Honeywell International Inc (HON) — Q3 2023 Earnings Call Transcript

Good morning, and welcome to Honeywell's third quarter 2023 earnings conference call. On the call with me today are Chief Executive Officer, Vimal Kapur; and Senior Vice President and Chief Financial Officer, Greg Lewis. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information that may be of interest or material to our investors on this website. Our discussion today includes forward-looking statements that are based on our best view of the world and of our businesses as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings. This morning, we will review our financial results for the third quarter, share our guidance for the fourth quarter and full year 2023, and provide some preliminary thoughts on 2024. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to our CEO, Vimal Kapur.

Thank you, Sean, and good morning, everyone. Let's begin on Slide 2. First off, we are saddened by recent events in the Middle East. We are deeply upset by the loss of innocent lives. Our number one priority continues to be the safety and security of our employees and partners in the regions and responding to their immediate needs. Coming to the third quarter, it was another strong quarter for Honeywell in which we delivered all of our financial commitments. We delivered adjusted earnings per share of $2.27, $0.02 above the high end of our guidance range. That was up 1% year-over-year or up 7% excluding a $0.14 non-cash pension headwind. Disciplined execution of our rigorous operating principles in the face of ongoing macroeconomic challenges continues to serve us and our stakeholders well. Third quarter sales were up 2% year-over-year, driven by double-digit growth in our commercial aviation, defense and space, and process solutions. Our Aerospace business continues to be a bright spot in our portfolio, driving meaningful commercial success. Our already robust backlog grew to a new record of $31.4 billion in the third quarter, up 8% year-over-year and 3% sequentially due to strength in Aero and other long-cycle businesses. Orders grew double digits in the quarter due to tremendous demand generation in Aero where orders were up 30% year-over-year. Honeywell Building Technologies and Safety and Productivity Solutions ended the quarter with flat year-over-year orders with book-to-bill up around 1, an indication that we are seeing a short cycle end market beginning to stabilize. Intelligrated was another positive indicator in the third quarter as we converted on our robust pipeline to drive double-digit year-over-year orders growth and over 50% sequential orders growth. PMT was down mid-single digits on unfavorable comparisons to last year's peak in advanced materials orders. Our segment margin expanded 80 basis points year-over-year, achieving the high end of our guidance range, led by HBT up 110 basis points. We continue to see business mix improvement due to strong growth in our higher-margin Aerospace business as well as ongoing gains from productivity. Free cash flow was $1.6 billion in the third quarter with over 100% cash conversion and 17% free cash flow margin, in line with our expectations. Greg will walk you through the free cash flow drivers in more details in few minutes. We remain committed to our capital deployment strategy and we put our robust balance sheet to work in the third quarter by deploying $2 billion through dividends, M&A, growth CapEx, and share repurchases. We bought back 5.3 million shares in the quarter, reducing our weighted average share count to 667 million, a step-up due to highly attractive valuation and our ongoing confidence in Honeywell's performance. We remain on track with our commitment to deploy capital to high-return categories and generate compelling value for Honeywell shareholders. As always, we continue to execute on our proven value creation framework, effectively managing through ongoing external difficulties and delivering on our commitments. Looking forward, our consistent adherence to our rigorous operating principles, underpinned by our Accelerator operating system, continued strength in our long-cycle end markets, and our technologically differentiated portfolio of solutions, should provide investors with comfort that we will remain highly resilient, perform in all economic cycles, and drive shareholder value for years to come. Next, let's turn to Slide 3 to review some of our exciting recent wins. Before I hand it off to Greg, let me briefly highlight some recent announcements that demonstrate our innovation across our portfolio. In Aero, we recently won a key new customer in the air transport space that will increase our APU and avionics installed base on roughly 200 new aircraft over the next five years. This win helps demonstrate the strength in our Aerospace portfolio regardless of the market conditions. In the energy space, we announced a partnership with SK E&S to deploy our UOP carbon capture technology at a natural gas power plant in Korea. Our technology will help enable the capture of greater than 95% of the carbon dioxide produced in the plant. We remain excited about the win rates across our sustainable technology solution business as we help pave the way for the world's great energy transition. Finally, our Forge for Building software was recently implemented in One Bangkok, the city's largest integrated district. This partnership with Frasers and TCC Technologies will foster and expanding adoption of our software offerings across business sectors as we support the achievement of sustainability goals. Our core focus as a company continues to be on aerospace, sustainability, and automation. Our recent wins are closely aligned to these initiatives and are proof that we continue to drive innovation across our portfolio, did not only see profitable market outcomes, but also position Honeywell to address the world's toughest challenges. Now, let me turn it over to Greg on Slide 4 to discuss our third quarter results in more detail as well as provide our views on guidance.

