Day, ladies and gentlemen, and welcome to Honeywell's Third Quarter Earnings Conference Call. At this time, all participants have been placed in a listen only mode and the floor will be open for your questions following the presentation. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mark Macaluso, Vice President of Investor Relations.
Thanks, Derek. Good morning, and welcome to Honeywell's Q3 2018 earnings conference call. With me here today are Chairman and CEO, Darius Adamczyk and Senior Vice President and Chief Financial Officer, Greg Lewis. This call and webcast, including any non GAAP reconciliations, are available on our website at www.honeywell.com/investor. Note that elements of this presentation contain forward looking statements that are based on our best view of the world and of our businesses as we see them today.
Those elements can change and we ask that you interpret them in that light. We identify the principal risks and uncertainties that affect our performance in our annual report on Form 10 ks and other SEC filings. For this call, references to adjusted earnings per share, free cash flow, free cash flow conversion and effective tax rate exclude impacts from separation costs related to the spin offs of our Homes and Transportation Systems businesses and U. S. Tax legislation, except where otherwise noted.
This morning, we will review our financial results for the Q3 of 2018, share our guidance for the Q4 and provide an update to our full year 2018 outlook. As always, we will leave time for your questions at the end. And with that, let me turn the call over to Chairman and CEO, Darius Adamczyk.
Thank you, Mark, and good morning, everyone. This has been a very exciting quarter for Honeywell. In August, we raised our full year earnings outlook by an additional $0.05 the 4th increase in 2018, driven by continued momentum throughout the portfolio. We completed the spin off of Garrett Motion on October 1 and are in the final stages of completing our second spin of the homes and global distribution business Resideo. We also announced our acquisition of Transnorm, a Europe based supplier of warehouse automation solutions, which I'll talk about more in a minute.
Most importantly, we continue to deliver our commitments to shareholders. We met or exceeded our guidance on all metrics. For the Q3, we delivered adjusted earnings per share of $2.03 up 17% year over year, driven larger by strong operational performance. We grew organic sales 7%, impressive top line growth across aerospace, safety and productivity solutions and homes. And our long range orders and backlog were up 26% and 17% year over year respectively, which positions us well for continued growth in 2019 and beyond.
Our focus on maintaining our productivity rigor, especially in an inflationary environment, was relentless this quarter. We generated 70 basis point of segment margin expansion, 20 basis points above the high end of our guidance, driven by sales excellence and strong productivity gains enabled by previously funded and executed restructuring. We will talk more about the steps we have taken to address the impact of tariffs later in the call. We also continue to see improvements in working capital performance, coupled with profitable growth, which is driving increased free cash flow conversion. This quarter, we generated $1,800,000,000 of adjusted free cash flow, up 51% year over year, excluding separation costs.
Conversion this quarter was 119%, well above our long term target. I'm particularly pleased with the progress we've seen and I'm confident there's more to come as we enhance our capabilities through the deployment of HOS Gold. We are focused on improving working capital management at every level of the organization. Lastly, as we've done throughout the year, we continue to execute our aggressive and disciplined capital deployment strategy, committing more than $4,500,000,000 to share repurchases, dividends and acquisitions through the Q3. That number includes the dividend paid to date, the Transnorm acquisition and approximately $600,000,000 in share repurchase in the 3rd quarter.
The pullback in the stock in the first half of October allowed for additional repurchases of Honeywell shares into the Q4 at attractive levels. And as you saw, we increased our dividend by 10% in September, which is the 9th double digit increase since 2010. Our end markets continue to be strong and we have a simpler, more focused portfolio following completion of the spins. As I said last quarter, we continue to execute well as evidenced by our sales, margin and cash performance and with significant balance sheet capacity to deploy. I continue to be encouraged by what I see in each of our businesses and I'm excited for what I know will be a strong finish to 2018.
Let's turn to Slide 3 to highlight some of the recent exciting news in our businesses. In aerospace, Gulf Air selected Honeywell's Go Direct flight efficiency software to reduce fuel costs and lower emissions across its entire 32 aircraft fleet. The software will provide Gulf Air clear analysis and real time insights that address all flight variables, allowing them to unlock savings beyond standard efficiency initiatives. Gulf Air joins a growing list of airlines adopting Go Direct flight efficiency software, including Aer Lingus, British Airways, FPL Airways, KLM, Lufthansa and Turkish Airlines. In Home and Building Technologies, Honeywell partnered with Dubai Properties to complete the installment of energy savings upgrade in all 11 Business Bay Executive Towers in Dubai.
The project includes a fully digital building management system to modern and control the tower's mechanical and electrical utilities as well as fan closed units that integrate the software to provide visibility to electricity consumption. We anticipate that project will result in savings of 3,300,000 kilowatt hours or approximately $400,000 annually. In Performance Materials and Technologies, GZAC Petroleum selected Honeywell UOP Technologies for new refinery capable processing 5,000,000 tons of crude oil per year. UOP will provide licensing and basic engineering design services that allow GIZec Petroleum to convert crude oil into high quality, clean burning Euro5 motor fuels. This is the 20th award for Europe's diesel hydro heating technology and the thirty-thirty award for its gasoline and unit cracking technology in the last 10 years.
Earlier this month, we announced the acquisition of Transnorm, a privately held European warehouse automation solutions provider that specializes in curved conveyor systems that quickly and efficiently move products and packages for premier e commerce and parcel delivery addition of TransDome has an installed base of 160,000 units in a large and growing aftermarket parts and services business. The addition of TransAlarm broadens Honeywell's Intelligrade's product portfolio and allows FTS to participate in the fast growing European warehouse automation market fueled by growth in e commerce. Clearly, a lot of exciting things are happening across the portfolio as we head into the final quarter of the year. With that, I'd like to turn the call over to Greg, who will discuss our Q3 results in more detail. Thanks, Darius, and good morning, everyone.
I'm going to begin on Slide 4. As Darius mentioned, we delivered another strong quarter. Consistent with the first half, organic growth was broad across the portfolio with about 65% of our portfolio growing 5% or more in the quarter and over 3 quarters of the organic growth coming from increased volumes. A few highlights, commercial aviation OE grew 19% organically led by business aviation. Defense and Space grew 14% organically with double digit growth in both the U.
