10 ERP applications by the end of 2020. The result will be consistent processes and centralized data coverage on a common IT foundation. We have achieved a lot this year and continue to redefine the limits of what Honeywell can achieve to be the best positioned multi-industrial company for the future. Let’s turn to Slide 5 to briefly review our progress against our key priorities. I laid out my key priorities for the company in 2017; since then, we have continued to foster our culture within Honeywell of doing what we say, which we call the “say-do” ratio. As you stack the results against our long-term commitments, you can see we are clearly making progress and in some instances achieving milestones sooner than we thought, such as organic sales growth and free cash flow conversion. We are accomplishing these objectives while making smart investments for the future through CapEx, restructuring, and research and development. Our software businesses grew in the mid-teens range last year on a path to the 20% long-term compound annual growth rate we anticipate. We have taken steps to unify and strengthen our software strategy through Honeywell Connected Enterprise and continue to invest in software development, sales and marketing capabilities, and the build-out of the Sentience platform. In 2018, Honeywell Ventures made five investments, including in Soft Robotics, a developer of automation solutions and soft robotic gripping systems that can grasp and manipulate items with the same dexterity as the human hand, and in IoTium, a managed secured network infrastructure platform for the industrial Internet of Things that primarily serves building technologies and industrial customers. We also completed two bolt-on acquisitions totaling roughly $500 million. Ortloff Engineers is a privately held licensor and industry-leading developer of specialized technologies to drive high returns in natural gas processing and sulfur recovery. This complements our existing UOP offering, which allows us to better meet customer needs for high recovery, non-gas liquid extraction plants. Transnorm, now part of Safety and Productivity Solutions, is a global leader in high-performance conveyor solutions that are used in diverse end-markets such as parcel delivery, e-commerce fulfillment, and airports. The acquisition strengthens Honeywell’s warehouse automation portfolio and positions the company to support the growing European e-commerce market while broadening Honeywell’s connected distribution center and aftermarket offerings. I will stop there and turn the call over to Greg, who will discuss our fourth quarter results and 2019 outlook in more detail.

