Please stand by. We're about to begin. Good day, ladies and gentlemen, and welcome to Honeywell's fourth 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. If you would like to ask a question at that time, please press star one on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. Lastly, if you should require operator assistance, please press star zero. 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 fourth quarter 2017 earnings conference call. With me here today are our President and CEO, Darius Adamczyk, and Senior Vice President and Chief Financial Officer, Tom Szlosek. As a reminder, this call on 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. We ask that you interpret them in that light. We identify the principal risks and uncertainties that affect our performance in our annual report on Form 10-K and other SEC filings.
This morning, we will review our financial results for the fourth quarter and full year 2017, share our guidance for the first quarter of 2018, and discuss how the recent U.S. tax reform impacts Honeywell. As always, we will leave time for your questions at the end. With that, let me turn the call over to President and CEO, Darius Adamczyk.
Thank you, Mark, and good morning, everyone. Honeywell delivered an exceptionally strong fourth quarter with earnings per share of $1.85, enabled by organic sales growth of 6%, which reflects a renewed emphasis on commercial excellence, revitalization of the Velocity Product Development process, and the benefits from growth investments. In 2017, we expanded our sales force in key regions and businesses and armed all our sales teams with the newest digital tools that are helping us win in the marketplace. We also revitalized our new product development process to ensure that the products we're selling are delivering value to our customers. Our order rates continue to grow, and our backlogs are strong as we head into 2018. Cash was a highlight as we generated $4.9 billion of free cash flow in 2017, above the high end of the guidance range.
In Q4, we achieved 123% conversion, which brought full-year conversion to 90%, or 109% excluding the impact of pension. Our efforts to improve working capital discipline are working. While I'm encouraged by our progress in this area, there's still significant opportunity, and each of our business is taking the necessary steps to improve their working capital performance. Full-year earnings per share were $7.11, up 10% year-over-year. This growth excludes the impact of separations cost for spin and charges for the fourth quarter 2016 debt refinancing, pension mark-to-market, and Tax Cuts and Jobs Act. Our EPS exceeded the guidance we provided in December, driven by 4% organic growth and 70 basis points of margin expansion. We also continued to aggressively deploy capital for our shareowners in 2017. We increased our dividend by 12% this year, which marked the eighth double-digit increase since 2010.
We bought back $1.6 billion of shares in the fourth quarter and $2.9 billion for the full year. As a company, our total shareowner return was 35%, far exceeding the S&P 500 TSR of 22%. Today, we're raising our full-year 2018 EPS guidance to $7.75-$8, which reflects a lower expected tax rate as a result of the Tax Cuts and Jobs Act. Tom will walk you through the tax reform detail later in the call, but I'm pleased to announce today that our 2017 performance, coupled with the anticipated benefits from this legislation, has enabled us to increase our 401K employer match for Honeywell employees in the U.S. This change represents a sustained long-term commitment to provide enhanced financial security in retirement, which we believe is extremely valuable and important to employees. Honeywell remains committed to being an employer of choice.
Let's turn to slide three to highlight a few of our recent commercial successes. In aerospace, United Airlines selected Honeywell Avionics for its new fleet of more than 150 Boeing 737 MAX airplanes. The flight deck package will include the first-ever installment of Honeywell SmartRunway and SmartLanding on a Boeing 737 MAX and will feature Honeywell's integrated multi-mode receiver and IntuVue Weather Radar system, which can enable connected radar, part of our Connected Aircraft offering, allowing Honeywell to download weather hazard data and provide pilots and dispatchers immediate information through the GoDirect Weather app. Honeywell solutions work in tandem to greatly improve passenger safety and comfort during takeoff, landing, and potentially hazardous weather conditions. We are excited about our continued partnership with United Airlines.
In Home and Building Technologies, Honeywell designed a new contemporary and state-of-the-art connected home solution. We signed a long-term agreement with ADT, a leading provider of security and automation solutions in the U.S. and Canada, to sell it exclusively through ADT's direct and professional dealer network. The solution includes security, smoke detection- Carbon monoxide detection, innovative long range and battery, operate motion viewers and home automation, incorporates both ADT's and Honeywell's user experience. We are excited to continue our long-term partnership of ADT, providing their customers the most innovative products for their connected home. In Performance Materials and Technologies, Honeywell Process Solutions leveraged Connected Plant offerings to position Honeywell as a specialized software industrial partner, ultimately winning three strategic projects with Kuwait Oil Company to enhance crude production in the Southeast Kuwait fields.