S. And international businesses and safety and productivity solutions grew 12% organically led by Intelligrated Warehouse Automation Business. The markets we serve continue to be strong and we continue to leverage our leading market positions, new product launches and investments in commercial excellence to drive profitable growth. We generated 70 basis points of margin expansion in the quarter while continuing our investments for growth and effectively managing the impact of inflation. A big part of our performance was driven by productivity enabled by our ongoing restructuring activities.
This quarter we funded approximately $70,000,000 in new restructuring projects aimed at improving our cost structure and optimizing our footprint and supply chain. The majority of our earnings growth $0.20 this quarter came from segment profit improvement, driven by enhanced sales volumes and sales excellence across the company. We also realized the $0.05 benefit from share repurchases, which resulted in a lower weighted average share count of 752,000,000 shares. This year through the Q3, we've reduced the outstanding share count by more than 2% and have deployed more than $2,000,000,000 in share repurchases. Below the line items were roughly flat for the quarter with higher pension income, offsetting higher repositioning and other funding.
Finally, our effective tax rate of 21.9 percent was lower year over year, which generated a $0.04 benefit consistent with the outlook we provided at the beginning of the quarter. All told, we delivered adjusted EPS of $2.03 This figure excludes the net impact of an approximate $1,000,000,000 favorable adjustment to the 4Q 'seventeen tax charge and approximately $233,000,000 in spin related separation costs in the quarter. Those include $117,000,000 of tax costs incurred in the restructuring of our various legal entities in preparation for the spin offs. You'll find a bridge to 3Q 'eighteen adjusted earnings per share in the appendix of the presentation posted on our website. Finally, we generated adjusted free cash flow in the Q3 of $1,800,000,000 up 51% versus prior year.
We continue to see marked improvements in this area with stronger cash flows and better conversion enabled by 0.6 turn improvement in working capital versus the prior year. This strong cash generation was most prominent in Performance Materials and Technologies and Safety and Productivity Solutions. So overall, another strong performance across the board consistent with our prior quarters. I am now on Slide 5 to review our segment results. The growth we saw in aerospace last quarter continued as we benefited our strong positions on winning platforms in a robust demand environment.
We delivered sales growth of 10% on an organic basis. Commercial OEE sales were up 19% organically led by engines, avionics and auxiliary power unit demand in business and general aviation, air transport deliveries on the Boeing 737 and Airbus A350 and lower customer incentives which added roughly one point of organic growth to aerospace in total for the quarter. Defense and Space grew 14% organically driven by U. S. DoD spares volume, robust sensors and guidance systems demand and higher volumes on key programs including the F-thirty 5 and CH-forty seven Chinook.
The aerospace aftermarket grew 6% organically, primarily driven by strong airlines demand and maintenance service program activity in business aviation. As a reminder, this was the last quarter that Transportation Systems now a publicly traded company called Garrett Motion contributed to our aerospace business and TS sales were up 7% organically in the quarter on continued growth in light vehicle gas turbos in North America and Europe driven primarily by new launches. Aerospace segment margins expanded 80 basis points, driven by higher defense and aftermarket volumes, commercial excellence and lower year over year customer incentives. In Home and Building Technologies, organic sales growth was 3% for the quarters. Homes grew 5%, driven by continued strength in ADI Global Distribution and Residential Thermal Solutions growth in the Americas and Europe.
Buildings grew organically 1% driven by continued commercial fire product strength globally, demand for our Tritium building management platform and the connected buildings business, offset by declines in our air and water business due to low demand for air purifying solutions in China. HBT segment margins extended 10 basis points, driven by commercial excellence and material and labor productivity including benefits from previously funded and executed restructuring. This was largely offset by the impact of inflation and unfavorable mix. HPT did experience some short term supply chain challenges and transition impacts related to the Resideo spin off in the quarter. As you know, the Homes business was not a separate entity within HPT before the spins and the separation as expected was complex with some significant changes in our organization, our systems and our manufacturing footprint.
With the Resideo spin off slated for October 29, we anticipate that we'll be able to address most of these challenges within the Q4 and get off to a good start in 2019. In Performance Materials and Technologies, sales were up 4% on organic basis driven primarily by growth in Advanced Materials and Process Solutions. Organic sales growth in Advanced Materials of 6% was driven by significant demand for Solstice, low global warming products. Process solutions sales were up 4% organically driven by continued demand in our short cycle businesses principally in software, field devices and maintenance and migration services. EOP sales were up 3% organically driven primarily by growth in engineering and new catalyst units in China.
PMT segment margins contracted as we previewed driven by unfavorable mix in UOP we continue to expect that to turn around in 4Q as we had previously communicated. Finally, safety and productivity solutions delivered another outstanding quarter with organic sales up 12%, driven by broad based growth across all lines of business and Telegrada continues to outperform growing consistently at double digits driven by strong orders growth and major systems and a robust backlog of new wins fueled by growth in e commerce. We saw continued demand for new Android based mobility product offerings as well as for service and scanning applications in the quarter. We also saw double digit growth in our legacy sensing business. All in all, organic sales growth was 16% in our productivity solutions businesses.
Within the safety business, organic growth was 6% with strong demand for new gas and general safety products. Additionally, the SPS China and India business delivered another quarter of more than 20% growth in sales. Strong segment margin expansion of 150 basis points was enabled by commercial excellence, higher sales volumes and productivity and repositioning benefits. Now let's move on to Slide 6 to discuss our outlook for the 4th quarter. The 4th quarter preview reflects the absence of transportation systems for the entire quarter and the anticipated completion of the home spin by the end of October.
So only 1 month of operating results for Homes is included in our guide. You will see this reflected in the updated full year outlook as well. Throughout the year, we have seen strong long cycle order rates and a growing backlog, which in combination with our short cycle momentum, we expect generate 5% to 6% organic sales growth in the quarter. We expect that segment margins will expand between 60 to 80 basis points, reflecting a quarter over quarter and year over year margin improvement in PMT and SPS, as well as margin accretion from the absence of our 2 spun businesses. We anticipate adjusted earnings per share of $1.85 to $1.90 which excludes the segment profit contribution net of tax from Garrett for the full quarter and Resideo for 2 months as I mentioned and it includes the benefit of the indemnification agreements we have with both companies.
Removing the after tax segment profit contribution from the spins in both periods, 4th quarter EPS adjusted is expected to be 17% to 20% up. Expected EPS growth will primarily be driven by strong segment profit growth. Other key elements include lower share count due to the more than $2,000,000,000 in share repurchases we have done through the Q3 and higher pension income offset partially by a higher effective tax rate for the quarter at approximately 22%. This outlook incorporates estimate of the tariff impact for what is enacted and known as of today. We continue to work those plans to address the impacts if any from other potential tariffs that have been discussed but not enacted.