Thank you, Vimal, and good morning, everyone. As Vimal outlined, we delivered another strong quarter in a dynamic macro environment. Third quarter sales grew 2% organically, led by double-digit organic sales growth in commercial aviation, defense and space, and process solutions. Commercial success in aerospace, which drove 18% year-over-year growth in the third quarter, was once again a bright spot for Honeywell. Our short-cycle businesses continued to show signs of stabilizing sequentially. Encouraging fundamentals persist across most of our PMT end markets, which led to another quarter of 3% year-over-year growth despite more challenging comps as we entered the second half. As expected, our long-cycle warehouse automation business remains around trough levels, which led to an overall volume decline of 1% for the quarter. However, excluding SPS, volumes were up 6% across the portfolio. Our backlog remains at a record level, ending the third quarter at $31.4 billion, up 8% year-over-year, driven by double-digit orders growth across our long-cycle businesses. Sequential improvements in supply chain constraints led to past due backlog reductions in our short-cycle businesses, while demand continues to outpace output in Aero, a bullish signal of the underlying robustness of that business. An improving cost position and favorable business mix due to significant growth in our high-margin Aerospace business, among others, enabled us to expand segment margins by 80 basis points year-over-year to 22.6% and achieve the high end of our guidance. On cash, we generated $1.6 billion of free cash flow, down 18% year-over-year, due to the timing of cash tax payments and higher net working capital as strong Aerospace sales performance drove up our receivables balances year-over-year, so we improved collections on our past due balances. Throughout this quarter, we accelerated our share buyback program, more than doubling the amount of shares repurchased compared to the second quarter. We feel great about the future of Honeywell and believe in our next leg of transformation and we'll continue to opportunistically buy Honeywell shares at attractive valuations. Now, let's spend a few minutes on the third quarter performance by business. Aerospace sales for the third quarter were up 18% organically with double-digit growth in both commercial aviation and defense and space, the strongest growth quarter for Aero in over a decade. Commercial aviation growth was led by strength in the air transport aftermarket where increased flight activity globally continues to drive demand. Commercial original equipment also grew in the quarter on increased deliveries to both business and general aviation and air transport customers. Defense and space sales inflected in 3Q, growing 18% organically, and orders grew over 30% year-over-year for the second consecutive quarter as we see the impact of increased global focus on national security come through. While the aerospace supply chain remains constrained, we are continuing to see modest sequential improvements, which enabled us to increase our output and convert our record backlog into sales growth. For example, this was the third consecutive quarter with a 20% year-over-year increase in original equipment and spare shipments. While these gains in output are encouraging and leading to sales acceleration, demand continues to outpace supply. This is evidenced by our Aerospace book-to-bill of around 1.3 in the third quarter. Segment margins in Aero were flat year-over-year as increased volume leverage and commercial excellence offset cost inflation and mixed pressure in our original equipment, as expected. Performance Materials and Technologies sales grew 3% organically in the third quarter, led by HPS, which saw double-digit growth for the fourth consecutive quarter. Process solutions sales grew 11% organically, driven by continued strength in our projects business and lifecycle solutions and services. In UOP, sales grew 6% organically, led by gas processing solutions and petrochemical catalyst shipments. We continue to see robust demand in our sustainable technology solutions business within UOP as orders grew triple digits for the third consecutive quarter and sales grew at strong double-digit rates. In advanced materials, sales decreased 8% organically, driven primarily due to the continued expected macro-driven softness in our electronics, chemicals, and life science businesses and challenging year-over-year comps. Sequentially, segment margins expanded 40 basis points, while on a year-on-year basis, segment margins contracted 50 basis points to 22.1% as a result of lower volumes in advanced materials. Safety and Productivity Solutions sales decreased 25% organically in the quarter, primarily driven by lower volumes in warehouse and workflow solutions and productivity solutions and services. The projects portion of our Intelligrated business is around trough levels in the current low-investment warehouse automation environment, but our pipeline remains robust, and successful execution of our sales strategies resulted in double-digit year-over-year growth and over 50% sequential growth in orders in the third quarter. Additionally, the aftermarket services portion of the business continues to deliver solid double-digit sales growth. In productivity solutions and services, we are working through the effects of distributor de-stocking, but believe we are nearing the end of that cycle. Sensing and safety technologies was also impacted by short-cycle softness, but this business continues to remain relatively resilient. Segment margin in SPS contracted 120 basis points to 14.5% as a result of volume de-leverage, partially offset by our continued operational improvements and commercial excellence. Turning to Honeywell Building Technologies, sales were flat year-over-year in the quarter. Our long-cycle building solutions business continues to outpace our short-cycle building products. Building solutions grew 4% organically, led by high-single-digit growth in building projects, driven by strong execution, particularly in energy projects. Orders for building projects were also substantial in the quarter, up nearly 20% year-over-year, resulting in a book-to-bill ratio of approximately 1.2. On the product side, sales decreased modestly as a result of relatively soft demand for security products. Segment profit remained a bright spot for the business, continuing to grow as a result of productivity actions and commercial excellence. All in, HBT's segment margin expanded 110 basis points to 25.2%. Growth across the portfolio continues to be supported by accretive results in Honeywell Connected Enterprise, providing further evidence of Honeywell's strong software franchise across our businesses. Overall, organic growth of approximately 20% in the third quarter was supported by strength in connected industrial, connected buildings, cyber security, and connected aircraft. Orders growth above 20% in the quarter remains a powerful indicator of the continued robust demand for HCE offerings. In October, we held the