Thanks, Darius, and good morning everyone. Let me begin on Slide 6. As Darius mentioned, we finished 2018 very strong in every financial metric. Organic sales growth for the fourth quarter was 6%. We have been at or above 5% every quarter this year. This reflects our continued commitment to customer excellence, new product development, and our realization of benefits from the investments we have made in our sales organization and new product development process. We generated approximately $2 billion of segment profit in the fourth quarter, driven principally by higher sales volumes, with segment margin expansion of 80 basis points. The impact of the spin-offs of lower margin businesses, net of acquisitions, contributed 30 basis points, while the core business generated 50 basis points expansion. Pricing and productivity was strong, which enabled us to effectively mitigate the impact of material and labor inflation. We also saw continued benefits from previously funded restructuring. Adjusted EPS was $1.91, up 12% versus the prior year, excluding the spins, which exceeded the high end of our guidance range by $0.01. The adjusted EPS figure excludes both the impact of an approximate $435 million favorable adjustment to the 4Q '17 tax charge and $104 million in spin-related separation costs. At the outlook call in 2018, we estimated that the separation cost for the two transactions would be in the range of $800 million to $1.2 billion. I am very pleased to report that the total separation cost for both spins came in lower than this estimate at $730 million, which demonstrates our ability to effectively execute complex transactions ahead of schedule and below budget. We also recorded $300 million in repositioning charges in the quarter to fund future productivity and stranded cost reductions. Share buybacks totaled $4 billion in 2018 and drove a $0.06 benefit from the lower share count in the quarter. You can find a bridge to the fourth quarter adjusted earnings per share in the appendix of this presentation. Finally, working capital improved by 0.6 turns year-over-year. Our businesses are all focused on improving working capital and we continue to see progress on our initiatives with room to free up more cash for capital deployment. Now, on to Slide 7 and review our segment results. Our aerospace business continued to perform extremely well in a robust demand environment, capping off a strong year of near double-digit organic sales growth. In the fourth quarter, we generated 17% organic growth in defense and space, with double-digit growth in both the U.S. and international businesses led by global demand for sensors and guidance systems, original equipment shipment volumes, and higher spares volumes on U.S. Department of Defense programs. We also saw growth in our space business driven by new satellite program wins and commercial helicopters driven by repair and overhaul demand. In commercial OE, sales were up 8% organically, with increased HTS engine demand for Gulfstream and Textron Longitude platforms and higher aviation ship set volumes driven primarily by the certification of the Gulfstream G600. Aftermarket growth was strong in all businesses, including defense driven by increased demand for avionics upgrades, both software and hardware, navigation products, and safety mandates. Our connected aircraft offering has continued to gain traction driven by GoDirect cabin tail capture on robust JetWave demand. Turning to Honeywell Building Technologies, organic sales growth was 1% driven by continued demand for commercial fire products in North America, Europe, and our high growth regions. Building Solutions projects growth was also strong, particularly for international airports. The HBS projects backlog is up 15%, setting up a strong 2019 as we continue to expand in the critical infrastructure markets like airports, cities, and stadiums. These gains were offset by declines in our China air and water business and temporary supply chain challenges within our building management systems business. We expect the air and water business to recover in 2019 driven by new product introductions for the mid segment and stronger demand as inventory net levels normalize after a challenging 2018. In December, the supply chain issues within building management systems began to stabilize, and we expect continued improvement in the first half of 2019. HBT also benefited from one month of single-digit organic sales growth from the former homes business driven by strength in both products and ADI global distribution. As a reminder, the results for HBT exclude homes and distribution after October. In performance materials and technology, sales were flat on an organic basis. Sales in UOP were up 2% driven by ongoing strength in licensing and engineering sales, but were offset by an expected decline in gas processing driven by an extremely strong fourth quarter in 2017. Process solutions sales were up 1% organically driven primarily by strong demand in our software maintenance and migration services and steel devices. This was offset by declines in large project activity, and in smart energy, and thermal solutions, both shorter cycle businesses due to supply chain challenges. Notably, we continue to see solid trends within the automation businesses and process solutions with total orders up double digits and short cycle backlog up over 30%, suggesting that oil price volatility in the fourth quarter may have temporarily delayed customer investment decisions. Advanced material sales were down 3% on an organic basis as continued strong demand and adoption of our Solstice line of low global warming refrigerants, which was up 5%, was offset by declines in specialty products, particularly in our electronic materials business, which is in the semiconductor space, as you know, and tough comps associated with the fourth quarter of 2017. PMT segment margins expanded by 200 basis points in the fourth quarter as expected, driven by the timing of catalyst shipments within UOP, commercial excellence, and the benefits from previously funded repositioning. Now turning to the Safety and Productivity Solutions business, that continued to perform at a high level with organic sales up 15%, driven by broad-based strength across all lines of business, double-digit organic growth in Intelligrated continued as orders from major systems and robust backlog conversion fueled strong results. We also saw double-digit growth in our sensing business and continued strength in our productivity products business driven by demand for Android-based mobility offerings and handheld printing devices. In total, organic sales in our productivity solutions segment were up 23%. Moving to safety, the safety business sales grew 5% organically, led by ongoing demand for gas products and strong growth in retail footwear associated with the holiday season. Finally, we continue to see strength in our businesses across high growth regions. In China, SPS grew double digits with robust growth across industrial safety, productivity products, and SIoT. Excluding the ongoing softness in air and water, HBT also grew double digits in China. For all of Honeywell, China was up 9% organically for the full year. In India, our capabilities and strength provided exceptional growth in the fourth quarter, greater than 25% over the prior year. This was driven by our building and process solutions business. We continue to see positive macroeconomic trends in the Middle East, which supported growth across all businesses, with three segments growing double digits organically compared to the prior quarter. Now with 2018 in the rearview mirror, let’s move to Slide 8 and discuss our 2019 outlook. We have a reliable playbook in Honeywell, and it’s not changing for 2019. Our focus on smart growth investments, breakthrough initiatives, and new product development, coupled with productivity rigor and the benefits of funded repositioning, has positioned us well for continued outperformance. For 2019, we anticipate an organic sales growth range of 2% to 5%, the low end of which reflects the possibility of some economic slowing but not a recession in 2019. Segment margin expansion is expected to be 110 to 140 basis points or 30 to 60 basis points, excluding the impact of the spin-offs. This will drive earnings per share growth of 6% to 10% excluding dilution from the spins in 2018. We expect to generate adjusted free cash flow conversion near 100%, consistent with 2018, driven by high-quality income growth and continued working capital improvements across the portfolio. We are confident in our businesses in the year ahead, supported by positive long-cycle orders and backlog trends exiting 2018. We have put forth a strong plan with multiple cost levers to pull in the event the recent volatility in the macro environment persists. As Darius mentioned in his opening, we don’t expect a significant impact in 2019 related to tariffs. We have worked very