Turning to the segments, we expect continued strength in aero, commercial OE in both air transport and business aviation and in the aftermarket driven by flight hours growth. We continue to expect mid single digit aftermarket growth in the 4th quarter and we expect that the momentum we have seen in defense will continue, driven by demand for sensing and guidance systems and spares volumes into U. S. Department of Defense programs. This is supported by orders growth of more than 40% in the 3rd quarter and backlog growth of more than 30% as well.
Our outlook for Home and Building Technologies for the Q4 reflects only 1 month of operations from homes and a full quarter of the remaining buildings businesses. We expect continued strength in homes from ADI Global Distribution and Home Products in the month of October and flattish growth in buildings for the quarter. For buildings, we anticipate continued strength in the fire business where we have been growing mid to high single digits, offset by slower energy conversions in building solutions as we've discussed previously, as well as declines in China air and water. The team is launching new buildings, products and we do expect growth to accelerate into 2019. In Performance Materials and Technologies, we're anticipating healthy growth in each of our businesses with UOP likely the strongest driver of demand across equipment, engineering and catalysts.
UOP's long cycle backlog is up more than 10%. We expect continued short cycle demand in process solutions software and service offerings, a trend we have seen throughout 2018 supported by 11% orders growth in the 3rd quarter. In Advanced Materials, we expect continued strength from customer adoption of our Solstice low global warming products and fluorine products. Given the anticipated strength in refining catalyst reloads coupled with continued strong margin expansion in process solutions and advanced materials, margins in PMT will be up sequentially and year over year in the Q4 as we had mentioned previously. Finally, in Safety and Productivity Solutions, the story remains robust in the Q4.
We anticipate broad based strength across all of the businesses led by Intelligrated, Safety and China and India. We are really pleased with SPS's performance this year and expect this to continue into 2019. Now let's turn to Slide 7 to walk through the bridge to our full year EPS guidance. Slide 7 presents a walk of the moving pieces in our earnings bridge for the full year. In August, we raised our guidance to 8.10 to 8.20 based primarily on a stronger outlook for the second half of the year with a small contribution from our change in asbestos accounting.
With the performance in the 3rd quarter approximately 0 point $3 above our expectations and anticipated strength in the 4th quarter, we are raising the low and high end of a full year guidance before consideration of the spins to an updated range of $8.22 to $8.27 which is a raise of about $0.10 at the midpoint. The expected dilution for 3 months of Garrett's earnings and expected 2 months of Resideo's earnings will be approximately $0.31 There is an approximate $0.04 contribution from the spin off indemnification agreements related to Honeywell's legacy liabilities, which nets the spin impact to about $0.27 As a reminder, on a go forward basis beginning in Q4, 90% of the expenses net of recoveries related to the covered liabilities will be reimbursed by Garrett and Resideo. When we take into account the estimated dilution from the spins, net of the indemnification agreement reimbursement, our new range for adjusted EPS is $7.95 to $8 per share. That equates to growth of 16% to 17% for the full year, removing the segment profit contributions from the spins in both periods. Our guidance continues to reflect a weighted average share count of 754,000,000 shares and an effective tax rate between 22% 23%.
Now let's turn to Slide 8 to summarize the details of our full year guidance. We have seen significant momentum throughout the year. On the left side of the page, you see the original guidance on our key measures, which we provided back in December. In the middle of the page is our latest guidance reflective of the strength in our end markets, 3 quarters of outperformance and the dilutive impact from the 4th quarter spinoffs. We now project organic growth of about 6% for the year which is 2 points higher from the high end of our original guidance.
A segment margin range of 50 basis points to 60 basis points, which starts at the high end of our original range, adjusted EPS of $7.95 to $8 per share which is $0.40 higher at the low end and $0.20 higher at the high end of our original range and adjusted free cash flow of $5,800,000,000 to $6,200,000,000 which is substantially above our original projections and represents conversion between 97% and 103% for the year, all representing very robust performance. The difference between our reported and organic sales growth is 3 points in our guidance. We anticipate an approximate 1 point impact from foreign currency translation offset by an approximate 4 point impact from our 2 spinoffs. On the segment guide, Aerospace and Home and Building Technologies reported sales figures have been revised to reflect the lost sales and segment profit from the spins. In Aerospace, we also narrowed our organic sales outlook to the high end of the range based on the strong performance to date and our strong backlog.
We have narrowed the PMT sales guidance to the midpoint of the previous range. PMT's margin guidance remains the same. In SPS, we raised our organic sales guidance by 2 points on the high end to 10% and raised its segment margin guidance to a new range of up 120 to up 130 basis points or 20 basis points improvement on the high end. This business has performed well all year long and we expect a strong finish based on the order rates, the backlog and the momentum in our short cycle products businesses. As you can see, our current guidance is significantly higher than our original guidance and accounts for the 2018 dilution from our 2 spin offs in the 4th quarter.
As Darius mentioned in his opening, we have delivered substantial operating results while executing a major portfolio change. Now let's turn to Slide 9. We wanted to provide a little bit of preliminary framework for 2019 giving all the moving parts with the spins, the liability indemnity and other below the line items. First, starting with the macro environment, we feel very confident in the strength of our end markets. We see continued demand in growing industries, including e commerce, which we address with our warehouse automation offerings from Intelligrated and soon to be TransDorn.
Commercial Aviation, where we have a strong position on the right platforms that will lead to healthy aftermarket growth, defense where we see robust budgets and clarity on defense spending for the year ahead and process automation where we expect to see an eventual pickup in large projects coupled with continued demand for software and services. As we said last quarter, we're proactively managing both the direct and indirect impacts from the Section 232 and Section 301 tariffs and are making necessary changes now for the additional tariffs enacted under List 3 as well as knock on retaliatory impacts if any. While we're hopeful there is ultimately a resolution to the situation, we're planning for the worst and making structural changes, including modify some sources of supply, seeking alternative sources and taking other commercial actions as necessary to position us for 2019 beyond. Given that, we continue to expect inflation to accelerate within the business and we are working to minimize those impacts with the help of our procurement, marketing and commercial excellence teams. We expect the impact to be minimal and manageable in 2018 as we've previously discussed, but now anticipate that the impact of 2019 prior to mitigation actions will be significant.