Honeywell will provide software and services to help KOC visualize and optimize the production and operations in the fields, and will supply an integrated control and safety system based on our Experion PKS and Safety Manager technology for a gathering station. This project enhances the capacity and capability of the existing facility in East Kuwait to manage excess water while keeping crude production at the facility's designated capacity. In safety and productivity solutions, we achieved major wins with two global package delivery companies to provide more than 100,000 Android-based handheld computers that will aid in delivery operations. We are seeing strong adoption of our new Android-based offerings and have significant new launches planned for early this year that will drive growth for the productivity products business in the second half of the year.
A number of these technologies will be on display at our annual investor conference, which will take place on February 28th at Honeywell's headquarters in Morris Plains, New Jersey. I am looking forward to talking with you more about our progress then. With that, I'd like to turn the call over to Tom, who will discuss our financials.
Thanks, Darius. Good morning. I'm on slide four. As Darius mentioned, we achieved 6% organic sales growth this quarter, capping off a very strong year. Our growth improved sequentially every quarter in 2017, starting with 2% in the first quarter. This is a reflection of the investments we've made in the sales organization, the M&A that we've done, our capacity expansions, and new product development, coupled with an improved economic environment in many of our end markets. We generated more than $2 billion in segment profit in the fourth quarter through our continued focus on effective selling and operational excellence. We experienced strong volumes, primarily in aerospace and safety and productivity solutions. Our margin rate increased by 30 basis points to 19.3%, stronger than we previewed in December, primarily due to stronger than anticipated demand in the air transport and regional aftermarket.
Earnings per share was $0.01 better than our preview in December, includes a $0.19 contribution from segment profit. Our tax planning actions drove a lower than planned tax rate for the fourth quarter of 16.5%. Now, this is before the impacts of the Tax Cuts and Jobs Act. The lower tax rate and lower share count, driven by the share repurchase activity Darius mentioned, combined for a $0.22 benefit, which was more than offset by restructuring and other projects we funded in the quarter, which was a $0.30 headwind. We funded over $150 million in attractive restructuring projects this quarter that will improve our cost structure, drive further productivity, and address the potential residual costs that would otherwise result from the upcoming spin transaction. On a reported basis, we had a loss per share of $3.18, driven by the impact of the $3.8 billion TCJA charge.
That reported loss also includes an $87 million pre-tax pension mark-to-market adjustment, primarily related to a lower discount rate, and $16 million in pre-tax spin-related separation costs. Our free cash flow in the fourth quarter was very strong at $1.8 billion, or 123% conversion. We're in the early stages of our working capital initiatives, but we're encouraged by the progress so far, and more importantly, by the opportunities that we intend to pursue in 2018. Overall, another strong performance with high-quality earnings to cap off a great year. Let's turn to slide five to discuss our segment results for the fourth quarter. Starting with Aerospace, sales were up 5% organically, two percentage points above the high end of our sales guidance.
In commercial OE, we saw improved air transport deliveries on key platforms, including the Airbus A320 and A330 and Boeing 737, and the benefit of lower OEM customer incentives, partially offset by slow demand in business jets, as expected. Growth in the aftermarket was stronger than anticipated, driven primarily by air transport, repair and overhaul activities, and sales of spares in business aviation. In defense, we saw continued strength in U.S. core defense, driven by spares demand and deliveries on the F-35 and Apache platforms. In Transportation Systems, we saw robust demand in commercial vehicles across all regions and continued growth in light vehicle gas turbos in China and South Korea. Aerospace margins were up 270 basis points, driven primarily by higher volumes, productivity net of inflation, slightly more modest OEM customer incentives, and commercial excellence. Aerospace margin performance was well ahead of our expectations.
In Home and Building Technologies, organic sales growth was 3% for the quarter. As a reminder, we realigned the Smart Energy business from HBT into PMT in the fourth quarter, so the HBT results for this quarter and going forward now exclude Smart Energy. Organic growth in products of 2% was driven primarily by the commercial fire business and environmental and energy solutions in Europe. There was continued strength in global distribution, particularly in the fire vertical. Our businesses in China grew high single digits with strength in all of the HBT businesses. HBT segment margins contracted 40 basis points, driven by lower residential security volumes, investments for growth, and a different regional mix. In Performance Materials & Technologies, sales were up 9% on an organic basis, driven by growth across UOP, Process Solutions, and Advanced Materials. That's the entire PMT portfolio.
In UOP, there was strong demand for our modular equipment, strong initial catalyst loads in the Middle East, and significant growth from natural gas project wins at UOP Russell in Russia and in North America. Growth in the short-cycle businesses within HPS continue to be strong, with significant demand for thermal solutions and field instruments. In Advanced Materials, we again achieved double-digit organic sales growth, fueled primarily by our Solstice low global warming refrigerant for mobile air conditioning. PMT segment margins contracted 180 basis points in the quarter, primarily driven by the unplanned plant outage we flagged in November and a different year-over-year mix of sales in UOP. The lower margin performance is also in part due to the integration of Smart Energy, which was not contemplated in our original fourth quarter guidance.
