Good morning, and welcome to Honeywell's Third Quarter 2021 Earnings Conference Call. On the call with me today are Chairman and CEO, Darius Adamczyk and Senior Vice President and Chief Financial Officer, Fred Lewis. Also joining us are Senior Vice President and General Counsel, Anne Madden and Senior Vice President and Chief Supply Chain Officer, Torsten Filz. This call and webcast, including any non GAAP reconciliations, are available on our website at www.honeywell.com forward slash investor. Honeywell also uses our website as a means of disclosing information, which may be of interest or material to our investors for complying with disclosure obligations under Regulation FD.
Accordingly, investors should monitor our Investor Relations website in addition to following our press releases, SEC filings, public conference calls, webcast and social media. 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 based on many factors, including changing economic and business conditions, and we ask that you interpret them in that way. We identify the principal risks and uncertainties that may affect our performance in our annual report on Form 10Q and other SEC filings. This morning, we will review our financial results for the Q3 of 2021, share our guidance for the Q4 and full year 2021 and share some preliminary thoughts on 2022 planning.
As always, we'll leave time for your questions at the end. With that, I'll turn the call over to Chairman and CEO, Darius Sedamcha.
Thank you, Rina, and good morning, everyone. Let's begin on Slide 2. Our outstanding discipline and execution enable us to deliver 3rd quarter results have met or exceeded our financial guidance in an increasingly challenging environment. We achieved the high end of our Q3 adjusted earnings per share guidance range and exceeded the high end of our segment margin guidance by 60 basis points, Despite significant headwinds from inflation and supply chain constraints which tampered down our top line growth potential. Despite that, organic sales were up 8% year over year driven by double digit organic growth in safety and productivity solutions, the commercial aerospace aftermarket of Advanced Materials and UOP.
Segment margin expanded 130 basis points to 21.2 percent driven by strong actions that we took across the portfolio to address the headwinds we faced from inflationary pressures and supply chain disruptions. Specifically, we've continued to operate our strong productivity playbook. We took swift pricing action that allowed us stay ahead of the inflation curve. We drove a 4% increase year over year on the top line Gillette approximately 40 basis points of margin expansion net of inflation. Adjusted earnings per share was $2.02 Up 29% year over year, achieving the high end of our guidance range.
We delivered a strong Q3 despite a volatile backdrop include a hurricane in our PMT factory corridor, power blackouts in China and the persistent and ongoing impacts on the supply chain more broad. I am pleased for our disciplined execution, which enable us to navigate the challenges in the macroeconomic environment can capitalize on the ongoing recovery in our end markets. I continue to be encouraged by the strength we are seeing in many areas of our portfolio. Orders across Honeywell are up high single digits year over year organic. Excluding the impact of COVID related mask business, which has seen significant demand declines since the pandemic has been subsiding.
Orders across Haniwa were up doubled digits year over year. Backlog was up 7% to $27,500,000,000 and up 9% excluding the impact of COVID mask orders, driven by strength in many of our segments and positioning us to deliver next phase of the recovery as we head into 2022. As always, we continue to execute on our rigorous and proven value creation framework that drives outstanding shareholder value. Now let's turn to Slide 3 to discuss some of our exciting recent announcements. Last month, United Airlines and Honeywell announced a joint multimillion dollar investment in Elderfuels, Powering the biggest sustainable fuel agreement in aviation history.
Alder Fuel is a clean tech company that is pioneering 1st of its kind technologies for producing sustainable aviation fuel or SAF at scale. When used together across the fuel lifecycle, The Alder Technologies coupled with Honeywell's eco finding process have the ability to produce a carbon negative alternative to today's jet fuels. As part of the agreement, United is committing to purchase 1,500,000,000 gallons of sap when produced to United's requirement, which is 1 and a half times the size of the known purchase commitments of all global airlines combined, Making this easily the largest publicly announced SAP agreement in aviation history and demonstrating the power of Honeywell Technologies continue to bring to the oncoming global energy transition. We also recently announced the acquisition of Performix, a provider of manufacturing execution systems or NES software for the pharmaceutical manufacturing and biotech industries. This acquisition builds on our strategy to create the world's leading integrated software platform for customers Uwinda, Life Sciences Industry, who are striving to achieve faster compliance, improved reliability, and better production throughput at the highest levels of quality.
The Performix MEX software joins Honeywell's large and growing portfolio of automation solutions for the life sciences industry, including Sparta Systems Quality Management Software and Honeywell's Experian Process Knowledge System. The combined offerings will address life sciences' customer needs across the product life cycles, from automation project execution to optimal production to sustainable quality. Lastly, We unveiled an all new aircraft cockpit system earlier this month called Honeywell Anthem, the first in the industry built with an always on Cloud connected experience that improves flight efficiency, operations, safety, and comfort. Honeywell Anthem offers unprecedented levels of connectivity, an exciting and intuitive interface model after everyday smart devices in a highly scalable and customizable design. This next generation flight deck is powered by a flexible software platform It can be customized for virtually every type of aircraft and flying vehicle, including large passenger and cargo planes, business jets, helicopters, general aviation aircraft and the rapidly emerging class of advanced air mobility vehicles.
In fact, Honeywell Anthem has already been selected by Vertical Aerospace and Lilium for their vertical takeoff and landing all electric aircraft. As these announcements highlight, we're continuously innovating and enhancing our portfolio, exciting new technologies aligned to our long term strategic objectives. Now let me turn it over to Greg on Slide 4 to discuss our Q3 results in more detail.