latest installment of Honeywell Connect, where we conducted 29 technology demonstrations to a group of 200 customers. We launched three new products, featured several product enhancements, and showcased advanced intelligence solutions using AI and generative AI technology. One highlight from the event was the introduction of a suite of cybersecurity solutions, including Honeywell Forge Cybersecurity Plus, Cyber Insights, and Cyber Watch, supported by the acquisition of SCADAfence in August, leading to new sales opportunities in as early as the fourth quarter. Overall, this was a great result for Honeywell. Our operational execution enabled us to grow third quarter earnings per share to $2.27, up 1% year-over-year on an adjusted basis. Segment profit drove $0.15 of improvement in earnings per share, the main driver of our EPS growth. Excluding the $0.14 pension headwind, EPS was $2.41, up 7% year-over-year. A bridge for adjusted EPS from 3Q '22 to 3Q '23 can be found in the appendix of this presentation with all the details. Finally, as Vimal mentioned earlier, we continue to leverage our healthy balance sheet, deploying $2 billion in the quarter, bringing the year-to-date total to $5.7 billion as we execute on our capital deployment strategy. So, overall, Honeywell's operating playbook continues to deliver strong results, and our best-in-class Honeywell value creation framework will enable us to drive compelling growth in earnings and cash for quarters to come. Now, let's turn to Slide 5 to discuss our fourth quarter and full year guidance. At this stage in the year and given the incrementally more challenging macro backdrop with geopolitics and interest rate dynamics, we're narrowing our full year guidance ranges for sales and EPS while increasing the midpoints of our segment margin expectations. Our demand profile remains healthy with record backlog and favorable orders performance. While we continue to monitor the timing of short-cycle recovery, we are confident in our ability to deliver on our commitments. For the fourth quarter, we anticipate sales to be between $9.6 billion and $9.9 billion, up 3% to 7% organically, driven by continued strength in commercial aviation, defense and space, process solutions, and UOP. We anticipate organic sales growth in Aero, PMT, and HBT in the fourth quarter. For the full year, we're raising the low end of our previous sales guidance by $100 million and lowering the high end by $200 million for a new range of $36.8 billion to $37.1 billion, representing 4% to 5% organic growth for the year. This reflects continued solid execution in our long-cycle business, while we awaited demand acceleration in some of our short-cycle businesses. Turning to segment margin, we anticipate the fourth quarter to be between 22.9% and 23.2%, flat to up 30 basis points year-over-year and up sequentially as we continue to benefit from improving business mix and our productivity actions. For the full year, we are also raising the low end of our segment margin guidance by 10 basis points for a new range of 22.5% to 22.6%, representing 80 to 90 basis points of year-over-year expansion. This improvement is driven by HBT, SPS, and PMT, which are all expected to expand margin. Now, let me walk you through the expectations for each segment in a little bit more detail. Looking ahead for Aerospace, we're very pleased with the continued improvements in the aero supply chain that are allowing us to capitalize on our record backlog. In Q4, we anticipate another quarter of strong sales growth, both year-over-year and sequentially, in commercial aviation and defense and space. In commercial aviation, we expect most of the sequential growth to come through increased original equipment volumes, though commercial aftermarket will also deliver healthy year-over-year growth with demand driven by continued improvement in air transport flight hours. In defense and space, we are coming off back-to-back quarters of 30%-plus orders growth, which has bolstered our already sizable backlog. And we see another quarter of double-digit growth to end the year. With our growth momentum from the third quarter carrying over into Q4, we now expect Aerospace sales to be up mid-teens for the year. With much of the incremental sales in this upgrade coming from increased original equipment shipments, as we capture a greater installed base, we expect Aero margins to be flat to modestly down for the year. In Performance Materials and Technologies, our strong execution and the encouraging outlook in our end markets will continue to drive favorable growth. For the fourth quarter, we expect our typical solid finish to the year, leading to year-over-year and sequential sales growth. Growth will be led by process solutions on strength in projects and aftermarket services. In UOP, our growth outlook is supported by robust demand for petrochemical and refining catalysts. The sustainability technology solutions business will continue to grow as we capitalize on legislation-backed demand. For advanced materials, we expect continued demand for fluorine products, a rebound in life sciences end markets, and an improvement in our electronics and chemicals business, supportive of sequential growth. For the full year, we continue to expect high-single-digit sales growth in PMT. Due to typical catalyst seasonality, we still expect meaningful sequential and year-over-year margin expansion in the fourth quarter, resulting in modest segment margin expansion for the year for PMT. In Safety and Productivity Solutions, our outlook continues to be impacted by the current low levels of investment in new warehouse capacity and distributor destocking. However, the impact on our financials is declining, creating stabilization and signs of potential return to growth in the coming quarters. For the fourth quarter, we expect these effects to lead to sales that are roughly flat sequentially, down organically, but to a lesser degree than earlier in the year. Orders will grow sequentially and year-over-year in the fourth quarter as we build on momentum from this quarter. While new warehouse investment remains challenged, customers continue to upgrade their existing infrastructure, which will lead to another quarter of double-digit growth for the aftermarket services portion of our Intelligrated business. For the full year, we now expect sales to be down approximately 20% as the SPS portfolio bounces along the bottom of the cycle. However, the productivity actions and operational improvements we have made this year will still enable us to expand margins solidly for the year. In Building Technologies, we were prudent with our posture at the start of the year as we faced unprecedented central bank tightening cycle and uncertain demand environment. While the operating backdrop remains difficult, we are encouraged by the sequential orders progression we saw each month throughout 3Q, including double-digit products order growth in the month of September. For the fourth quarter, we expect modest sequential sales improvement from our Q2 and Q3 levels, with growth continuing