We have established a robust MOS across the company to ensure that we stay ahead of the situation though and will continue to rigorously address any cost increases throughout our supply chain and adjust prices as necessary. It is our expectation that we will be able to effectively manage the situation and still deliver strong results as we have done through 2018. So as you know, this will put some pressure on margin rate expansion. Moving on to our spin offs, we estimated the total associated stranded costs to be approximately $340,000,000 across the business with more than 50% of these costs eliminated by the end of this year and the balance eliminated in 2019 and we feel very good about where we are in that regard. We have made very good progress and we're managing this smartly and it's a big focus now that the spins are done.
We expect that the full year dilution on a go forward basis from the 2 spins, net of the indemnity reimbursement and excluding those remaining stranded costs will be approximately $0.90 In terms of other preliminary figures for 2019, at our current level of buybacks, we are anticipating at least a 1% reduction in share count Due to the measures we took earlier this year to de risk our pension plan investments, pension income will be approximately $300,000,000 lower year over year and our funded status is expected to remain well above 100%. Repositioning funding, we expect to be approximately $325,000,000 next year. Based on our planning for the Q4 and the repositioning we have funded to date in 2018, this represents approximately $150,000,000 decline year over year. We'll continue to take the opportunity to deploy repositioning funding to improve our supply chain, optimize our fixed costs and manage our remaining stranded cost reduction plans. Finally, with the impact of the legacy liability indemnity reimbursements from our 2 spin offs, we expect that asbestos and environmental will be lower by approximately $425,000,000 As a reminder, this reduction represents the 90% of expense that is covered by the indemnification agreement and is included in the $0.90 of dilution we mentioned earlier.
We will provide you with more details about our expected 2019 performance during our Q4 earnings report and 2019 outlook in January. Now with that, I'd like to turn the call back over to Darius, who will wrap up on Slide 10.
Thanks, Greg. The Q4 begins a new chapter for Honeywell. Our 2 spin offs leave us in even stronger position with a more focused and growth oriented portfolio and industry leading businesses across attractive end markets. Each has multiple levers to drive inorganic and organic growth as well as continued margin expansion. Our cash performance this year has been outstanding and there is still room for improvement.
Year over year free cash flow growth has exceeded 20% each quarter and our free cash flow conversion has also improved significantly. We are rapidly approaching 100% conversion as we demonstrated this quarter. Our financial condition is best in class for healthy balance sheet that provides us with significant capacity to deploy the dividends, share repurchases and M and A. Our commitment to deploy cash both smartly and aggressively has not changed. Importantly, we have a strong performance culture.
Our say will continue to equal our due and we are focused on continuing to outperform for our customers, our share owners and our employees. We are looking forward to sharing more exceptional results as well as our 2019 outlook during our Q4 earnings call in late January. With that, Mark, let's move to Q and A.
Thanks, Darius. Darius and I are now available to answer your questions. So, Derek, if you could, please open the line for Q and A.
Thank you. The floor is now open for questions. Thank you. Our first question is coming from Nicole DeBlase from Deutsche Bank.
Yes, thanks. Good morning, Darius and Greg.
Good morning. Good
morning. So maybe I'll start with a couple of higher level questions. With the benefit of such a global business that you guys have touches many different end markets, maybe you could just talk through what you're seeing around the world, particularly with respect to emerging markets since we're hearing some concern from investors about potential project push outs, slowdown in short cycle activity, etcetera?
Yes. I will take that one. I mean, certainly, we are seeing a little bit of China has to be the highlight. And certainly, Q3 was not as robust as some of the quarters that we saw in the first half. So there is we did have some tougher comps that we expected.
We had some challenges in our air and water business, which has been throughout the year. So I'm not alarmed yet, but certainly Q3 was a bit slower in terms of growth. I mean, we grew the Chinese market, but not at the double digit pace that we saw earlier in the year. So that's probably my number one area to watch. I wouldn't say I'm concerned about it yet, but certainly an area of focus.
On the flip side of the coin, we U. S. Was extraordinarily robust. Think about 9% to 10% kind of a growth rate in the U. S.
And was probably at the other end of the spectrum. We continue to be very bullish in the U. S. Markets and I expect that to continue. And then sort of the rest of the goal was a little bit of a mixed bag.
I mean, Southeast Asia business was good. We had a really nice recovery in our Latin American business. That was really good to see. That's been a focus for our business activities throughout the year and we see that coming back. Middle East was okay.
India was a bit slower than we anticipated, but we expect a pretty good recovery in Q4. So all in all, I mean, there's certainly some puts and takes, very encouraged by what we are seeing in North America with a focus on China as we head into Q4.
Thanks Darius. That was really comprehensive. And I guess just shifting to capital allocation, just some thoughts as you head into 2019, maybe it was good to see Transnorm come through recently, but how robust is the pipeline? And I guess if M and A doesn't come through as you expect, is there scope to go higher than that 1% reduction in share count that you are kind of earmarking for 2019?
Yes. And I think that's why we are very careful to pick our wording in the press release, which is that you should expect at least 1% share count reduction. The 1% is roughly commeasure with the $3,000,000,000 that I already committed to. But you are spot on. Your comment is exactly right.
That's the way we think about capital allocation. And then depending upon what happens in M and A, we will potentially do buybacks. There are a couple of things that we think we could get done and announce, maybe even as possibly in Q4, probably not close in Q4. So, but I never really count the M and A transactions until they are signed and done. So, I want to monitor that quickly.
We have been in the market early in Q4 as we pointed out in the press release. I thought there were some attractive price points for us and continue to be. But yes, that's the framework you're thinking of is exactly the one we use, which is we kind of will toggle this between M and A and buyback. As I said, I would prefer M and A, but it's as I've said on multiple earnings call now, it continues to be a challenged environment and unfortunately it's kind of becoming the new normal. Although we were thrilled to pick up the Transnorm acquisition and I think an attractive entry point or from a price pay, but a really important entry point into Europe for our Intelligrated business.
Not only is it a terrific acquisition on its own, it also gives us that really nice foothold in Europe with just an outstanding business.
Thanks Darius. I will pass it on.
Thank you.
Thank you. Our next question comes from Jeffrey Sprague from Vertical Research Partners. Please go ahead.
Thank you. Good morning, everyone.