hard to mitigate that across the year for 2019, including addressing the potential impact of the still unannounced List 4, which contemplates a 25% tariff on all remaining items imported from China. We will continue to monitor this throughout the year and react accordingly, as we did in 2018. Some other items to take note of related to our 2019 plan: We are on track to slightly ahead of our plan to eliminate all stranded costs in 2019 related to the spin-offs, with a little over half the costs removed to date. We see the impact of these costs primarily in the net corporate cost line and in the segment margin in Honeywell Building Technologies. Based on the planned reduction in pension income driven by discount rates and assumed asset returns, as well as lower repositioning and other charges driven by the spin indemnity, our total net below-the-line charges are expected to be approximately $80 million in 2019. We will see continued benefits from planned and executed share repurchases. Our 2019 plan assumes a weighted average share count reduction of about 3% year-on-year or 730 million shares. This is based on the 2% share count reduction we executed from 2018 repurchases and at least 1% additional reduction in 2019. You will find additional details on our 2019 plan inputs in the appendix. Based on what we can see today, we expect to be at the upper end of our sales guidance range for organic growth. However, given the many uncertainties in the macro signals, we are planning cautiously in 2019 overall, as it’s difficult to predict short cycle revenues, particularly in the second half of the year, and remember that is still approximately 60% of our business. Let’s turn to Page 9, we have provided initial assessments of our end markets and anticipated organic growth rates in each for 2019. The green arrows indicate that we expect market conditions to improve, while the gray flat arrows indicate that we expect market conditions to remain relatively similar to last year. Starting with aerospace, we expect organic sales to be up strong mid-single digits for the year. We continue to see a robust demand environment in both commercial aerospace and defense. In transport, we expect continued growth in narrow-body production rates. We forecast new business jet deliveries to increase 8% to 10% in 2019 supported by several new aircraft models entering into service, a decline in young used aircraft inventories, and stable used jet prices. Our long-term strategy of securing good positions on the right platforms and building our installed base will serve us well in 2019, particularly with new business jet platforms, where we are well positioned from an OE standpoint. Mid-single-digit flight hours growth will continue to drive aftermarket demand, and we expect further tailwinds from the ADS-B compliance mandate deadline, along with increased demand for connected aircraft solutions across all products. The industry dynamics in defense will be positive in the U.S. and internationally driven by budget growth, but we are planning conservatively for 2019 given the tough year-over-year comparisons following 2018’s banner year where we grew 15% organically in the business. With the favorable margin rate uplift from the former Transportation Systems spin, you should expect segment margins of approximately 24% for the aero business going forward. Now, on to HBT, as a reminder, following the spin of our homes portfolio, HBT’s primary exposure is to non-residential construction. Here we anticipate low single-digit organic sales growth after a challenging 2018 driven by better execution in our operations, better selling strategies and sales coverage, and new product introductions. We expect commercial fire to continue to be strong with the expansion of sales coverage and share gain, and commercial security to improve with the expansion of our channel partner network. The declines we experienced in our China-based air and water business should subside through a combination of stronger market demand and new product introductions for the mid-market and mass mid-market segments. Globally, we see building management solutions growth in both hardware and software driven by high growth region expansion and our investments in software. Honeywell building solutions growth will be driven by government investments in smart cities, social infrastructure, and airport monetization and capacity enhancements, particularly in high growth regions. We also expect continued adoption of connected building solutions on a global basis. You should expect to see margins in the range of about 20.5% in HBT after the spin-off of homes. For PMT, sales are expected to be up low single digits on an organic basis. In oil and gas, petrochemical market growth should remain steady at about 4% driven by demand for packaging and plastics. However, given the volatility in oil prices in the second half of 2018, investments in global mega projects slowed and we see the oil price volatility potentially putting some pressure on upstream spending plans in 2019. Nevertheless, we anticipate similar market dynamics overall for 2018 and the basis for our plan is that oil prices remain in the low to mid $60 per barrel. The refining market should continue to be strong as global demand for cleaner transportation fuels remains. The U.S. natural gas market which is primarily served by our UOP Russell business is expected to improve in 2018. UOP is expected to deliver a strong year driven by its strong backlog, licensing and services growth, and improved market demand in gas processing after a tough 2018. Process solutions will continue to grow across its short cycle businesses as we saw in 2018. This is supported by short cycle backlog which was up over 30% at year-end. Finally, within advanced materials, we expect continued growth from Solstice and our flooring products and better execution in specialty products. Lastly, in SPS, sales are expected to be up in the mid-single digit range. We expect strong e-commerce and warehouse distribution macro trends to continue as our customers seek and implement differentiated warehouse solutions to deal with rising demand. Our orders in Intelligrated in 2018 were up over 30% for the year. In the safety business, we anticipate growth to be driven by new product introductions within gas protection, growth in our core product lines, and high-risk personal protective equipment and new product launches in general safety. In productivity, we expect strong growth driven by backlog conversion in Intelligrated and our sensing business, new mobility product introductions, and expanded software offerings. We are also seeing growth in our life cycle service offerings and Intelligrated, which includes maintenance, technical support, and optimization services. That is combined with the aftermarket capabilities we acquired with Transnorm. Now let’s move on to Slide 10, here you can see the bridge of our 2018 adjusted earnings per share to 2019. The spin impact which we define as the after-tax segment profit contribution from the spins in 2018, nine months of Transportation Systems and 10 months of Homes, net of the estimated impact of the spin indemnity assuming that it was in place all year for 2018 will be a $0.62 headwind to earnings in 2019. As you can see, the majority of our earnings improvement of $0.30 to $0.60 per share will again come from operational gains in our businesses, driven by profitable growth, continued productivity improvements, and incremental benefits from previously funded restructuring. You can see the remaining impacts from the share count, below-the-line items, and tax rate I have already touched on will contribute approximately $0.11 per share. Now let’s move to Slide 11 to discuss our first quarter guidance. For the first quarter, we expect to generate 3% to 5% organic sales growth driven principally by healthy growth in our long cycle businesses with a more cautious tone towards short cycle given the market volatility exiting 2018. With that said, we do anticipate that the commercial aftermarket, our sensing business, productivity products, and commercial fire products will continue to be strong on the short cycle side. We expect segment margins will expand 30 basis points to 60 basis points excluding the spins, consistent with our long-term framework, and 110 basis points to 140 basis points on a reported basis aided by 80 basis points of margin accretion from the absence of the two spins. Our expected adjusted earnings per share range of $1.80 to $1.85 represents growth of 6% to 9% expense. We have $0.25 of earnings dilution from the spins in the first quarter of 2018. Our guide is based on an effective tax rate of 22% and weighted average share count of 737 million shares for the quarter. We feel this will be a very strong start to another successful year for Honeywell in 2019. With that, I would like to turn the call back to Darius, who will wrap up on Slide 12.