to be led by our long-cycle building solutions business. The supply chain is improving each quarter, and we expect to make further progress on converting our past due backlog into sales. We're also encouraged by the resiliency we are seeing in verticals such as airports, government, and education, and expect institutional demand to provide support amid commercial softness. We project HBT sales to be up low-single digits for the year, with commercial and operational excellence enabling HBT to be our largest margin expander in 2023. Now, moving on to our other key guidance metrics. We anticipate net below the line impact to be between negative $105 million to negative $155 million in the fourth quarter and between negative $525 million and negative $575 million for the full year. This guidance includes a range of repositioning between $45 million and $85 million in the fourth quarter and between $260 million and $300 million for the full year as we continue to invest in high-return projects to support our future growth and productivity. We expect the adjusted effective tax rate to be around 19% in the fourth quarter and around 21% for the full year, unchanged from our previous guidance. We anticipate average share count to be around 664 million shares in the fourth quarter and around 669 million shares for the full year as we continue to reduce our share count through opportunistic buybacks. As a result of these inputs, we anticipate adjusted earnings per share to be between $2.53 and $2.63 for the fourth quarter, flat to up 4% year-over-year. Excluding pension headwinds, fourth quarter EPS growth would be up 6% to 10%. For the full year, we're nearing both ends of our EPS guidance ranges by $0.05 for a new range of $9.10 to $9.20, up 4% to 5% year-over-year, holding the midpoint of our prior guide. Excluding pension headwinds, EPS growth would be up 10% to 11% for the year. On cash, we continue to expect to meet our original free cash flow guidance of $3.9 billion to $4.3 billion in 2023, or $5.1 billion to $5.5 billion excluding the net impact of settlements, driven by stronger collections and inventory management. Higher cash tax outlays in the third quarter will be offset by more favorable cash outlook in the fourth quarter giving us confidence in our full year guidance. So, to summarize, we're narrowing our full year guidance ranges for sales and EPS while raising the midpoint of our segment margin expectations based on our confidence and the ability to successfully deliver results in a fluid operating environment. Before turning back to Vimal, let's turn to the next page and discuss our preliminary thoughts for 2024. While next year's environment is shaping up to be just as volatile as the last few years, our proven track record of navigating an uncertain macro backdrop should give investors confidence in our ability to execute on our commitments. We have a unique set of operating principles that enable us to move quickly and decisively to drive growth, protect margins, ensure liquidity, and position ourselves well to deliver in any environment. Our end market exposures remain favorable into 2024, particularly in aerospace and energy. We expect continued commercial aviation fleet growth and replenishment, increased domestic and international defense investment amid geopolitical uncertainty, heightened focus on automation due to labor scarcity, increased energy demands and intensifying decarbonization goals, accelerating the need for technologies enabling the energy transition and increased infrastructure spending. All of these compelling vertical tailwinds as well as ongoing customer demand to help enable digitalization give us confidence that all four of our reconstituted businesses will deliver growth next year. The timing of an eventual recovery in short cycle is less certain and will be a swing variable to our sales outcome. We have a strong setup that will drive growth in sales, margin, and earnings in 2024 within our long-term financial framework. We expect organic growth to be led by our long-cycle businesses due to record-level demand and backlog in 2023. Additionally, our focus on new product innovation is yielding benefits. We believe extending our success in delivering new solutions to our existing vast installed base, as well as the commercial efforts driving greater penetration of our current set of technologies to new markets to help enable robust organic growth. That, coupled with our ongoing leadership in high-growth regions and the strength of our software franchise, gives us confidence in the top-line. We also expect supply chains to continue to improve gradually in Aero throughout next year. For overall Honeywell, 2024 margins will benefit from improving business mix, continued benefits from price costs, and productivity actions, including our precision focus on reducing raw material costs as well as implementing AI into our development and production. We will continue our investments in R&D and growth-oriented capital expenditures and remain keenly focused on creating uniquely innovative, differentiated, recession-proof technologies to address the world's toughest automation, digitalization, and sustainability challenges. While we expect our spend on repositioning to be relatively stable year-over-year in '24, we also anticipate modestly higher interest expense and lower pension income next year, both driven by the acceleration in yields across the bond markets we have seen since this summer. That will lead to slightly higher net below the line expense. We will provide more information about the year-over-year magnitude of these changes at year-end when we snap the line on pension, but we anticipate there'll be more in line with normal historical changes, not last year's outsized impacts. As a reminder, pension income is a non-cash item, given our overfunded pension status, and will ensure no incremental contributions are needed. This is a great position to be in for our employees, both former and current, and our shareholders. We expect our cash to grow in line or above earnings next year with improvement assisted by the absence of the one-time settlement from de-risking our balance sheet earlier this year, which had an outsized effect on our cash performance. We're also embarking on a multi-year unwind of the last two years of working capital buildup. We will continue benefiting from improved demand planning and optimized production and materials management using our enhanced end-to-end process and digitalization capabilities through Accelerator. We see several compelling growth capital opportunities and expect to fund high-return projects through disciplined CapEx spending in the coming years. Our balance sheet strength will continue to give us meaningful capacity for M&A, and we expect an ongoing favorable deal environment going into 2024, which supports our intention to accelerate capital deployment. Now, I'm going to pass the call over to Vimal to say a few words about the announcement we made earlier this month on our portfolio and strategic priorities. Over to you, Vimal.