Good morning, Jeff.
Good morning, Jeff.
Hey, I was wondering if
we could get just a little bit more help on the bridge. Greg, I think you said the guide reflects 16% to 17% pro form a growth for 2018. Could you just baseline us on what that implies for segment OP dollars in 2018 for aero and HBT as if the spins were out on a full year basis?
Jeff, in terms of the absolute dollars, I don't think we're going to highlight specifically those numbers directly. But the $0.31 represents you can think about that as close to linear, but not exactly because of the stub period that we've got in homes because we are getting only 1 month of the homes results in that $0.31 So you could think about it as almost linear, but not quite. I mean that we've got both 4th quarter high degree of profit that we're losing in December November. The Resideo side is going to be a little bit less clear from that perspective. But it's the $0.31 is close to linear, but not exactly.
And then just on the $0.90 so it sounds like stranded costs would be an incremental headwind on top of that, if you could clarify that, but is there any deployment of the spin dividends of $2,800,000,000 in that construct?
No, the $0.90 is just simply the loss segment profit on an after tax basis and net of the reduction in our below the line expenses associated with the indemnity. As we talked about the $340,000,000 of stranded cost, which we feel very good about our progress in terms of eliminating that so far is not included in that number. And we'll update you more on that as we get into the January guidance and we finish the year out. You can imagine that as we said, we've taken out by the end of this year greater than 50% of that and we feel like we're in a good position. We're turning our attention from a spin perspective, from getting the deal done to the sustainability side and there will be a lot of focus on that, but that is not in the $0.90 at this point in time.
And in terms of the usage of the spin dividends, you know, Darius talked about the capital deployment framework and we'll utilize that as firepower for executing around that framework, but it is not precisely included in any way in that $0.90
I'm sorry, just one other for clarification. When you say net of indemnity, do you mean only kind of the $315,000,000 or so that Garrett and Resideo owe you and then we've got an incremental tailwind to get to that 425 that you're talking about on lower asbestos and environmental?
Yes. No, again, think about that as asbestos and indemnity for 2018 and the knock on effect of the 90% reduction on a year over year basis in those two particular line items. Obviously, in the asbestos side, narco has nothing to do with that. So we have to take that out. But that's the way to think about it.
And Jeff, this is Mark, if I could. Just to be clear, the caps, the $350,000,000 cap that we cited in August, that is the cash payment cap, right? And so, as we had said in August, the expenses, whatever they are, could be higher and that from a P and L perspective could be closer to the $0.40 we cited in the release. So I think that's where you're getting tripped up. There's a $0.40 expense.
Separately, there's an annual cash payment cap in respect of any year that's $315,000,000
Yes.
So that's where when we gave the $0.40 again, that was a call that a framework, but the actual value of what's going to be in the P and L maybe higher or lower depending on how things go in the $425,000,000 is reflective of where we see 2018 expense in those 2 categories.
Great. Thank you very much guys.
Thanks, Jeff. Thank you.
Thank you. Our next question comes from Josh Pokrzywinski from Morgan Stanley.
Hi. Good morning, guys.
Hey, Daskin. Good morning, Jay.
Yes. Just maybe to dig into PMT on a couple of questions. First, with the recent ruling out of SCOTUS on some of the HFC stuff, how does that impact maybe some of the trajectory for Solstice from here? And then I guess a follow-up on that on some of the refinery comments?
Yes. I mean, it doesn't, because as you may despite that ruling, there are quite a few states that are still adapting the HFO regulation in greenhouse gas emissions. So as of right now, we don't see much of an impact yet. We are continuing to work with the regulatory bodies, both at the federal and the state level. And at the present time, we don't anticipate substantial impact.
And frankly, a lot of the companies that we're working with are on that path anyway. And again, obviously, that's only a U. S. Issue. What was your second question on PMT?
Yes. I guess more broadly in with some of the environment going on there, particularly IMO 2020 and refiners starting to redeploy. I think UOP set to have a good shipment quarter in 4Q. How much of that are you seeing in the business today versus maybe extended visibility into 2019? Just trying to calibrate as refiners spend when it helps Honeywell specific.
Yes. I mean, typically, refiners kind of wait to the last moment. So we've a lot of that investment. So that's what sort of surprised us. So we expect 'nineteen to be a good year.
But the numbers speak for themselves. UP backlog up double digit. That gives me a good sign, strong booking rates. Sort of the margin challenges that were evident in Q3, we very much expected. We communicated those in Q2.
We knew that they were going to be dilutive. But by the way, that reverses in Q4 based on the mix of products that we ship. So overall, we are very bullish on UOP and what they are going to do. And like I said, at the end of the day, I look at the numbers and when I see backlog up double digit like it is, I am very encouraged as we head into 2019 beyond.
Got you. And then just one quick one for Greg on free cash. I think you guys talked about a lot of moving pieces on the pension side and then on the indemnity side, maybe some P and L hit that doesn't come quite through on the cash payments. How should we think high level about free cash conversion for 2019 inclusive of the spins and the moving pieces therein?
Yes. Again, I think you should think about cash conversion year as approaching 100%, even ex spins. We feel like we're getting into that neighborhood this year. And with the continued opportunity that we do have in working capital, we've made really nice strides as I highlighted, 0.6 tenths of a turn improvement year over year and this quarter in particular was sequentially better than last quarter by 2 to 3 tenths as well. We feel like we still have more opportunity to go.
So, we're still going to be targeting something, you know, plus or minus a couple of points to 100%, as that number will move a little bit over time depending on specifics, but we feel very good about our ability to live in that range.
Yes. And Josh, I think we are extremely proud of what we have been able to achieve on the working capital side. If you recall a couple of years ago, I have made this a priority for the business for us to really monitor the balance sheet as much as we monitor P and L statement. And with this kind of a growth rate that you are seeing, 7% top line, our working capital is down more than $600,000,000 I mean that's I'm very proud of the Honeywell team in terms of what they've been able to accomplish on that perspective and it's coming through in our cash performance.
Thanks for detail. I'll pass it along.
Thank you.
Thank you. We'll next move to Steve Tusa from JPMorgan.
Hey, guys. Good morning. Good morning, Steve.
Darius, never heard you this excited. It's a bit of a change where
we would have expected it
from Dave, but you've been a little more balanced. So with the help
of the results. If Michigan loses tomorrow, I could be more excited.