Thank you and good morning everyone. As Darius highlighted, we executed with the typical level of rigor that you have come to from Honeywell and delivered on our commitments despite a challenging backdrop. Our Q3 was strong with sales up 8% organically to $8,500,000,000 segment margins expanding 130 basis points to 21.2%, resulting in 36% incremental margins and free cash flow of more than $900,000,000 up 20% year on year. Our Q3 performance demonstrates our ability to deliver for our shareholders in all environments. Now let's take a minute to discuss how each of the segments contributed to that.
Starting with aerospace, 3rd quarter sales were up 2% organically As the ongoing recovery in flight hours drove another quarter of strong double digit commercial aerospace aftermarket growth. As expected, air transport aftermarket sales continued to gain momentum, growing more than 10% sequentially from the Q2 and growing 40% year over year. Commercial original equipment returned to growth in the quarter driven by strong demand for business jets. The growth in commercial aerospace was partially offset by defense and space, which was down 17% in the quarter, primarily due to supply chain constraints, which limited our deliveries. Excluding those impacts, Defense and Space would have been down mid single digits in the quarter, an improvement versus the first half run rate.
Aerospace segment margins expanded 390 basis points 27.1%, driven by growth in our high margin aftermarket business, strong productivity from our lower cost base and pricing. Building Technologies sales were up 3% organically, driven by broad based demand across the building products portfolio as well as continued growth in building solution services. Orders were up double digits year over year for the 4th straight quarter, driven by demand for fire products, building management systems and projects. Backlog for building solutions services was up over 35% year over year, positioning the business for growth into 2022. In addition, our healthy buildings portfolio maintained strong customer momentum with approximately $100,000,000 of orders in the quarter, bring year to date orders to $250,000,000 HBT segment margins expanded 190 basis points to 23.5%, driven by pricing and productivity, partially offset by inflation.
In PMT, sales were up 9% organically, led by 29% growth in UOP and 14% growth in Advanced Materials. UOP sales growth was driven by higher petrochemical catalyst shipments and their backlog grew double digits year over year, which should drive growth well into 2022. Process solutions sales were down 2% organically as the HPS orders were up 20% year over year, driven by broad based demand across the portfolio, providing confidence in the longer term outlook for the business. PMT segment margins expanded 260 basis points to 22.2% in the quarter, driven by pricing, strong operating leverage and a healthy mix of UOP. In Safety and Productivity Solutions, despite battling supply chain and inflation challenges, sales were up 21% organically, driven by another quarter of double digit warehouse and workflow solutions growth, productivity solutions and services growth and gas analysis.
Orders in these three businesses were also up double digits year over year, resulting in a robust SPS backlog of more than $4,000,000,000 personal protective equipment sales declined year over year as mass demand declined meaningfully. This was partially offset by growth in the hearing, gloves fall protection categories. SPS segment margins contracted 70 basis points to 13.2%, driven by unfavorable business mix, which combined with targeted investments and supply chain challenges in Intelligrated, drove inefficiencies in manufacturing and installation as the business has been scaling to outsized growth, which was 60% organically this quarter. Finally, growth across our portfolio was underpinned by continued progress in Honeywell Connected Enterprise. Our Connected Buildings and Cyber Solutions delivered another quarter of double digit organic growth and 3rd quarter recurring revenue growth is once again up double digits year over year.
So overall, we delivered strong organic sales growth, drove 130 basis points of improvement in segment margins, 60 basis points above the high end of our guidance despite the challenging environment. For the quarter, we delivered GAAP earnings per share of $1.80 and adjusted earnings per share of $2.02 up 29% year over year, achieving the high end of our guidance. A bridge from 3Q20 adjusted EPS to 3Q21 adjusted EPS can be found in the appendix of this presentation, which includes reference to a $160,000,000 non cash charge related to ongoing UOP matters that are described in our Form 10 Q. The majority of our year over year adjusted earnings growth, dollars 0.26 was driven by our strong segment profit improvement. Below the line items were a $0.13 tailwind, driven by lower repositioning and higher pension income.
A lower effective tax rate of 22.9% and lower weighted average share count of 699,000,000 shares drove a $0.04 and $0.03 benefit respectively. We generated dollars 900,000,000 of free cash flow in the quarter and as increased earnings, excuse me, has increased earnings increase in working capital due to growth of the business and related supply chain challenges, tamped that down a bit. Finally, we strategically deployed $1,500,000,000 primarily to share repurchases, dividends and CapEx in the Q3, which significantly exceeded operating cash flow. We paid $646,000,000 in dividends, deployed $208,000,000 to capital expenditures and reduced $650,000,000 of Honeywell shares, reducing our weighted average share count to 699,000,000. Total capital deployment was up 44% year over year.
In all, this was another strong quarter under difficult circumstances. We continue to manage through the multi speed recovery across our portfolio, making disciplined investments for the future and meeting or exceeding our commitments while proactively addressing macroeconomic challenges. With that, let's turn to Slide 5 to discuss the impact of the supply chain constraints we're facing and how Honeywell is adapting to address those challenges. As we saw last quarter, the world continues to face persistent supply chain challenges as the sourcing environment for direct materials and electrical components continues to be tight. Logistics capacity remains strained and labor availability becomes more challenging, all driving constraints in operating and inflationary pressures on our cost base.
Semiconductors remain an acute problem due to a structural disconnect between supply and demand, driven by canceled industrial and automotive orders during COVID-nineteen, as well as unplanned growth of 5 gs, personal computing and Consumer Electronics. We've also started feeling pressure in aerospace as the supply chain broadly ramps up more slowly than needed, leading to parts challenges due to deteriorating supplier delivery. While we have been mitigating the overall risk by proactively partnering with distributors and alternative suppliers, the challenges accelerated in the last quarter, constraining growth in some of our businesses. The most affected businesses in our portfolio are SPS, Aerospace and HBT. We provide guidance ranges for our quarterly and annual outlook in order to incorporate an adequate level of risk for things just such as this, as we see these dynamics in the last few quarters.