Thanks, Greg. Two weeks ago, we announced a portfolio reorganization that aligns our business with distinct, compelling megatrends that are shaping the future of our industries and our planet. These are automation, the future of aviation, and energy transition, all of which are underpinned by our robust capability in digitalization. This realignment will enable us to have a simpler, clearer strategic focus and clearly define Honeywell's value proposition for our customers, investors, and employees. We are an automation, aerospace, and sustainability-focused technology company. We believe this change will empower our business leaders to better prioritize R&D efforts, capital expenditures, M&A pipeline, go-to-market strategies, and more. It will also create a more focused framework for M&A, allowing us to pursue bolt-on acquisitions and select dispositions that align with our themes and enhance our portfolio. Overall, we have demonstrated the ability to operate under dynamic circumstances, including a global pandemic, large-scale supply chain disruption, heightened inflation, international trade disputes, unprecedented central bank tightening, and geopolitical tensions. Underpinned by the strength of our differentiated Accelerator operating system, we are confident that we can deliver strong financial performance in 2024. We will provide more specific inputs in our annual outlook call once we close out the year. Now, let's turn onto Slide 7 and I will close with some long-term comments. Let's take a minute to zoom out from the quarterly results. As a reminder, my priorities as CEO are: first, simplify the portfolio to better align with the key megatrends that I mentioned earlier; next, I will drive accelerated organic growth by strengthening our innovation playbook, growing our sustainability and digitalization offering, and maintaining our leadership position in high-growth regions; on top of those organic growth efforts, I will manage the portfolio by enhancing our M&A capability, including staying disciplined and executing on bolt-on M&A aligned to these three megatrends; I also plan to advance the Accelerator operating system to create more value through business model optimization. We continue to make progress on our long-term growth algorithm that we discussed during our May Investor Day. Our 2023 guidance represents another year of strong financial performance consistent with our framework, following meaningful progress since 2017 through some very turbulent times. We'll continue to carefully track our progression towards achieving our targets and remain confident in our ability to accelerate growth, expand gross margin to above 40%, achieve 25%-plus segment margin, and generate free cash flow margins of mid-teens plus. I'm thrilled to lead Honeywell into the next phase of our transformation, and I'm optimistic about the tremendous opportunities we are uncovering to capture value, drive incremental sales growth, expand margins, and generate more cash. And we'll continue to update you as these efforts increasingly transfer into enhanced financial performance. Now let's turn to Slide 8 for closing thoughts before we move into the Q&A. We delivered on all commitments in the third quarter. We have, and will continue to demonstrate resiliency while managing through a dynamic macroeconomic and geopolitical backdrop. Overall, demand generation remains strong, particularly in the long-cycle businesses with orders up double digits year-over-year and record backlog levels will continue to support strong results, while we navigate an external environment that remains challenging for the short cycle. Our portfolio is aligned to powerful megatrends, including automation, the future of aviation, and energy transition, all underpinned by digitalization. Our technologically differentiated portfolio of solutions and our world-class Honeywell Accelerator operating system will enable us to capitalize on these trends and drive the profitable growth we outlined in our long-term financial framework. We're expecting a strong finish to 2023 and we're well-positioned for further growth in 2024. We look forward to updating you on the progress as we execute on our commitment. With that, Sean, let's move to Q&A.