So just on the orders, you kind of threw out the fence, you threw out the HPS orders, in calibrated, obviously. When you think about kind of the long cycle businesses, what were total orders up for the long cycle businesses for the quarter kind of in total? Or if you just want to kind of list maybe a couple of ones we didn't hear like UOP or something like that. I don't know. What were total orders up for long cycle businesses?
Yes. To give you a specific, they are up 26% year over year. Our backlog is up 14% for long cycle. And then just to give you a couple of the specifics, HPS projects up 27%, HBS projects up 22%. Intelligrated was actually flat.
And but keep in mind, they're up 40% year to date. So this was tough comps. We are not trust me, I am not worried one bit about the growth in the Intelligrated businesses. So that's why I am pretty excited today. I mean, when I always worry about tomorrow and when I see those kinds of numbers come through, I have good reason for optimism and I think it points to a very bright 2019 beyond.
Okay. And then just kind of attacking kind of the base question in a little bit of different way. And again, this is merely just kind of like math on actuals. Just using the kind of prior ARO guide of about $3,700,000,000 and stripping out kind of a $500,000,000 number last 9 months or for the year for Transpo gets me down to kind of around 3.1. Is that kind of the right arrow pro form a roughly?
I mean that's just basic math on what
you guys are targeting. Yes. I think you're in the neighborhood.
Okay. And then just for HBT, kind of similar math gets to be around 1.1 type of number. Does that sound right?
Check that one and make sure that one is obviously a little bit less precise given the homes building split, but we'll come back to you
on that one in particular.
Okay. And then just one last one for you. The restructuring next year is a little bit higher than I would have expected. I don't view that as necessarily a negative. But what is when all is said and done, given that it seems like everybody is wants to ignore restructuring at other companies these days.
What is kind of the normal run rate restructuring number for you guys in this kind of new construct
going forward? Do you think longer term? Yes.
I don't know if there is such a thing as normal number. It is dropping significantly year over year by more than $100,000,000 So it's coming down. Some of it is commensurate with a slightly smaller Honeywell. But we still have, as you recall back to EPG, one of the things we have plenty of runway for and what Torsten's number one mission, our new Head of Integrated Supply Chain is to really reduce our fixed cost base. So that's where most of that funding is going to be going next year.
And it's a fairly substantial change in terms of the cost structure of Honeywell and a, reducing it and b, making it converting it from being much more fixed oriented to variable oriented. So we are going to need some continued restructuring funding. I don't know if I can give you sort of a normal number. I would think that it's still going to be elevated at kind of the levels we projected for 2019 and probably for 2020 and probably after that come down a bit more as we get some of that heavy lifting done. So that's the way to kind of frame it up and think about it.
Okay. Thanks a lot for the color.
Great. Thanks.
Thank you. We'll next go to Scott Davis with Melius Research. Please go ahead.
Hi. Good morning, guys. Good morning. Good morning. Hi.
It's not much to pick on for sure, but one of the things that was thrown out there when you were doing the spins was potentially doing buildings with the resi business and you didn't you kept buildings. What gets you excited about buildings turning? I mean this has long been really kind of a 3% -ish growth business, not really much better than GDP, probably not better
than GDP. But you said
in your prepared remarks some new products
and things like that. So
give us kind of a sales pitch, if you will, on why you kept that business?
Yes. First of all, let's start with Connected Buildings. I think our technology offering in Connected Buildings is maybe as further along than any of the other connected. I mean, we have ready to go technologies that we are currently offering and selling and you heard an example of that in our pitch this morning. So, I'm very excited that we really need to be much more commercially savvy to really clearly explain to our customers what that will do for in their building in terms of energy consumption, comfort, security, well-being of the occupants and so on.
So I'm very excited about that technology. And it's not futuristic. It's here now. I think we just got to get through the commercial challenges that we're facing. Number 2, the market dynamics between the resi and the commercials are very different.
The competitors are different. I feel good about our position. I feel good about the installed base we have. I think it's a business that can and should do more. The reason I think we also have to remember that we created this Homes P and L from scratch.
I mean, think about this, Scott. I mean, we did more than 20 manufacturing transitions in the course of a year. If I didn't have that kind of hard deadline, said we are going to get this done in the year, that would have probably taken 3. So that team has done a tremendous job in executing that kind of heavy lift. And I think they performed pretty well given that kind of a distraction.
So now that that's basically behind them, I am going to moderate and I am continuing to be optimistic about what we are doing. I was with Vimal Kapoor and his team earlier this week and they have got their hand on the post and I think that could be a very successful business for us.
Fair enough. Transnorm seems interesting, but I don't know the company very well. I mean, can you just give us a little sense of what other than the installed base that you're getting, I mean, what you're getting from a standpoint of technology? And is that something that you can the synergies at least with Intelligrated, is that something you can take
more Intelligrated to Europe and more transformed to the U.
S? Or does it not work that way?
No, it does work that way. In fact, Intelligrated was a customer of Transnorm. So we know the product. It is IP protected. It is actually technology differentiated.
It has a high aftermarket and services component, which I always look for in any business. It has a very enviable position in Europe. And frankly, I was looking for Beachhead to land in Europe in Intelligrated. We've been spending a lot of organic dollars, what I call just part of their R and D and sales and commercial build out to have a broader presence in Europe. Our U.
S. Customers have been asking us to really have a broader presence in Europe. And I frankly wanted to add a business that gives us a much broader foothold. On top of that, I really like the business. We were able to pick it up at what I view as a very appealing price in this kind of a market environment that we are in with differentiated technology and IP protection.
So I think it's I am thrilled. And as you know, Scott, I really like the warehouse automation space.
We do as well. Well, good luck, guys. Thank you. Thank you. Thanks, Scott.
Thank you.
Our next question comes from Andrew Kaplowitz from Citi.
Hey, good morning, guys. Good morning. Good morning.
Derik, Aerospace has continued
to strengthen here this cycle. And obviously, you do have more difficult comparisons in 'nineteen, but it's hard not to notice the momentum that Honeywell has given its share on new business jet platforms that are coming to the market. You've talked about connectivity, defense obviously strong. So as you look at the continued product rev in 2019, does it seem like the visibility here toward, call it, above normal cycle growth in aero was higher than usual in 'nineteen and maybe beyond?