We are managing this situation aggressively on a daily basis and have deployed the full strength of our reengineering efforts to qualified alternative parts, which has mitigated some risk on our productivity solutions and services, advanced sensing and fire business. We created Tiger teams using advanced digital tools to track shortages and deploy a number of actions to liberate supply in the market. We also continue to mitigate inflation in materials, freight and labor and our operations through targeted regular pricing actions. For the longer term, we're developing dual source platforming strategies and executing long term supply agreements with some of our key suppliers. This coupled with strengthening direct engagement with the semiconductor OEMs and foundries will improve our ability to secure increased volumes in the future.
We do expect this environment to persist into the fourth quarter and the first half of twenty twenty two. We'll continue to adapt as we manage through this period. With that, let's turn to Slide 6 to talk about our expectations for the Q4. As we enter the Q4 and given the ongoing challenges I mentioned, we expect sales to be in the range of $8,500,000,000 to $8,900,000,000 down 4% to flat on an organic basis, which includes the impact of the COVID-nineteen driven mass sales decline. Excluding this impact, organic sales would be down 2 to up 2 organically.
We would also normally see a seasonal step up from the 3rd to the 4th quarter, which this year will be somewhat dampened by the unique calendar impact of having more days in the 3rd quarter and Air Transport flight hours continue to accelerate, driving continued sequential and year over year growth in the commercial aftermarket sales. The pace of the air transport acceleration will continue to vary regionally with domestic travel recovering faster than international. Commercial original equipment build rates will also continue to progress gradually. Defense and space sales will be down due to lower demand from U. S.
DoD programs driven by moderating U. S. Defense spend and soft international defense volumes. We will continue to manage through the constraints as the aerospace supply base ramps up, but we are expecting to miss out on potentially 100 of 1,000,000 of dollars worth of shipments due to these continued challenges in Q4. We now expect organic sales growth to be down mid single digits for the year in aerospace.
In building technologies, we expect continued strong demand across the portfolio as the world continues to reopen and sustainability solutions take hold, driving sales and orders growth in the Q4. We will face ongoing pressures from the supply chain constraints, but continue to work our mitigation actions as we anticipate mid single digit sales growth for the year. In PMT, we see continued strength in the short cycle HPS businesses, Though this will be tempered by the slower recovery in projects. Our strong orders growth in the Q3 will support our growth acceleration into 'twenty two. For UOP, we're pleased with our robust 3Q performance and expect continued growth into the Q4 and into 2022 supported by the strong backlog, which is up double digits year over year.
Last, we expect continued healthy demand for products across the Advanced Materials portfolio. We expect PMT organic sales to be up low single digits for the year. In safety and productivity solutions, we expect another quarter of robust growth in our warehouse and work of Flow Solutions and Productivity Solutions and Services businesses. In our Productivity Solutions and Services business, which is having an outstanding year, backlog remains up triple digits year over year, which combined with our Intelligrated backlog that is over $2,400,000,000 gives us confidence in these businesses for the remainder of 2021 into 2022. Mass demand has accelerated as expected as the world recovers from the pandemic, though we will partially offset this softness with strengths in other areas of the PPE portfolio.
Finally, we expect to see strength in our short cycle gas analysis and advanced sensing businesses, driven by double digit orders growth in the Q3. Will continue to manage through this challenging supply environment, which will impact our growth potential, but will record strong double digit growth for the year. Now let me turn to our expectation for our other core guided metrics. For our 4th quarter segment margins, we expect to be in the range of 21.2% to 21.7%, up 10 basis points to 60 basis points year over year. We expect margins to continue to benefit from pricing actions ahead of inflation, volume leverage and ongoing productivity from our streamlined cost base despite the headwinds from unfavorable business mix in Intelligrated and efficiency challenges due to the supply chain environment.
4th quarter net below the line impact, which is the difference between segment profit and income tax income before tax, is expected to be in the range of negative $10,000,000 to negative $95,000,000 with a range of repositioning between approximately 140,000,000 and $215,000,000 as we continue to fund ongoing restructuring functions. We expect the effective tax rate to be approximately 20% and average share count to be approximately 698,000,000 shares. As a result, we expect 4th quarter adjusted earnings per share between $2.03 $2.13 down 2% to up 3% year over year. Given these Q4 expectations, full year organic sales growth will be in the range of 4% to 5%, narrow in the range we provided last quarter to 34.2 of $34,600,000,000 We are once again raising the low end of our segment margin guidance by 10 basis points for the year to a new range of 20.9% to 21.1%, representing expansion of 50 to 70 basis points for the year. We expect margin expansion in Aero, HPT and PMT as we carefully invest back into the business while managing the multi speed recovery across the portfolio.
Our fixed cost management remains a focus and we are tracking favorably to the permanent reduction of $1,000,000,000 of fixed costs from our 2020 cost actions. We expect our net below the line impact to be in the range of $40,000,000 to $125,000,000 including capacity for 400 to $475,000,000 of reposition. Our full year effective tax rate will be approximately 22% and weighted average share count will be approximately 701,000,000 for the year, over delivering on our minimum 1% reduction in shares. This will take adjusted earnings per share to a range of $8 to $8.10 up 13% to 14% year over year. This maintains the high end of our previous guidance and raises the low end by $0.05 Despite these challenges, we are maintaining the same cash flow outlook for the year in the range of $5,300,000,000 to $5,600,000,000 Now let's turn to Page 7 and review our guidance progression throughout the year.