In Safety and Productivity Solutions, sales were up 12% on an organic basis, exceeding the guidance we provided in October, driven by another strong quarter at Intelligrated, building on the robust orders and backlog growth throughout 2017. We had a significant increase in retail business sales as our direct selling strategy matured, as well as continued strength in China. There was also robust growth in the safety business as refinery maintenance resumed, driving demand for our entire range of safety products and continued strong demand for our legacy sensing controls and workflow solutions, including solutions provided by Vocollect and Movilizer. The mobility business remained soft, but we secured several large orders for our new Android-based products, which Darius mentioned.
A result of strong volumes in SPS, margins expanded 140 basis points, also exceeding the high end of our guidance, helped further by the benefits from ongoing productivity efforts and from previously funded repositioning. I'm now on slide six. I'll be very brief on this slide as we've discussed each of these measures previously. What this slide does is takes us back to the original 2017 guidance and compares it to the final results. For all categories, the final outcome met or exceeded the original guidance. The do matches our say in Honeywell vernacular. Also, not included on the slide are long cycle orders and backlog. Those results were also impressive, each growing double digit in 2017. Move to slide seven to discuss the recent U.S. tax reform and its impact on Honeywell's 2018 financials.
Honeywell has long been a proponent of corporate tax reform that would enable us to compete more effectively on a global basis and to enjoy efficient and unencumbered movement of our capital. On December 22nd, as you know, the U.S. Tax Cuts and Jobs Act passed. The legislation significantly revises the U.S. corporate income tax by lowering corporate income tax rates, implementing the territorial tax system, and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. A result of the legislation, we recorded a $3.8 billion provisional charge in the fourth quarter, comprising of three elements. The first is a mandatory transition tax or deemed repatriation charge on the $20 billion of previously unremitted earnings of our foreign subsidiaries. This non-cash charge was recorded entirely in the fourth quarter of 2017, but is to be paid over an eight-year period in accordance with the legislation.
The second element is also a non-cash charge. It's a deferred tax liability adjustment, favorable in this case, to reflect the impact of the lower U.S. corporate tax rate on our deferred tax balances. The third element, also a non-cash charge, is for the implementation of the territorial tax system, including withholding and local taxes associated with the future repatriation of cash back to the U.S. These taxes will generally be paid as the cash is repatriated. This portion of the aggregate charge reflects the tax structures we have in place today, as is required by the accounting rules, and does not anticipate the benefit we would realize from future tax planning. It's only been a month since the tax reform passed, and further guidance continues to flow, clarifying the legislation.
Our accounting reflects our best estimate using the current information we have available to us, the amount of the provisional charge may be adjusted over the course of 2018 as things become clearer. We will update you on the changes, if any, to the amount of the charge, to our effective tax rate, and to other provisions of the tax legislation which are material to Honeywell. At our upcoming Investor Day, we will also update you more completely on the cash repatriation opportunities that we have, as well as on our expectations for the use of those repatriation proceeds. Preliminarily, we expect that at least $7 billion of the $10 billion of cash held by our foreign subsidiaries can be repatriated in the next two years. Of course, we'll continue to generate overseas cash, which will add to that pool of potential repatriation.
There still is extensive tax analysis and planning to be done to ensure we execute the repatriation in the most efficient manner. This new global mobility of our cash will allow us to continue investing in our businesses in the U.S., to pay a competitive dividend, to more aggressively seek out M&A, particularly in the U.S., and to repurchase our own shares. Our preference is for attractive bolt-on acquisitions in our core markets. To the extent M&A opportunities do not materialize, we'll gradually accelerate share repurchases as we did in 2017. Looking at 2018 as a result of the reduction in the U.S. corporate tax rate, our effective tax rate is now expected to be between 22%-23%, versus our normal 25%-26% historical rate.
Given the uncertainties that still remain surrounding the implementation of tax reform and the extent of the analysis still to be done, we are conservatively assuming a tax rate of 23% in our guide, which increases our 2018 EPS guidance range by $0.20 to a new range of $7.75-$8 per share, an increase of 9%-13% from 2017. As Darius and I mentioned, we're pleased with the new legislation, particularly the mobility of capital and global competitiveness it provides to Honeywell and to our shareholders. Let's discuss our expectations for the first quarter on slide eight. We exited the year with strong order rates and firming backlogs that we expect will drive a continued acceleration in organic sales growth every quarter in 2018.