Vimal and Greg are now available to answer your questions. We ask that you please be mindful of others in the queue by only asking one question. Operator, please open the line for Q&A.

Hi, good morning.

Good morning, Julian.

Maybe just wanted to start off with a question on the fourth quarter margin outlook. So, I think you're looking at about 40 bps of margin uplift sequentially, 30% operating leverage sequentially. It looks like PMT perhaps is the segment where you're expecting a very big margin uplift. So, just wondered if you could go into a little bit more detail around that. The margins have been down year-on-year, all year there. So, just maybe help us understand what's really changing a lot in the fourth quarter to get that moving. And then just as a very quick follow-up, HBT, cross-currents this year. You've got a low base as we think about '24, but the interest rate environment is negative. So, just confidence in HBT's growth ability looking out? Thank you.

Hey, Julian. So, I'll take the first one and I'll pitch it to Vimal for number two. So overall, we've had a great year in margin expansion for Honeywell. And again, we're looking to finish the year at the high end of our guidance range, as you've seen. So, I think we've continued to demonstrate our ability to drive margin expansion in any environment. And as we look into Q4, as you said, we see a nice sequential improvement from Q3 to Q4 and some healthy margin expansion there as well. In PMT, we talk about it often, the margin tends to be somewhat lumpy from any one quarter to the next. A big part of that, of course, is where catalyst shipments wind up during the course of the year and which end market. And so, as we go into Q4, for PMT, we have a pretty healthy UOP mix for sure. And we're seeing also some recovery from some of the challenges that we've had earlier in the year with operations in AM. So, that's really the underlying theme for Q4. But we think the teams have done a great job and PMT is on track also to have a very nice year overall with high-single-digit top-line growth and some modest margin expansion. So, we're pretty pleased with where we are going with that. And maybe, Vimal, I'll hand it to you on the HBT one.

So, Julian, on HBT, I would say, I'll spend a minute to kind of first go back to what our business model is before I kind of answer your question. I think there are three parts of our HBT business model. First, it is 60% product, 40% solution. And within 40% solution, more than half is aftermarket. So, by very mix, it's a short-cycle oriented business. The second point is the products we have, they are critical to the buildings and that's why they are higher margin. And that explains our constant margin improvement in the segment. And finally, our exposure in buildings is a combination of real estate, but also infrastructure. And all that put together explains our results of 2022, where we grew double digits, and this year, we'll grow low-single digits. To your question of 2024, we remain confident HBT will grow per our guidance. Our backlog is growing in our solution business and, of course, the swing factor remains here the short-cycle position.

Great. Thank you.

Can we have the next question, please?

Hey, guys, good morning.

Hey, Steve.

Good morning, Steve.

There are some challenges at SPS, and it now accounts for about 10% of your profits. It seems to be stabilizing, but will the timing of those shipments allow that business to grow next year, or should we brace for another decline? Could you clarify the expectations for SPS?

Steve, you're right, SPS is coming out of the bullwhip effect of COVID and clearly that reflects in our Q3 numbers. But as we mentioned in our earlier conversation, the SPS orders in Q3, we had a book-to-bill of 1 and we see similar trends continuing in Q4, which means we are in a recovery cycle in this business moving forward, starting Q4, and we'll see that in 2024. Margin expansion will certainly help there, because the volumes growth will help in margin expansion. We have re-baselined our cost base, aligned to the new revenue scale. So overall, we should see recovery from this point onwards.

Okay. So that's a growth business with some nice leverage next year is what you're saying?

I believe overall top-line growth may be somewhat flat next year. However, as Vimal mentioned, the acceleration in short-cycle businesses will provide significant leverage. We expect to see that impact soon. On the Intelligrated side, the aftermarket is growing much faster than the project business, which will positively affect our mix. While we are still waiting for the timing of that acceleration, we have reached a point where the order rate has stabilized, so we anticipate improvement soon, bringing along substantial leverage.

Hey, good morning, guys, Vimal, Greg and Sean.

Good morning, Scott.

Good morning, Scott.

Hey, the world is kind of changing and volatile. China seems like it's taken another step down. But can you guys walk us around the world and what you're seeing from a geographic mixed perspective and just a little bit of color on how things maybe change through the quarter or into Q4 from that front as well? That'll be my question. I'll pass it on after that. Thanks.

Thank you, Scott. You are correct that there is a lot of variation in how things are operating globally at this time. Starting with China, we anticipate high single-digit growth this year, primarily driven by growth in Aero, as well as some growth in other sectors. We expect China to continue a similar trend, with mid-single-digit to high-single-digit growth projected for 2024. Our backlog and strength in Aero will support this. In other regions, we see considerable strength in Asia, especially in India and ASEAN countries, along with a strong position in the Middle East due to our energy sector presence. However, Europe and the U.S. are both experiencing the effects of high interest rates and a challenging environment, which we all feel. So, there is a balance of positives and negatives. Importantly, our backlog has grown by 8%, and we have good order forecasts for the fourth quarter, which positions us well for 2024 despite the challenging conditions. We believe that our long-cycle businesses will contribute to achieving our forecasted revenue growth range for 2024.