Since we provided our initial 2021 guidance in January, we have navigated through several uncertainties, the ongoing global pandemic, supply chain challenges, unprecedented raw material inflation and labor market challenges. And at each turn our rigorous operating principles have enabled us to continue to demonstrate our resiliency. In our latest update, we have adjusted our sales outlook purely due to the we are battling in supply chain, which dampened 3Q and our Q4 sales potential. We continue to have a robust backlog of demand. Despite these changes to top line expectations, we have not only maintained the high end of our segment margin and adjusted EPS guidance, but we have further increased the low end of both ranges have maintained our previous free cash flow guidance.
These are excellent proof points of our ability to execute in all economic cycles. In total, I'm encouraged by the strength we are seeing in key areas of the portfolio as we head into 2022, particularly driven by strong orders growth and backlog position, as well as aggressive supply chain tactics that are mitigating risks, enabling us to deliver on our long term commitments. Now let's move to Slide 8 where we can talk about some of the preliminary thoughts we have on 2020. With the commercial aerospace recovery in view, upcoming capital reinvestment in the energy sector, non residential construction spending returning to 2019 levels and the exponential growth we continue to see in e commerce, we have a strong setup for 2022. We expect organic growth in all four segments driven by strong portfolio wide demand and backlog underpinned by year to date orders growth of 17% in HPT, 14% in Aero, 10% in PMT and 6% in SPS or 8% in SPS if we exclude the COVID mask business.
This coupled with the strategies we have in place that are focused on driving uniquely innovative and differentiated technologies to address the world's increasing demand for digital transformation, process technology and sustainable solutions gives me confidence in our future. However, we do expect growth in the first half of twenty twenty two to be constrained due to continued challenges from labor force uncertainty, supply availability and logistics challenge. Inflation will continue to be a factor under these circumstances, though our pricing rigor as reflected in our margin rates will help us. We do expect changes to corporate tax legislation, though the exact impact of that is as of yet unknown. With these dynamics in mind, let's look at our key markets.
In aerospace, we expect strong growth in our commercial aerospace business. Ongoing improvement in global flight hours will drive growth in our commercial aerospace aftermarket. We also expect original equipment build rates, which have lagged the flight hour recovery, to ramp up in 2022. In defense and space, we expect flat to low single digit growth year over year as U. S.
And international defense budget spending stabilizes and our supply challenges meet. In HPT, we expect non residential construction growth and an ongoing return to public spaces to drive demand for building products, services and projects. We also expect continued demand for our portfolio of healthy building solutions as well as tailwinds from U. S. Infrastructure plans.
We expect a large backlog to draw from as well as we end in 2021. In PMT, we're assuming improved macroeconomic conditions and higher stable oil prices will improve growth in UOP and also help recover automation projects in HPS. We expect continued strength in advanced materials driven by demand in the auto, construction and healthcare sectors. For Safety and Productivity Solutions, we expect strong demand in our Productivity Solutions and Services, Gas Analysis and Advanced Sensitive Businesses. We also execute on our robust backlog of major projects in our warehouse and workflow solutions businesses.
However, we will face constraints to growth as supply chain challenges continue in the first half of twenty twenty two. Mass demand will remain at our lower second half exit rates as the world recovers from the pandemic. For overall Honeywell, we expect margin expansion to be driven by aftermarket recovery in aerospace, accelerating catalyst shipments in UOP and improving mix in SPS. Our strong productivity and pricing actions, which should carry through to next year and provide potential upside will enable key investments to support medium term top line growth, including a step up in R and D and our digital initiatives. We look forward to completing the combination of Honeywell Quantum Solutions with Cambridge Quantum Computing, which is a very big strategic step forward for us, but will be a minor drag on our margins.
We have significant balance sheet capacity for M and A and share repurchases, and we expect to reduce our share count by a minimum of 1% again in 2022. So overall, we have some insight into our end markets and a lot of confidence in our continued operational execution, which will give us the ability to deliver another strong financial performance And continue to execute our strategy to be the premier software industrial. We'll provide more specific inputs once we close out the year. So with that, I'd like to turn the call back over to Darius.
Thank you, Greg. Before we wrap up, I'd like to take a minute on slide 9 to discuss an important topic, Anuel's culture of inclusion and diversity. Our commitment to inclusion and diversity enables better decision making, helps build competitive advantages and further long term success. Inclusion and diversity is one of our foundational principles, and Honeywell expects all employees to exemplify these principles. We continue to build on our initiatives to promote racial Equality and Inclusion and Diversity, including employing mandatory unconscious bias training to our global workforce, establishing a global I and D steering committee cosponsored by me and fortifying Honeywell's I and D Governance structure by embedding IND councils into each business group.
We also established 2021 goals for each of my direct reports that include an annual objective of driving diversity within his or her organization. These initiatives have yielded results. Women and people of color represent a higher percentage of the workforce at Honeywell compared to our peers. In addition, representation of women and people of color at Honeywell has increased each year since 2018, which is a testament to our ongoing commitment to hiring, developing and retaining diverse talent. Now let's wrap up on Slide 10.
We delivered on our Q3 commitments despite a challenging backdrop. As always, we remain laser focused on executing our strategic objectives and investing in growth opportunities that position our business well for the next phase of recovery. We're executing on our proven value creation framework with the rigor you can expect from Honeywell, Which will continue to consistently drive shareholder value. With that, Rina, let's move to Q and A.
Thank you, Darius. Darius, Greg, Anne, and Torsten are now available to answer your questions. We ask that you please be mindful of others in queue by only asking one question. Ari, please open the line for Q and A.
Thank you, Rina. The floor is now open for questions. If you have a question, please click on the raise hand icon at the bottom of your Zoom screen. We will now take our first question from Steve Tusha from JPMorgan. Steve, over to you.
Hey, good morning. Can you hear me okay?
Yes.