Thanks, Greg. We accomplished a lot in 2018 and expect great things in 2019 as well. We delivered on all our commitments, successfully completed spin-offs ahead of schedule and under budget, while still overdriving on the organic growth, margin expansion, earnings per share, and free cash flow targets that we have established at the end of 2017. There is significant room for continued margin expansion on the path to our long-term target of 23%. This is aided by over $450 million of repositioned funds in 2018 and in prior years, which will drive improvements to our cost structure, supply chain, and gross margin in 2019 and beyond. Our balance sheet capacity is strong, and this will provide another lever to drive outperformance in any macro environment. We are continuing our business transformation through several new initiatives, including Honeywell Digital, a unified software business in Honeywell Connected Enterprise, and increased focus on our supply chain. We are excited about 2019 and expect another great year. With that, Mark, let’s move on to Q&A.

Thanks, Darius. Darius and Greg are now available to answer your questions. If possible, please keep your questions to one comment and a quick follow-up so we can address all questions. Marguerite, if you could please open up the line for Q&A.

Yes, thanks. Good morning, Darius and Greg. Nice way to finish up 2018. Darius, I guess on aerospace, just really the momentum continues to be really impressive with organic growth of 10% in each of the past two quarters. Maybe you can talk about the sustainability of the confidence around the biz jet volume for you. I know you mentioned 8% to 10% for this year. And on the 2019 aerospace guidance of mid-single-digit plus, is the defense tough comp really the only headwind you are seeing in 2019, maybe just some color there? Thanks.

Yes. I mean, so first of all, we are very confident about our aero outlook for 2019. Our bookings have been strong, January has been strong. Yes, the comps do get tougher and there is still some short cycle. As people saw in our outlook for Q1 and what I anticipate for Q2, we have every bit of confidence that mid-single-digit is hopefully the bottom, but we don’t know the second half of the year and that’s why the numbers are what they are and potential government shutdowns and budgetary challenges and trade licenses becoming an issue. We hope that doesn’t happen, that just reflects sort of external risk. But overall, there is absolutely nothing that I am concerned about in terms of the bookings, growth rates, and growth we are seeing in that business. It’s pervasive across all three segments, whether they are transport, BGA, or defense and space. So I am very pleased, and it’s not a place where I am going to be losing a lot of sleep in 2019.

Appreciate the color. Thanks. I will leave it to one.

Thanks, Peter.

Thank you and good morning.

Good morning, Sheila.

Good morning, Sheila.

Across your four businesses, you either have a deceleration in organic growth or flattening of sales growth. Just where are you factoring in some conservatism with a slowdown and how are you capturing that low end of the sales growth guidance of 2%?

Yes. I think it’s not so much that I am – we are capturing any conservatism in any of the businesses. I think what we have in our guidance going forward is the fact that more than 50% of our business is short cycle. And what’s different about this year than I think many years in the past is we have many more unknowns, whether it’s Brexit, whether it’s trade negotiations, specific China U.S., whether it’s Fed hikes in terms of what happens, whether it’s government shutdowns, or just a lot of geopolitical unknowns more than usual. It’s our to express a level of confidence around all these unknowns around a little bit wider range than we anticipated, I think would probably indicate a level of knowledge that we currently don’t have. Now having said that, as you can see in our Q1 outlook, we are actually front-end loaded. If anything, we are going to be at the upper half of our revenue growth range in the first half of the year. So actually, we provided that all things go as we think they will to the positive side, I think that hopefully we will be raising the bottom of that range as we move further through the year. But I don’t see really any growth issues in any of our businesses, and we expect all of them to grow in 2019.

Thank you for the color.

Thank you. Good morning everybody.

Good morning John.

Good morning John.