Thank you, guys.

I apologize for that; I had my mute button on. Thank you for the question. Greg, I don't want to misinterpret your words, but did you mean that for 2024, we should consider a long-term framework of 47 to 50 basis points of operating margin based on what you see today? I understand there are many macro factors at play. Also, should we consider free cash flow growing in line with earnings, and would it be appropriate to add back the one-time items from this year as a base to grow from, since $1.2 billion is a significant amount? Any insights on the pension headwind would also be appreciated.

Sure. It's still too early for guidance, and we will provide that in about 90 days when we announce our full year earnings. We view our comments within a long-term framework, which serves as a useful indicator for our current perspective. However, in 90 days, we will have much more information. Regarding free cash flow, you are correct that we have $1.2 billion in settlements, which won't recur next year, so that will be added back to the base. We anticipate that free cash flow will grow in line with or potentially faster than earnings. The uncertainty around that growth depends on the expected liquidation of our working capital alongside a strong pipeline of growth projects. We are currently in the budgeting process for the fourth quarter and may present some positive developments in our capital expenditures next year. Overall, we are optimistic about our cash flow progress, as this quarter has shown impressive cash flow numbers, including 100% conversion and a 17% cash margin. We are also seeing improvements in inventory management, particularly with Aero reducing their days of supply. This summarizes our outlook for next year, but we will provide more precise details in 90 days. Regarding pensions, there could be a potential increase in costs of $50 million to $100 million, influenced by fluctuating rates. As noted, while we've seen a reduction in income trends for the upcoming year, it is not expected to be as severe as the changes we experienced in 2023.

Yes, good morning.

Good morning, Andrew.

Good morning.

I have a question regarding advanced materials. It seems to be performing weaker than we anticipated. You mentioned that softness in electronics, chemicals, and life sciences contributed to these declines. In the last quarter, you emphasized electronics and chemicals. I would like to understand what has changed, as you previously indicated that electronic materials should see improvement in the second half. Since this is a high-margin business, what has shifted? How does the business outlook appear as we approach year-end, and what kind of momentum are we looking at for next year? Thank you.

Yeah. Thanks, Andrew. Look, I would say, in AM, the fluorine products business is doing extremely well, continues to grow. As applications keep growing, its geographic spread keeps growing. So that's very positive. Electronic materials have definitely bottomed out. We have seen signaling of recovery from the fabrication manufacturers. And part of that is seen in Q4. Not as good as we'd like it to see, but we are seeing signals of recovery in the electronics side. And there are parts of chemicals which are weak, which is affecting our overall revenue. And like any other short cycle, we expect it to recover aligned with economic conditions there. But I must say that our conviction in the business is very strong. We had outstanding years in 2021 and 2022. And this year should be seen in comps to the past two years.

Hey, good morning, everyone. Thank you.

Good morning, Sheila.

I wanted to ask about Aerospace please, and specifically, defense and space, great growth in the quarter, up 18%. What are you seeing from a bookings perspective there, the sustainability of demand with everything going on? And how does defense factor into Aero margin mix? Thank you.

Thanks, Sheila. I think the highlight of our Q3 has been Aero, particularly in defense and space. Our bookings remain strong, with Q3 being a solid booking quarter, just like Q2. This strength is driven not only by domestic U.S. bookings but also by the opening of international defense markets. We see this reflected in our booking rates. Revenue growth has been supported by actions in the supply chain, which are now evident in the defense sector as well. We anticipate continued growth in the defense segment in both Q4 and into 2024. In summary, defense is set to play a significant role in the ongoing growth of Aero, given the current geopolitical conditions worldwide.

On Aerospace margins, in relation to defense and space, it does not significantly impact our margins. Therefore, the growth in that area is expected to be similar to the overall margin rate. We see that growth as quite positive for segment profit growth.

Hey, thank you. Good morning, everyone.

Good morning, Jeff.

Hey, not to get too tied up in arcane pension accounting, but did you guys change something in pension to mitigate the impact of interest rate changes? Certainly, nice to hear the headwind is that modest, but my rough math would have maybe suggested a bit more. And then, maybe just to add another part. Vimal, you touched on advanced materials a little bit in a previous answer. But can you give us a little bit of color on how you see the 410A, the 454B transition unfolding? What's happening to 410A prices and availability? And where you stand competitively as these OEMs are making the shift? Thank you.

So, maybe I'll hit the pension one first. So no, Jeff, we haven't changed anything in our accounting. We'll do our normal mark-to-market in the fourth quarter as we've done for many years now. And again, what I mentioned $50 million to $100 million is a range. We'll see how the final numbers pan out with discount rates and returns on assets for the asset bases themselves. So, nothing different, and we'll give you a more precise answer after the turn of the year when we snap the line.