Great. Just on the organic growth guidance for next year, Would you expect first half to be to actually grow or are you looking at it being kind of more like the 4th quarter? And then, I mean, you talked about all 4 segments growing, I guess. Does that mean like, Will you decelerate from this year because of the first half? Like maybe just give us some a bit of guidepost on kind of what the messaging is on first half versus all of next year on this front?
Yeah. No. So the short answer to your question, Steve, is that, yeah, we do expect the first half to grow. I think how much is gonna be a little bit dependent upon some of the supply chain challenges that we pointed out that we're seeing in Q4. Frankly, we see it this way, which is on semiconductors, we actually see some positive tailwinds as we head into So that's good.
I don't think that it's going to be completely alleviated, but it's going to get better. When it comes to some of the other components, particularly for aerospace and some of the tier 2, tier 3 suppliers, particularly castings, forgings, things of that nature. We're not sure where we are in that improvement cycle because it really just kind of popped up in Q3 in a more acute phase. So we're a little more cautious there. But the short answer is We do expect growth in the first half of twenty twenty two.
What I will say is that We'll have some headwinds in SPS due to sort of what I call COVID related masks. But I think those are gonna be particularly acute in Q1 of next year, they're evident here in Q4 of 'twenty one and to a lesser extent, Q2 of 2022 and then it's kind of going to, we're going to get back to that normal run rate. So as you can see, I mean, it's The year of 'twenty two is setting up terrific. I mean, we're up double digit orders growth in each of our SBGs. One exception, SPS is sort of call it mid single digit, but if you exclude the impact of the COVID masks, we would be up double digit as well.
So the only constraint that we see is to some extent YJ. And at least in semiconductors, we think that Q4 is the peak of those challenges. That's the way we see it today. Now I will say this lastly, which is it's a dynamic environment. There were some puts and takes here in Q3 that were There are probably more takes than positives.
So we're going to monitor this as closely as Q4 evolves.
And that's even why we have such a wide guidance range for the Q4. $400,000,000 of revenue range is wider than we're typically doing and it's exactly for those reasons. So does terrific mean acceleration from 'twenty one? That's just my follow-up. Thanks.
Well, I think it's all I can say is we expect growth in the first half. And when we get together with January, February to give you our outlook, we'll have a better view. But we certainly expect growth. The backlog supports that. And our story hasn't changed from really the end of Q2 earnings report.
I think the setup for Honeywell for 'twenty two, 'twenty three is terrific. There's nothing here that makes me wanna change my mind. Yes, we're gonna have to deal with some of the supply chain challenges. Here, they're real. They're probably understated in the market.
I think that frankly, it's only recently that it's been realized how severe they are. But we've incorporated that in our guide for Q4, and I think we're working diligently to try to resolve them. I mean, we've been at this for 12 weeks now and it's not just one way, it's not just pushing suppliers harder, it's also doing redesign, alternative products, Finding different ways to generate revenue. So I think we've got a pretty good playbook, but I won't Understate this, the challenges are real and fairly substantial.
Our next question comes from Julian Mitchell from Barclays. Julian, over to you.
Thanks very much. Yes, good morning. So maybe my question would focus on the revenue outlook in Aerospace, because I think the guidance for this year has come down 3 quarters in a row now in that division. So just wanted to try and understand your level of confidence in when the defense and space piece will return to growth again. Is it sort of early next or towards the end of the year and also any updated thoughts on commercial aero aftermarket and how you think your own revenues will lag or move in line with the recovery in traffic because of spare parts and so forth.
Yes.
Okay. Yeah. So Julien, a couple of points. On defense and space, as you saw, we kind of had a, frankly, a bit of a disappointing double digit negative for Q3. But remember that had we not sort of had some of these supply chains challenge, which really became very evident in Q3, Because think about these as Q3, Q4 suppliers which are smaller, which reduced capacity during the pandemic.
And now we're getting a lot of demand, not just from us, but probably some of the other aerospace players. It's going to take some time to work through that, but we would have been down mid single digits in q3 had that not happened. You know, we have unfortunately more past due than we want in defense and space. That's went up substantially in Q3 and we've got to work our way through that. What I will tell you about defense and space is if you look at our bookings or where we are at this cycle early Q4 versus where we were at the same period of last year.
That gives us some, well, quite a bit of confidence that we're looking at flat to low single digits. Now that could get even better. I don't know that it's going to get a lot worse. What we're seeing here is if you recall, if you go back to 2020, we had very strong orders and revenue in 2020 in defense space, and you see the effect of some level of usage and destocking by some of those defense and space customers and distributors. So we're optimistic about normalization net in 'twenty two.
And based on what we see today, and this is important to say today and this could change, we see flattish to low single digit growth. And let's now switch gears and talk about commercial aftermarket. We see that continue to improve it. You saw that strong growth in Q3. We think it's going to continue to get better.
We're still nowhere near the 2019 levels, but it continues to get better. As you know, November 8, we're gonna open up the borders and more international traffic is gonna step up. So as more Traffic is gonna step up. So as more international comes back, as COVID abates, which we think we're gonna happen here in Q4 In Q1 next year, we see continued growth in our aftermarket coupled with Stronger growth in OE, both in air transport as well as PGA. So the setup for aerospace, I think for 'twenty two is quite good.
Greg, I don't know if you've been
No, I think you got it. Great. Thank you.
Thank you.
Our next question comes from Scott Davis from Melius Research. Scott, over to you.
Hey, good morning, guys and Ann. Hopefully, you
can hear me okay.
But Darius, could you can you quantify what you think supply chain cost you in revenues in the quarter? Do you have a sense of that? And if you have a sense of that, Darius, do you have a sense of can you delineate between like a lost sale and a delayed sale? How much of that is kind of Gone forever versus just pushed into next quarter or whatever.