So how did your European businesses do and what’s actually baked I guess on the growth rate? Any color there and what’s baked into your guidance for 2019 for Europe?

Yes. John, Europe continued to be strong. In the fourth quarter, our European businesses were up 6%, which capped off 4% organic growth for the year. We are still seeing good strong growth there, and it’s pretty broad-based, to be honest, SPS is probably the strongest of the bunch, but each of the businesses is growing in the mid-single digits or higher in Europe at this stage. And as we look forward, we expect that’s probably going to be still low mid-single-digits - low to mid-single digits. But as Darius mentioned, clearly there are concerns out there. Brexit in particular will have some sort of an answer in the next 60 days as to what occurs with that and we have got a meaningful size business in the UK. So definitely back to the concern aspects of macro signals, Europe is an area where we are waiting to see what’s going to happen with Brexit in particular and what impacts that may have on us.

But Greg, that performance, the 6% that’s pretty good relative to what other companies have been putting up in Europe and given the slowing in Germany itself, is there a mix issue that’s benefiting Honeywell or new products? What do you think is attributable to why you are doing?

Well, again I would tell you that each of the businesses is performing well. So it’s not like one is - I mean SPS being the strongest of the bunch, but each of them is up mid-single digits for the year. So it’s the strength across our entire portfolio.

And then as a follow-up, last year you guys put up a 3% to 5% core growth target. Darius, you flagged accelerating core growth as your number one priority. Now I understand the economics and sensitivity is around the 2 to 5 this year, but I am just trying to think big picture. What are you and how are you actually going to tackle driving Honeywell towards more of a mid-single-digit type of accelerating core growth over time? Is that meaning to go after like in Darius that pie, the 40% that’s not growing at 5% plus, or do you kick start building technologies which has been sort of a problem for a little while, or more M&A? I mean, what, maybe just walk us through a little bit of your own thoughts and maybe horizon too?

Yes. John, it’s any one thing, it’s probably all of those. I mean it starts with portfolio and we think that based upon what we have done here, we’ve got more growth-oriented and less cyclical portfolio that’s certainly part of it. Secondly, which is our tremendous focus on product development and we are launching a whole new process called Z21 which basically is going to reduce our innovation cycle times in half, deploying more capital to R&D because my strong belief is that part of any growth story is got to be a strong innovation engine, and that’s something that we are trying to create. Continued focus on high growth regions, I mean we are winning in places like China and India. Even though the back half of the year China was a little bit slower, we grew nearly double digit in China this year, so that continues to be our success story. Our focus on commercial excellence from our sales force is working where we are getting better productivity out of sales force, better performance. It’s never only one thing. We are working all those levers. As you can see in the growth rate that we have demonstrated this is granted the markets are pretty good, but certainly involve the self-help that we have administered over the last couple of years. There is no way we would be in that range, both in 2018 and what we are projecting for 2019.

Just lastly, India has been a real success story, I think you flagged it again. Would you consider putting more resources or doing M&A in India in particular? Region-wise, it’s much smaller than China, but it does seem to have gained a lot of traction for Honeywell. I’m just wondering – I’m thinking about it?

Yes. We have had a lot of focus on India. I mean to give you a perspective for India, our growth in India in Q4 was 27%, so that’s tremendous. We have a big footprint there not just from our business perspective; we have our engineering centers there with over 10,000 people. So, we feel very comfortable with our presence there. The opportunities now to go after the mass mid-market segment and that’s actually one of our core initiatives for 2019 and beyond. It's just not to play in the top tier, the mid-tier, but actually having a greater level of participation in the mid-market segment. So India is definitely one of the economies which we think is going to be a great story for us in 2019 and beyond.

Thanks very much.

Thanks John.

Thanks. Good morning and great results.

Thank you.

Good morning and thank you.

Two questions. First, just big picture M&A pipeline, what can you say about it? Is it as healthy as it’s ever been? Or anything large that you guys are looking at? Just any commentary on the nature of the pipeline right now?

Yes. I would say large probably not, because I think that we are still very much focused on bolt-ons and not mega deals. I would say that is and will continue to be our focus. We got a deal done in Q4, which was good. Now, Transnorm was a deal of size, the kind of size we like, it was about $0.5 billion to capitalize on that. But to be honest, on my commentary, the pipeline continues to be good and we are working on a deal that recently fell through just because although there has been a little bit of a correction in the market as we saw particularly in December, that didn’t really change expectations of lots of sellers. So we continue to struggle with valuations and the expectations, which there is a very pronounced shift up and it’s got to work in our financial model. So we continue to be very active. The pipeline is good, but I also want to tell you that we are realistic because we are cautious buyers and we don’t like to overpay. We have to be certain about what we are buying and make sure that generates the right level of returns for our shareholders.

Appreciate it. And second question was just if there are any supplier constraints you are seeing on the aerospace side? I remember last year you had some aftermarket constraints. Are you seeing any pinch points emerge?