Jeff, on advanced material, I would say, pretty fascinating to see how this changeover is happening between Solstice 410A and 454. We are working with all key OEMs for several years. This is not a new dimension for us. We have been on it for the last several years, and we see the switchover happening from 410 to 454 in the times ahead, and we have secured our position with the key OEMs. So, I would say, for us is I would call it like business as usual because this is something which is part of our business, and we were ahead of the game here to look ahead and think about it simplification on us, and we are well covered on that.

Yeah, thanks. Good morning, guys.

Hey, Nicole.

Nicole, good morning.

Can we double click a little bit on what you guys are seeing with respect to channel inventory reductions within HBT and SPS? Where are we in that inventory destocking process? And do you think we will enter 2024 in a pretty clean position with respect to channel inventories?

Nicole, I would say that the channel inventory is reflected in our orders rate. Our orders rate for both buildings and SPS had a book-to-bill of 1 last quarter, and similar trends are continuing into October, indicating that we are on a path toward a slight recovery. This suggests that channels are starting to restock after the cycle. We anticipate a short cycle that will gradually recover each month moving forward, although not as quickly as we would prefer at this time.

Thank you. Good morning, everyone.

Hey, Deane.

Good morning.

Hey. On HBT, you called out cost inflation headwinds. Could you size that? What kind of pricing actions have you taken? And then, on the verticals, airport, government and education, how has government stimulus, has that started to come through? And are you benefiting there? Thanks.

Yeah. Hey, Deane, we don't disclose our individual segment's price/cost. But if you recall, I mean, we've mentioned that we're going to retain our price/cost positivity, and we've done that inside of HBT throughout the course of the year. So, you see the numbers for total Honeywell, I think we're within our zone that we had guided. From a pricing perspective, it's probably going to be 4% for the year across the total portfolio. Maybe I'll pass it to Vimal on the other side.

So, we do get, I would say, benefit from different government stimulus programs, the recent one being around, I would say, chipset, semiconductor activity in the U.S. The proposal activity there is strong. And hopefully, we'll win enough to see the benefit of that in the times ahead. But I must also point out that we also see heightened infrastructure activity outside the U.S., specifically in high-growth regions. One of the strengths of the HBT business is a very strong footprint in high-growth regions, China, ASEAN, Middle East, India, et cetera. And there, the activity on infrastructure build-out is pretty strong, which is going to help us in building out our backlog, specifically in long cycle. So that's how we see those dimensions in the business.

Thanks. Good morning, everyone.

Hey, Joe.

Good morning, Joe.

Hey, everyone. I have a question about orders. It's encouraging to see the improvement compared to last quarter. I believe Aero was the only segment that saw growth last quarter. However, I didn't catch any comments regarding PMT. If I overlooked it, I apologize. Could you provide some insights on the orders for PMT this quarter, or perhaps specifically for HPS and UOP?

Yeah. So, year-to-date, I would say, the orders rate in UOP and HPS are pretty strong, and we expect to finish very strongly for both the businesses in 2023 and carry forward good backlog for 2024. The wins are driven by multiple end markets in HPS. And UOP is certainly benefiting from strong demand for catalysts. But also now, strong demand coming from sustainable technologies. Our sustainable technology business is growing at a triple-digit rate, as we had anticipated. And all that is really adding up for strong performance of UOP for 2023 orders.

Hey, good morning, everyone.

Good morning, Andrew.

Hey, Andrew.

I understand you are anticipating an increase in PMT margin in Q4, but as you've indicated this year, PMT margins have been somewhat subdued overall. So, how confident are you that it will rise in Q4? Also, considering the transition of HPS, do you expect PMT to be one of the stronger margin performers in 2024?

So, in terms of conviction level, it's high. I mean, I feel pretty strongly about the PMT team's ability to perform here. Again, we're not at a place where we're giving guidance ranges for next year for any given segments. I expect the PMT business, as currently constructed, we expect accretion next year as well. But we're not going to get into any specific guidance ranges around that at this moment. But our conviction level is high. The team is delivering. They've taken all the right actions in each of the three businesses. And as we said, with a nice mix going into Q4 on catalysts, we expect to be able to deliver the margin accretion in Q4.

Thank you. Our value creation framework is working. While the macro economy remains challenging and the timing of a short-cycle acceleration is uncertain, we are deploying our rigorous operating playbook to navigate near-term volatility. We are confident in our ability to weather near-term challenges and meet our performance targets, underpinned by ongoing strength in our two biggest end markets, aerospace and energy, combined with the operating rigor you have expected from Honeywell. Thank you all, and our Honeywell colleagues, who continue to enable us to outperform in any environment and drive differentiated performance for our customers and shareholders. Thank you all for listening, and please stay safe and healthy.