Yes, no, I can. So think about the impact In Q3, about $300,000,000 plus or minus. And think about what's embedded in our Q4 outlook of an impact of $300,000,000 to 500,000,000 Now in terms of loss forever versus push, it's not loss forever. I mean, as I talked about, some of unfortunately, some of our past dues going up and that went up $200,000,000 to $300,000,000 just in Q3, so it's not lost. We've got to be able to get our Supply chain to function more effectively and efficiently.
And that's exactly what Torsten and his team are are working on. And But it's we don't envision that as lost. Customers still need those products. And frankly, I think, you know, when this earnings cycle ends, I don't think we're gonna be that unique in terms of some of the bottlenecks that that we're seeing.
Okay.
Thank you. Good luck, guys.
Thank you.
Our next question comes from Nicole DeBlase from Deutsche Bank. Nicole, over to you.
Guys, good morning.
Good morning, Nicole.
Maybe you could talk a little bit about how you're thinking about driving 4Q margin expansion I know things are tough, but you're also up against a very strong backlog with the potential for growth to really bounce back in 2022. So kind of how do you balance that against cutting costs for the short term issues that you're facing.
Yeah, well, yeah, first of all, Nicole, I don't, Cost cutting is not what we're doing. We're actually investing this year, particularly in businesses like Intelligrated, which are growing at clips that probably no other business has seen before. But the biggest lever here, and I think one of the best operational stories for Honeywell that you see here in Q3 is our pricing discipline. I mean, we think we gain in terms of a price cost 40 to 50 basis points of margin expansion, and that's what you're seeing come through in our margins. I mean, I think that was a terrific commercial execution by the team, and They did a great job.
So this is not so much a function of sort of cost cutting. This is more of a function of commercial execution.
Yes, I would agree. I mean, if you think about it, Nicole, last year, obviously, we were in a substantial cost cutting mode and our repositioning pipeline and the projects around that reflected it. This year, we always say that we continue the productivity playbook, fixed cost power 1, create operating leverage by growing sales and holding you know, fixed costs flat as just a mantra of the way we work. And so to Darius' point, we're not doing massive cost cutting. We are being smart about where, we're putting it back though and we are using the things that we spoke about last year in terms of automation and our digital capabilities I mean, I'll be honest, this the supply chain work that we're doing, that Thorsten and the team are doing are very much enabled by our Honeywell Digital tools and capabilities and some of the visibility that he's put into his own capabilities in the supply chain to manage.
So this isn't about cutting costs, it's about managing them properly. And we are investing back in the business as Darius mentioned. But we're going to be doing it diligently. So, I feel pretty good about the margin rate expansion. You would see it's the implied margin rate expansion is a little bit lower than what our guide was previously, simply because the sales numbers are down.
So, we'll have a little bit less operating leverage from an opportunity standpoint, but still very healthy margin expansion in Q4.
Yeah. And just to add to that, and great, this is an important point. Honeywell Digital kind of has 2 elements. Number 1 is it helps us to operate the business better. And Torsten and his team have done a great job instrumenting Exactly how do we uncork some of these bottlenecks that we're seeing.
I mean, it's not perfection. It's not that we're gonna completely avoid them, but I think we're doing a nice job. And second of all, which is continue to drive productivity, as Greg pointed out, through automation. Automation is a big lever for us And one that, frankly, we're using aggressively, both in sort of our manufacturing facilities, but also in the office environment. And it's been enabling us to drive productivity.
Thanks for the clarification guys, super helpful.
Yeah, thank you. Our next question comes from Jeff Sprague from Vertical Research. Jeff, over to you.
Thank you. Good morning, everyone.
Hey, gentlemen.
Hey, good morning. Sort of a related question. Darius and Greg, one of the other themes out of earnings season so far is kind of the double edged sword element of backlog, in other words, things not priced in the backlog for the current inflationary market. Given that you run with relatively large backlogs, I just wonder if you could address the profitability in your backlog. Do you have inflation protection And any particular headwinds we should think about as that backlog converts?
That's a very good question, Jeff, and we've thought about that one. And you're right. We've aged backlog. You got to be very, very careful because if you don't go back and revisit your Backlog and reprice it, then you're gonna have a problem. And and I can tell you that's a very active exercise we're doing because As you can imagine, I mean, whether you're just to quote some figures, I mean, steel is up 198% year over year, nickel, 25%, copper 46%, aluminum 66%.
I mean, adhesive are fairly substantial increases. So what we've been doing in in more or less all of our businesses, and particularly long cycle ones, is trying to go back and reprice some of our back You kind of almost have to do that because, and not to even mention labor inflation, which we're also seeing. So It's part of our playbook, part of our exercise and exactly what we've been trying to do.
Okay. Thank you very much. Our next question comes from Josh Pokrzywinski from Morgan Stanley. Josh, good morning and over to you. Hey, good morning, everybody.
So I guess one question for Darius and Torsten since he's on the line as well. How's that $500,000,000 of supply chain that you guys talked about at the 2019 Analyst Day looking? I mean, you're probably looking at the composition of that a little differently today just given how much has changed. And then just a smaller follow-up, how do we think about the cadence of UOP catalyst shipments here, those look pretty solid in the quarter.
Yeah, let me start with the UOP question and I'll turn it over to Thorsten for the other. I mean, UOP's bookings remain very, very strong. You saw that both in revenue and the booking rates here in Q3, so we're optimistic. And keep in mind, which really gets us excited also, and I've talked about this before, HPS follows UOP by a 12 to 18 month cycle. So it it UOP leads, HPS follows.
And so that sort of gives you another good indicator that we should see a nice impact on In HPS 12 to 18 months from now. We've done this analysis before, and that's the typical lead lag cycle. So not only is this good news, And let's face it. I mean, we all read the same articles. The world needs more energy.