Well, we continue to be bullish in aero. And as you look at our backlog position, there's no reason not to be. But your initial point is right too, which is our comps get a little bit tougher given the kind of growth rates that we've seen. If you look at the little more details of the numbers, the 2 that really pop out at you, especially here in Q3 is, one is the growth in the business jet market. That's been that hasn't been a high performer for quite a while.
And now it's starting to really pop as a lot of the new platforms are being introduced into the marketplace. And 2, the used equipment inventory is down. I mean, it's down substantial, which is always a good time and a good sign in terms of new equipment sales. And then defense and space, defense continues to be very strong. We don't think that that's going to change as we head into 2019.
Potentially, there could be a slight down arrow in terms of OEM momentum. I don't really expect that to be the case, but that may be the only place where I'm a little bit nervous. But all in all, I commercial, the business jet and defense are commercial, business jet and defense are all kind of pointing either strongly up or up. So 2019 looks very promising based on what we're seeing today.
Yes, that's helpful. And maybe Darius or Greg, you mentioned the tariff impacts so far have been manageable. You continue to work to mitigate all the tariff impacts. But maybe could you elaborate in your comments? I think, Greg, you said that tariff impacts in 'nineteen could impact margin.
How much more ability do you have to price increasing tariffs? You talk about changes that you might make? You talked about sort of looking at your supply chain. So maybe more color there, if possible?
Sure. Yes. So in our last discussions, we talked about the fact that what we're seeing in 2018 in terms of pressure was in the tens of 1,000,000 of dollars. And as you bring List 3 and List 4 into play and you layer that on over the entirety of 2019, that starts getting into more like triple digits, 100 of 1,000,000 of dollars. And we still feel good about our ability to price in the market and we've been successful and continue to take aggressive approaches in that regard.
And then as it relates to changes in supply chain, we talked about the fact that we're local for local and that's been very helpful for us. But we are making a few small moves. You are not going to see us make big overhauls to the supply chain, but there are certain spots where strategically we are going to make a couple of changes in those flows. So again, the challenge, the hill gets steeper, but the level of rigor and attention to this has been at a very high level for the last 8 months and is going to continue as we go into 2019. The pressure comment is, as you know, when you price in the market and you price cost up, so revenue goes up and margins go up by a commensurate amount, but that's just a pressure on your margin rate.
So that's really what I was referring to there. Not so much that we're not going to be able to cover the profit impact of the inflation itself, but it just that inflationary environment with pricing turns into a margin expansion challenge on the upside.
Andy, if I could just add, I think there's still a lot of unknowns, right. I mean, you have List 3, which potentially that that rate goes up at the end of the year and then you have a potential List 4 with timing, which isn't particularly clear. So there is a lot of unknowns here. We are working through all the knowns and I feel very confident in the process that we're building and I can tell you all of our businesses are all over this in terms of taking any and all levers they can. But still a lot of unknowns in terms of what's going to happen at the end of the year, what's on List 4, the level of List 4 and timing.
So we are prepared, we are ready to act and we are trying to mitigate the best we can.
Thanks guys. Appreciate it.
Thanks, Sanjay.
Thank you. Our next question comes from Sheila Kahyaoglu from Jefferies.
Hi, good morning and thanks for taking my question.
Good morning. Good morning.
Darius, it seems you're building a very focused aerospace company, but maybe in a more measured manner. Just looking at aerospace post Garrett, it looks to be somewhat accretive to margins and maybe eliminate the business that wasn't a perfect fit within that group. What sort of opportunities arise for the aerospace segment in terms of profitability and maybe how are you thinking about the risk?
Yes. Well, I think the aerospace group has been very good at a couple of things, especially in the last couple of years. Number 1 is, they are certainly continuing to drive productivity and becoming much more efficient. There is a high level of expertise in terms of what they can accomplish and I think far from done. So there's further opportunity to do that.
Number 2 is they're much more installed base focus in terms of the upgrades, enhancements, software enhancements and so on, if Shave obviously continue to build accretion to the margin rate. And overall, I like how that team is executing. They've won a lot. They've had great wins on a lot of different platforms and the execution is strong. And I particularly like the progress on the commercial side of the business.
And connected aircraft continues to be a very big opportunity, which we materialize. Longer term, and I pointed this out, is we look for a 25 plus kind of a margin rate. We think that that's very possible in that business and we're going to continue to make march forward as Tim and the team continue to make progress there.
Thank you.
Thank you.
Thank you. We'll next go to Andrew Obin with Bank of America Merrill Lynch.
Yes. Good morning.
Hey, good morning, Andrew.
Just a question. When was the last time that U. S. Grew faster than China for you guys?
It's a very good point. It's been a while, but it's interesting how the global markets are evolving right now. And as I look into 2019, kind of an early take is, I think U. S. Is going to be a very robust market again.
Now, there's a lot of moving pieces in the geopolitical environment right now, but right now, it continues to look strong.
And I guess a follow-up question on that. How does your strategy you had a strategy really focusing on high growth regions. U. S. Going to be a key market, but not really a growth market.
How are you thinking about capacity availability in the U. S? For example, some of your competitors are talking on process specifically, shortage of engineers. They're sort of at the limit, not really able to take more projects. And are we seeing contagion from China in high growth regions?
So just a follow-up question.
Yes. I mean, I think, I'm very encouraged and thrilled to see the kind of growth rate, GDP growth that we are seeing in the U. S. I think it's been terrific. But as you look at overall, if you look at the GDP growth in some of the high growth regions, over the long term, they are still likely to be higher than the U.
S. I mean, obviously, U. S. Has increased its rate. But so our high growth focused strategy, I think, is still spot on and needs to be.
And we are going to stay committed to growing in high growth regions as well as the U. S. In terms of investment and profile and so on, I mean, I have always said all along that I believe in being local for local, meaning that I want to be able to serve North America from North America. I want to be able to serve China from China and Europe from Europe. To me, that just makes perfect sense.
I want to have people that have a mindset for their local markets or from our R and D, manufacturing, sales, marketing, all these perspectives. And now as we kind of restructured and looked at our fixed cost base, that's exactly the model we are going to. We're pretty mature along the path already. But to the the short story is, to the extent I continue to see this kind of a growth in the U. S, we're obviously going to be continuing to invest in increasing our capacity here in the U.
S. To make sure we properly serve the market. And based on what we're seeing this year, we're going to be investing in 2019. And if I
could slip one more, you sort of highlighted that productivity was a contributor to strong cash flow and it's just very impressive that despite very robust growth, this business is generating working capital. What about the business model that enables this generation? Is there a payback or this is the kind of business that can actually generate robust cash flows as it grows?