Yes, no, the answer to that is yes. And I would say there are some pinch points on the supply chain emerging, not just in aerospace, those are there and prevalent particularly in areas like casting etcetera, but we see similar challenges in smart energy and even in some elements of electronic supply chain. So the pinch points on the supply chain are real. They are there. We are working through those and hope to resolve those. Frankly speaking, our results could have been even better had some of those pinch points not been there.

Thanks a lot, guys.

Sure.

Hi, good morning.

Good morning.

Good morning. Maybe just a first question around SPS, you grew around 10% plus organically in 2018. Your Slide 9 shows about mid-single-digit growth this year amidst sort of accelerating market arrow. So is that guidance based on anything you are seeing in the short cycle businesses within SPS or it’s simply about tough comps and the usual macro aspects that you had mentioned earlier?

Yes. Thanks, Julian. I think it’s a little bit of both. I mean, obviously, we continue to be very excited about Intelligrated and the double-digit growth rates that we achieved this year and with a very strong backlog expect that to continue to be strong. Our retail business, though not large, grew over 20% in 2018, so that’s probably going to dampen a bit with some of those comps. We still feel very positive about productivity products and sensing and IoT with the new product introductions that they have, but those and the industrial safety businesses, they are short cycle. When those things change, they can change quickly. So I think that’s where we are trying to be a bit cautious because we have seen it happen before in terms of the speed at which the short cycle can turn on us. So it’s not a matter of having seen it so far and being concerned about anything with our business specifically, but I would just call it a bit more caution with the environment we are in.

Yes, just to add to that, Julian. Majority of that business is actually short cycle. Intelligrated is about the only business that isn’t short cycle. So based on what we are seeing now and today and our guidance for Q1, there are no warning signs for us here where we are positioned is just uncertainty, particularly in the second half of the year.

Thanks. And then my second question around PMT, any more color you would like to provide on how you see the cadence of the large project activity within HPS in terms of the scale of any delays? And also UOP, how you are gauging the volatility there at the moment?

Yes. No, I like the greater stability. What we saw in Q4 a little bit was a bit of a pause on the order rates just around the volatility of oil, but given the right direction movement, we are much more bullish. But despite that, I just want to quote you a couple of numbers from Q4 and why I am bullish on PMT for this year. First of all, our HPS quarter rates were up double-digit. Second of all, our UOP backlog is up 8%. So I am very optimistic around PMT performance for 2019. Probably the one segment that was pretty soft was in our advanced materials business, the electronics chemicals, which electronics has been a bit weaker, some of the other companies in that segment announcing and we saw that in our electronics chemicals business. So that’s probably the only sort of minus that we saw in Q4, but overall, book to backlog, the order rates were good. To be honest, especially in HPS, our global mega projects log and quote are really strong; we even booked a lot of those orders in Q4. I feel pretty good about PMT for 2019.

Great. Thank you.

Thanks, Julian.

Thank you.

Hey, guys. Thanks for fitting me in.

My pleasure.

Good morning.

Just wanted to ask about the not – we are not sensitive or anything like that. You mentioned kind of the next phase of the transformation and some of the footprint stuff that you are looking into. Is that something that you will be able to kind of quantify more and speak to at this year’s Investor day or is that going to remain – I don’t know what you put at the bottom of the slide like you are consulting with people or something like that about what the number is going to be? When we kind of hear more about that and how big could that opportunity be?

We are not putting you in the middle anymore on the call. You wind up grumpy, Steve. No, the short answer is yes on Investor Day, we are going to – it’s obviously going to be a segment of that presentation. We are going to give you a lot more detail, but I just want to be very clear that the next phase of the transformation is not just the ISC transformation. That’s a very big part of it, but we kind of talked a little bit about this deck about the three legs of the stool, which are ISC transformation, Honeywell Digital, and Honeywell Connected Enterprises. That’s sort of the next phase of the evolution of Honeywell. One of those three is a business and the next two are going for at least the next 3 to 4 years. This is going to give us a lot more tailwinds in terms of margins, cash generation, more efficiency, working capital, simplifications, better planning, lower capital intensity, a lot of benefits. We are going to provide a lot more color on that at our Investor Day.

Are you going to give something – are you going to give something tangible or will it be kind of like directional arrows? I mean, sometimes the stuff can, it sounds great, but ultimately, it doesn’t like filter down at the bottom line for other companies. Just curious if you are going to like give something tangible, numbers wise?

So Steve, I mean, oftentimes we get asked about how long of a runway do we have for margin expansion. To me, this is continuing to fill the portfolio of things that keeps that runway alive and well. That’s kind of the way I am thinking about all of these things are going to continue to contribute to our ability to drive that margin expansion well beyond 2019.