Some of it is going to come from renewables, but frankly, Some of it is gonna have to come from hydrocarbons as well. So we think that that's overall the world right now is energy short and there's gonna be a reinvestment cycle, both in renewables and to some extent hydrocarbon. I'll turn it over to us. Yeah.
I mean the $500,000,000 they are split primarily between our short cycle business, Especially in SPS and HBT and the long cycle business in aerospace. So that's what we are seeing. We first saw dramatic impact on the short cycle business, but now in Q3 really saw that supply shortages are kicking in also in the long cycle in the aerospace business. But the majority sits primarily in the semiconductor related short cycle business.
Okay. Thanks a lot guys.
Thank you.
Thank you very much. Our next question comes from Dean Dray from RBC Capital Markets. Dean, good morning. Welcome back to Dean. Our next question comes from Andrew Obin from Bank of America.
Andrew?
Yes. Can you hear me?
Yes. Good morning.
Good morning. Just a question, follow-up question. A, On China, when do you guys see China reaccelerating? And another question is, if I look at HBS and UOP, China has been
a huge market, huge source of growth. And what we've been reading is because of these energy constraints in China, China is reassessing some sort of more commoditized energy intensive industries like textiles, but more importantly chemicals. We've read about some large chemical projects being canceled. What does it mean for sort of HBS and European China going forward? Thank you.
Yeah. Well, first of all, we actually just to give you a data point from Q3, our growth in China continues to be robust. We were up high single digits in Q3 and we actually don't see that debating. So our position in China continues to be very good. Our orders rate As you know, there's probably a focus in China right now to actually generate more energy, particularly to support The industry right now that's happening in Q4, so we actually think that's going to create a very favorable investment environment and business opportunity And the other business opportunity for us, which we're very excited about, is a focus in China on sustainability.
And when we think about some of the UOP HPS solutions in our sustainability technology solutions business, That's going to create a giant opportunity for us in China and frankly one we're very excited about. So we think that there's going to be kind of a Twofold opportunity here. I think there's going to be a reinvestment cycle, what I call a little bit more of the traditional energy, but really an accelerated and more pronounced investment cycle in renewables. And as you know, we have a very strong position in China and we think we could be a Major player in that sustainability play.
Our next question comes from Andy Kaplowitz from Citigroup. Andy? Good morning, guys. Good morning, Andy. Darius, many of the multi industry peers that you have been relatively acquisitive over the last 6 months.
We know Honeywell has been active also, but its level of activity has been maybe a little lower given the So is this just a function still of valuations being pretty high? And I know Darius you've spoken about this before. You've spoken last quarter, I think just about being more aggressive with the balance sheet. So what does that mean? Do you see a step up for Honeywell on M and A related activity over the next year?
Yeah. I mean, yeah, I think M and A is sort of still the desired way to deploy capital. I mean, we just We have done SPARTA this year, although it didn't require cash. We think the CQC Honeywell Quantum Solutions is a very important and meaningful transaction. Yeah, it's a merger, not a deployment of capital, but nevertheless, it is a transaction that's critical for us.
We just did performance It's a smaller acquisition, but it's a critically important one. And you see a little bit of a pattern, right? Sparta, life sciences, Performance Life Sciences, we like that segment and we're going to continue to look. Yeah, with this level of, With this kind of interest rate environment that we have today, the M and A market is overheated. It is what it is, but I've said we're not gonna stay on the sidelines forever.
I mean, yes, versus Any historical metric, the multiples are high. But and I don't love it, but the market is what the market is. It It doesn't mean we're gonna stay on the sidelines forever and wait for it to turn. I mean, it's been this way. If interest rates go up, I do think a little bit, so which may allow us to be even more active.
But we are active. We're looking at numerous deals and You know, nothing is 100% in the world of M and As, but we're hopeful we're going to be able to get something done and certainly want to deploy our capital in that way. But it has to be the right business. It has to fit our technology orientation. It has to be at the right value point, although nothing is cheap these days.
And we're thrilled with what we're doing with Sparta. I think that's been, looking back at this, it's been about 6 months plus since we've acquired that company. It's going to be a winner. I'm very confident of that.
Appreciate it, guys.
Thank you.
Our next question comes from Peter Arment from Baird, Peter. Yes, can you hear me? Yes. Good morning, Peter.
Hey, good morning, Darius. So Greg, Darius, maybe you could just talk a little bit about How you're viewing SBS kind of margins, the outlook going there. You talk a little bit about kind of improved mix and execution, but obviously you're up against some headwinds there in that business. You talked a little bit about supply chain and also just the PP and E business Klein, how should we think about just kind of the outlook improving margins in SBS?
Yeah, yeah. Well, As you know, the fastest growing business in SPS is Intelligrated. It is margin dilutive. We've been talking about that. And look, that business grew 60 percent this quarter.
Any business growing at that kind of pace is going to have some challenges. But you coupled that kind of level of growth, which pulls on things like electronics, steel, metal, With the supply chain challenges we have, it's going to have some efficient challenges, particularly since it's there's a strong correlation between 3rd party buy, our own manufacturing and installation. And when those things don't work together well, there's some challenges. I can tell you we're Investing heavily in that business to really prepare it to be a $4,000,000,000 $5,000,000,000 $6,000,000,000 business, which is the path that it's on. So there's an investment play, there's an efficiency play and so on.
Having said that, a lot of our other businesses such as AST, such as PSS had an absolutely terrific quarter. PSS has been a great success story for us. It's winning in the marketplace. So we think that this sort of margin challenge is going to abate over time, particularly as we made some of the process improvements and investments in Hallagravet.