Well, I think it can. Number 1 is sort of the business profile and the timing of payments, particularly for our projects business, they are very favorable. Number 2, they have done a terrific job in managing their working capital. It's a point of focus and emphasis. 3, and this is something we have done across our business, which is we are really looking and standardizing some of our terms and conditions.
That's been frankly, I would say, it wasn't the sort of cleanest structure that we had and now we are really standardizing and cleaning that up and it's generating benefits. And it's not just for SPS, it's really true of all of our businesses. So, a lot of things moving in the right direction there for certainly for SPS, but all of our businesses as well. Thank you very much.
Thanks.
Thank you. We'll next go to Nigel Coe with Wolfe Research. Please go ahead.
Thanks. Good morning. Thanks for doing the long and fitting us in here.
This is great. So just more of
a comment than a question. You got 2% price this quarter. So you seem like you're in good shape to manage the extra inflationary pressures from tariffs. But you're the only one talking about potential for the companies are at so far. So I'm wondering, are you sort of working on the basis assumption that the 25 was in place in January and that we get less full?
And are you taking preemptive actions to anticipate and get ahead of those potentials?
Yes. I mean, the short answer is yes. I mean, we are getting ready. I'm not saying we are necessarily pulling the trigger on all those actions.
We haven't pulled all the levers for
the 25% yet, but, We haven't pulled all the levers for the 25% yet, but we're going to be ready and we're assuming that that will happen. Frankly, we think that that probability is obviously increasing as more time goes by and we have to be ready. So I would say not all the levers have been pulled yet, but we are certainly preparing them and feel very good about our ability to mitigate all or most of that impact.
Okay. And then a quick follow on. On going back to free cash flow, because to my mind that was the real highlight in a great quarter. You called out SPS and PMT as particularly strong contributors to cash. Is that because aero and HBT were with the spins weren't producing quite a good conversion?
Or was there some catch up here? I mean, and maybe any commentary in terms of free cash conversion by business would be helpful?
Yes. I'll start and maybe turn over. I think you nailed it Nigel. I mean from an HBT perspective, when you do when you have to do 2 spins and you have to do this many transitions, there is some level of inefficiency, particularly in the inventory situation, because we're doing a lot of plant separations and so on. And as I stated before, I think the team has done just an incredible job to get us ready.
Aero, they've done a great job on receivables, payables and so on. But inventory is still an opportunity. I think we all know about some of the challenges that the aerospace supply chain is facing. So there's probably further gains to be made there. But they've done a really nice job.
And then SPS has been tremendous across the board, whether we talk about all three elements of working capital advances and so on. And then PMT really picking up the pace, particularly on receivables. They have had a lot of past dues that are now coming in and really nice momentum in building into Q4 and we think that there is even more upside there.
Yes. Aero is up. So they had a good performance too. I think they just had a head start in terms of the disciplined aspects as Darius talked about with things like terms and so on. So in many ways, we're actually modeling a lot of the aerospace process and behaviors and what we're trying to do elsewhere.
So you should definitely not take that comment as aero is not doing well. They actually are growing their cash flow quite nicely also.
Great. Perfect. Thanks a lot.
Thank you. And our final question comes from Julian Mitchell from Barclays.
Thank you very much. Maybe just a quick question on HPS. I think in process you talked about a lot of the strength still being short cycle driven. So just wondered what you're seeing in terms of greenfield projects, large orders. There's obviously some movement in the LNG area, but maybe some offset from macro uncertainty on large projects in general.
So maybe just how you see the greenfield demand?
Yes. I mean, Julian, I think the highlight number for me for HPS is projects were up 27% year over year in Q3. I mean, that's I think that number speaks for itself. So, it's a very impressive number. It gives you an idea that that business continues to win in the marketplace and I'm very bullish.
That's coupled on top of the short cycle growth, particularly in services and our software businesses and overall, it continues to do very well. So there's not really much other than good news coming from the HPS world.
Thank you. And then my last one would just be around buildings. You talked about the expectation of an improvement in growth there in 2019 and probably beyond. Do you anticipate needing much of a step up in R and D or CapEx or M and A to help drive that growth or you think the run rate of investments is sufficient right now?
Yes. I think on R and D, I think it's I would say, it's not necessarily a need to increase the R and D levels, but really to streamline and optimize Vimal and Vimal and team are making sure that we are investing in the proper things and really on things that move the needle and not kind of the incrementalism, which require a lot of investment that really don't generate great returns. And I think it's certainly an area of opportunity.
But I
think some of the really high performing businesses like fire, which have continued to do very well, It's not all bad news. And I think there are a lot of good things going on in the buildings part of the portfolio already. But certainly like in any large business, there's a couple of things we also need to improve. So I'm very confident that team is going to get it done.
Yes. And just again, back to the spin, taking away the distraction of having to split the company in 2 fundamentally. That took the effort of the entire organization to go do and now having that done, they're going to have a lot more time and attention to be able to drive some of that growth as Darius highlighted, which we feel very good about the end market and our position there. So, it should be good. Yes.
And just to echo what Greg said, I think we all probably underestimated the amount time, effort and organizational focus it takes to do 2 spins at the same time, particularly when you really are creating a new P and L called home. So I am thrilled with the execution that the team has exhibited.
Yes, I
mean, you talked about the supply chain changes, but we also we had the clone ERP systems. This was definitely a heavy lift to go do, so that team did a great job. Perfect. Thank you.
Thanks.
Thank you. That concludes today's question and answer session. At this time, I'd like to turn the call back over to Mr. Darius Adamczyk for any additional closing remarks.
Thank you. Before I end, I want to thank the Honeywell employees and leaders that will begin new careers at Garriott and Resideo for their contributions to the company. Both businesses are starting with strong foundation, a great heritage. I'm confident both will be very successful. We look forward to watching their accomplishment as new public companies.
I have full confidence that the strong performance Honeywell delivered for our shareowners in the 1st 3 quarters of 2018 will continue through the year end. Our order rates are strong, our backlogs are growing, and we're realizing the benefits of our continued efforts to drive software and connected growth, productivity, commercial excellence and improved free cash flow. It is an exciting time to be at Honeywell, and we look forward to sharing more on our progress as we head into 2019. Have a wonderful weekend.
Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a