Yes, that’s a very good point, because what the gist was yes, the way this was organized before, it still has sort of core reporting into the SPG Presidents in Que, but we gave just a lot more authority and control to Que just because when you’re running a $10 billion or $12 billion business, and you have something that’s a fraction of that, it requires a lot of time, attention, strategy changes, agility; it’s tough to manage that.

Right. No, that makes sense and that’s helpful. Just a follow-on question really just on Intelligrated and some of the assets you’ve bought around it, are you close to being at the point where you can go-to-market together with some of these products globally? How long will it take? I mean, just particularly given how regionalized some of the warehouse offerings are?

Yes, the short answer is now. We are ready as a matter of fact, we are quoting globally and as excited as we are about the North American market, we anticipate being securing some jobs both in Asia this year as well as Europe and we’re ready. We’ve invested from an R&D perspective; the Transnorm acquisition is going to further help, but you should expect us to get some more momentum here on a global level in 2019 and a lot of those solutions are finished.

Hi, good morning guys.

Good morning, Scott.

Hi, morning, Scott.

Hi, so much of the future story of Honeywell seems to relate to software in some way, shape, or form and I am a little intrigued by HCE in general. Can you help us understand how centralized is the software development effort, and whenever I hear about centralized software development, it always makes me want to cry, but worse, but how do you still stay close to the customer and the businesses themselves and still have this type of a centralized effort and ensure that you’re actually getting a return on the investment?

Yes. So maybe let me just maybe explain that when we say centralized, that means sort of the platform, the IT stack that we call Sentience. That's what's centralized, that all of our connected enterprises use, but then the actual analytics to solutions provided, those are vertical-oriented and the way we approach this is essentially each of those businesses, end customer-focused business, so whether it’s connected aircraft, connected plant, connected buildings, we developed and the MV0, MV1 which was called single-pane of glass which has a lot of value drivers and solutions for end customers. We typically partner with a few key anchor customers to help us iterate and drive and optimize the solution, so we’re very close to the end customers. As a matter of fact, we develop a lot of these solutions with the end customers, but we also don’t want to drive customization, but rather standardization, so don’t think about this as something that’s insular and doesn’t work with end customers; that’s not the case. What we want to do is have end customer intimacy while driving leverage to the IT stack called Sentience. That’s really the core of the spread.

And maybe if I could just add to that with the leadership from Que, she is applying that customer go-to-market approach across all of those connected enterprises, such that each one of them individually isn’t having to develop those muscles and skill sets independently. While these businesses are still embedded inside of the four SPGs, those four SPG Presidents wouldn’t possibly be able to give it the amount of time and attention that Que will apply as the President of HCE, so centralized really means focus much more so than corporate.

Yes, that’s a very good point because what the gist was yes, the way this was organized before it still has sort of core reporting into the SPG Presidents in Que but we gave just a lot more authority and control to Que just because when you’re running a $10 billion or $12 billion business and you have something that’s a fraction of that, it requires a lot of time, attention, strategy changes, agility; it’s tough to manage that.

Right. No, that makes sense and that’s helpful and just a follow-on question really just on Intelligrated and some of the assets you’ve bought around it, are you close to being at the point where you can go-to-market together with some of these products globally? How long will it take? I mean, just particularly given how regionalized, some of the warehouse offerings are?

Yes, the short answer is now. We are ready as a matter of fact, we are quoting globally and as excited as we are about the North American market, we anticipate being securing some jobs both in Asia this year as well as Europe and we’re ready, we’ve invested from an R&D perspective, the Transnorm acquisition is going to further help, but you should expect us to get some more momentum here on a global level in 2019 and a lot of those solutions are finished.

Hi, guys. Good morning.

Good morning, Andrew.

Good morning.

Just a question on defense, just because it was so strong. Can you give us more visibility into how sustainable some of the developments that you had in 4Q and into the first half? I would imagine F-35 ramp is sustainable; you mentioned Space and Defense, I think you mentioned aftermarket. If you could just walk us through a visibility for the next six months?. Thank you.

Well, I would tell you, so as you mentioned, our Defense business has been growing mid-teens all four quarters of 2018, and as we look out for the next six months, the backlog growth there is also very strong; it’s strong double digits over 20% in Defense and Space. So for the next six months, as you mentioned, I think our visibility is very good to continued strength in that area.

And just maybe on China, could you just describe more color on specific markets and just your top-down view on China’s economy? And how do you think it will progress through the year just because you have such a big business there and you’ve been very knowledgeable?