Yeah, I would just echo that. I mean, we've always talked about this is creating end market for ourselves for to follow later with service and software that's still Our expectation, as Darius mentioned, when the material availability doesn't match up with the installation labor, it becomes challenging and that's really what we're facing right now. We'll get through it. But, it's this availability of material throughout the supply chain, You know, create some big challenges when you're seeing this type of growth.
Appreciate the color. Thanks.
All right. Our next question comes from Deane Dray from RBC Capital Markets. Deane, are you there?
Yes. Thank you. Good morning, everyone.
Hey, Dean.
Hey, sorry I was juggling multiple calls this morning. So thanks for letting me get back in. I want to circle back on a topic that Josh raised and just the idea of UOP leading HPS. P. S.
And it just begs the question about the oil and gas industry CapEx cycle. It's really been slow to recover here, but now with the spike in oil prices, what's your expectation on release of new projects? Even as simple as MRO has still been lagging as well. But what's your outlook there please?
Yeah. Look, I think this is becoming fairly obvious, and we all read the same articles and see what's going on, which is There's going to have to be a reinvestment cycle. As much as we all want sustainable and renewable technologies to take over sort of energy needs tomorrow. It's probably going to be a little bit of a longer term. And it's very clear to me that there's going to be a reinvestment cycle.
We're seeing a good reinvestment cycle when I call some of the shorter projects, refurbishment Focused at the installed base, but we're strong believers that there's going to be a fairly strong reinvestment cycle in 2022 and 2023 here. Think that's necessary. So we're bullish on that segment. And certainly the price of oil, price of gas support that kind of investment. I mean, if you look at gas and oil, I mean, they're very, very attractive levels.
What we need now is some level of stability. So that's good. But let me give you a couple of other specific data points. Our renewable fuel orders This past quarter, we're up 86%. I mean, I think we forget sometimes that we just characterize UOP as oil and gas.
It is not just oil and gas. It has an incredibly strong green fuels portfolio, which is winning in the marketplace, and we've seen 86% Rob. Also some of our energy storage controls orders were up 64% this past quarter in our HPS business. So those are just a couple of data points for you that we are very excited about the energy future. We have a portfolio that's going to play in
it.
Having said that, There's going to have to be a reinvestment cycle in sort of what I call the oil energy infrastructure.
That's really helpful.
Thank you. Thank you.
All
right. Our next question comes from Joe Ritchie from Goldman Sachs. Joe? Thanks. Good morning, everyone.
Good morning, Joe.
Guys, when I take a look at your your performance Just from a growth standpoint and what we're seeing from a backlog orders perspective, you know, HBT is probably the one where we're seeing the biggest disconnect. And so I'm curious if you can maybe just provide a little bit more color on whether it's specific components, labor, What specific regions you're really seeing some of these supply issues, supply constraint issues, and when we would expect some of that to alleviate, for the growth to really pick up. Yeah, this is one of the places where the electronics shortages are very acute. And so, The fire business in particular uses some very specific semiconductors which have been extremely short. I think Doug Wright and the supply chain team have done a very good job of trying to free up capacity from other distribution points.
They've also been doing, we talked a little bit about the reengineering work. They've done a lot of reengineering to try to, include different chipsets into some of their into some of their platforms. So this one is really pretty acutely tied to the whole you know, capacity expansion that's going on in the fab industry. So, I think we're going to feel this. We talked about the Q4 and into the first half of the year, this is one of the businesses I think we're going to feel that probably more than others.
But it will come to an end. I think it's a very it's not a 1,000 parts. It's measured in like tens of parts here. Okay. Thank you.
Our last question comes from Sheila Kahyaoglu from Jefferies. Sheila, over to you.
Good morning, Darius and Greg, and thanks for fitting me in.
Good morning, Jill.
Greg, good morning, guys. You guys noted to an earlier question too, defense was down mid single digits ex the supply chain issues. Maybe could you parse a little bit about how much of that mid single digit decline came from US DoD O and M budgets declining versus international programs. And somewhat related to that, margins are are growing pretty nicely despite the supply chain issues and the OE growth in the quarter in aero. So is defense materially lower or was there better price in the segment?
Yeah, maybe I'll take the last one first. I mean, think about the operating leverage that we're getting across the portfolio, pretty heavy in aerospace in particular. I mean, that was the we talked about our cost reduction programs last year and Aero was at the top of that list PMT second in terms of the level of fixed cost takeout. So part of what you're seeing from Aerospace in terms of almost 400 basis point improvement is a big operating leverage that they're getting even though it's on only 2% revenue growth. In terms of the split between US DoD and international, I think what we're seeing is similar to what we spoke about before.
I mean, the U. S. DoD and international are both down from a demand perspective as we're going through that recalibration, if you will, on some of the pre buying that had been done last year. And we do see the supply chain issues that we're having are really in a lot of the mechanical spaces. So, I expect that we'll start seeing that improve as the supply chain, the aerospace supply chain complex you know, ramps up, you know, into the Q4 and into the early part of next year.
I don't know, of course, if you want to make a few comments on that.
Yeah. I mean, this is, we've seen this in 2018, 2019 and we were eventually able to grow this by 18%, 19%, 20% year over year and this will take you in the next couple of quarters.
Great. Thanks so much.
Thank you.
That concludes today's question and answer session. At this time, I would like to turn the conference back to Darius Adamczyk, for any additional proceeds. Darius, over to you. I want
to thank our shareholders for your ongoing support. We delivered strong Q3 results and continue to navigate effectively through uncertainty, while gaining traction in key strategic growth vectors and positioning ourselves to capitalize on improving key end markets. Thank you all for listening and please stay safe and healthy. Thank you.
Thank you. This does conclude today's conference call. You may disconnect at this time. Have a wonderful day.