Yes, it’s been as I mentioned, our China business has been up nearly double-digit just shy of that for the year so another solid growth here, a bit of a slowing in, I would say in Q4, but there are some very clear reasons, and we understood that slowing so we kind of take it segment by segment. If we think about SPS, it was terrific; it was up double-digit growth in China, no slowing, actually if anything, things are accelerating in PMT; we had some tough comps, we understood that and expected that. We had some big both orders and revenue growth, so we expected that nothing unusual. We’ve doubled the business in UOP in the last two years so the comps are not small. Yes, exactly. So nothing out of the world of expectation for HBT; as you know, we’ve had some challenges with the air and water segment, and frankly some of our distributor partners got a little bit ahead of themselves, given the robust growth that we saw in 2017, and that’s been a bit of a challenge for us all year. But we expect that to grow again in 2019, so we think that’s going to be behind us. With Aero, we had some cash collection challenges, which limited our shipments because our backlog was actually better than the revenues would indicate. So all in all, we’re not building in a tremendous year in China, not kind of the usual Honeywell strong double-digit growth in China, where we think it’s going to be a little bit slow. But all of that is reflected in our guidance, and we expect to grow in China in 2019 for certain. How much that’s going to be? Well, we will see all-in-all; I feel pretty good about how the businesses are positioned.

Terrific. Appreciate it. Thanks so much.

Thanks, Andrew.

Thanks. Good morning, guys, and thanks for truly fitting me in.

Welcome.

Thanks. A lot of impact so obviously, look, you guys got a lot accomplished in 2018; congratulations.

Thank you.

I think one of the areas that we haven’t really focused a lot on is that specialty products business. So maybe just a broader strategic question there; I think that business is tied to semis, electronics. How do you think about that business longer term? You got you did a lot in 2018. This business seems to be a little bit more cyclical versus the rest of your portfolio, so maybe some thoughts around that, that to start would be great.

Yes, I mean, yes, there is some cyclicality. There is also some stability, I mean, we have our Spectra business there, which is doing quite well, our Aclar business, which is acyclical, our Electronic Materials business, which is more cyclical, so it’s a bit of a mixed bag. Probably we’re given some of the challenges in the Electronics segment probably on the lower end of the curve than we are, but I think like anything; I mean we’re we like a lot of those businesses; they perform for us. But as always, we’re and as we pointed out during our speaker notes today, we’re always assessing everything. I think some of the big things that we wanted to do, we didn’t think that fit our portfolio within 2018 but everything is always under assessment; we’ve never done, and we always want to kind of add and also subtract potentially, so I don’t, there is no specific update to the SP business, but like I said, we’re always assessing and we’re going to do what fits our portfolio.

Yes, that’s fair. Darius is it fair to think of that business though as being mostly semi-CapEx-oriented?

It’s a mixed bag. I mean, there is really a variety of different businesses, and that’s why it’s kind of tough to talk about sort of any given one trend, because you have electronic materials, you have some Defense spend, and you have healthcare in there, you have consumer goods. So, I mean you have an entire variety of end markets that there’s exposure in specialty products, so it’s tough to say what that total blend ends up to. But yes, there’s sort of an eclectic mix of various end markets.

Okay. Yes, fair enough. And just one quick one Greg, you mentioned the stranded costs earlier; I think the number I had was roughly around like $340, $350 million.

That’s right yes.

So, the timing of those costs, I mean, does it, what’s remaining in 2019? First, can you quantify what’s left in 2019? Secondly, will we get through those costs through the first half of the year? Are they going to be kind of linear as the year progresses?

Yes. So, we have taken actions that we will have eliminated about half of those costs already as we exited 2018 and as you saw in the fourth quarter, with the corporate number being flat to slightly up, that reflects the first quarter of not having the ability to allocate about $45 million or $50 million to those two spin businesses that are now gone. So that’s a little bit of why you saw maybe a heavier number than you might have expected but we expect that to come down over the course of the year from the first to the fourth quarter, and we will exit the fourth quarter at a run rate by which all of those costs will be gone. So that’s you should expect to see a bit of a stair-step down and again, keep in mind that two-thirds is in our net corporate costs, about a third of that was sitting in HPT, so you’re not going to see a $300 million number per se but it’s reflective of a step down as we go through the year.

Got it. Helpful, guys. Thank you.

Thanks, Joe.

Thank you.

Hi, thanks. Also a sincere thanks for squeezing me. I certainly don’t expect to go before Steve, but possibly before Joe next time anyways, a question on non-res. A lot of mixed messages, people talking about low single digits but yes, they appeared to have talked about very robust commercial projects. Just wondering what you’re seeing in that space; is that a very vibrant market or is it just kind of GDP limp?

Okay. I mean, if you look at our HPS business, which is probably the best indication of kind of the commercial activity up double-digit bookings in Q4, so actually very, very strong. We also want to make sure we captured a service, that’s the opportunity that business is stabilizing. I think Vimal and the team have put the business on the right path. We’re seeing good signs and sort of the secret to the growth there is revitalization of the NPD pipeline, and I see a lot of good things in the various segments, whether it’s building products, whether it’s fire, whether it’s our BMS systems, so we actually expect a pretty good year. And if you take HPS as a leading indicator, that’s also been a pretty good sign in Q4. So we’re a little bit cautious in the outlook but given the stability that we have now, and it should be a nice recovery story for us in 2019.