Segment margins are expected to expand 30-60 basis points, driven by volume leverage, commercial excellence, and productivity net of inflation, leading to earnings per share of $1.87-$1.93, or growth of 9%-13%. This is based on an estimated first quarter tax rate between 22%-23%. As we previewed in the December outlook call, the guidance for the first quarter and full year exclude costs related to Home and Transportation Systems spin-offs and adjustments, if any, to the fourth quarter provision for the tax legislation. Starting with Aerospace, we expect sales to increase in the low single-digit range organically. Our Air Transport OE business will be impacted by fewer deliveries on Boeing 777 and a decrease in production rates at certain regional OEMs, partially offset by increased A350 deliveries.
On the Business Aviation side, we expect organic sales to improve as production rates increase across most of our OEM customers, offset by higher OEM customer incentives. In the aftermarket, we expect to see strong spare sales with airlines across Americas and Asia Pac and demand in maintenance service plans in Business Aviation. For Defense, a very similar story to recent quarters with growth buoyed by demand in U.S. Defense, partially offset by declines in Space. In Transportation Systems, we expect continued light vehicle gas turbo penetration across most regions, particularly in China, North America, and Europe, as well as continued momentum in the commercial vehicle segment. In Home and Building Technologies, sales will be slightly up. We expect continued strength in global distribution, the commercial fire business, and our businesses in China.
We see improving order pipelines in our MEA products businesses offset by weaker volumes in residential security in the U.S. In Building Solutions, growth will be modest as the robust high-growth region activity is offset by slower activity on large install and service projects in the Americas region. As we progress with our planning for the spin-offs, we have reorganized Home and Building Technologies to better align with how this segment will operate going forward. Instead of showing you results from products and distribution, we'll start reporting on results in the two new reorganized business units, Homes and Buildings. This will be effective when we release first quarter earnings. Moving to Performance Materials and Technologies, sales are expected to be up low to mid-single digit on an organic basis, driven by continued conversion of our strong backlog. Entering 2018, PMT long cycle backlogs are up 8% from 2017.
In Process Solutions, we also expect continued demand for our short cycle software and service offerings and field instrumentation products. In UOP, we expect significant catalyst deliveries for new units in China, as well as sustained equipment and engineering growth. Solstice growth in Advanced Materials is expected to continue, although there are tougher year-over-year comparisons in the first quarter. Finally, in Safety and Productivity Solutions, we expect sales in the mid-single digit range organically, driven primarily by large project wins at Intelligrated and strong orders demand exiting the year in sensing and IoT and workflow solutions, including for Movilizer's cloud service application. In safety, we expect growth across the gas vertical in China and all lines of business in the Americas as a result of our new product launches, sales investments, and improved market conditions. We also expect improvement in the retail business.
On a regional basis, the SPS China business is expected to grow more than 10%, driven by sensing and IoT, safety, and productivity products in the region. Let's turn to slide nine. I want to talk about our revised full-year guidance. We've updated our full-year margin guidance to reflect our stronger than expected performance in 2017. Full-year segment margin is now expected to be between 19.3% and 19.6%. This reflects 30 to 60 basis points expansion, which is consistent with what we said in December. The segments have been updated accordingly. We've also updated our earnings per share guidance, as Darius mentioned, to reflect a lower anticipated full-year effective tax rate between 22% and 23% due to the tax legislation.
Full-year EPS is now expected to be $7.75-$8, up 9%-13% year-over-year, excluding separation costs, the fourth quarter 2017 charge related to the Tax Reform, and any 2018 adjustments to that charge. Let me wrap up on slide 10. Fourth quarter was an outstanding finish to 2017. We achieved strong sales growth, continued margin expansion, double-digit earnings growth, and exceptional free cash flow conversion. At the same time, we continued our aggressive capital deployment with more than $1.5 billion in share repurchases in the quarter and $2.9 billion for the full year. We also funded more than $350 million in restructuring in 2017, which is helping us to proactively address stranded costs ahead of our two planned spin-offs. Those spin-offs remain on track for completion by the end of this year.
We're also pleased with the passage of U.S. Tax Reform, we've raised our 2018 EPS guidance by $0.20 as a result. We believe that the Tax Reform will provide a sustainable long-term benefit to Honeywell, not a single quick hit. In that same light, we believe that the benefit that we share with our work associates should also be a sustainable long-term benefit. We've chosen an ongoing mechanism that will benefit them now and in the years to come throughout their retirement. That is an increase to the employer matching contribution in our U.S. 401K plan. Our strong order rates and increased backlogs heading into 2018 give us confidence in our first quarter guidance. We're well-positioned for continued outperformance in 2018. With that, Mark, let's move to Q&A.
Thanks, Tom. Derek and Tom are now available to answer your questions. Derek, if you could, please open the line for Q&A.
Absolutely. The floor is now open for questions. At this time, if you have a question or comment, please press *1 on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing *2. We ask that when you pose your question, please pick up your handset. Thank you. Our first question is coming from Jeff Sprague with Vertical Research. Please go ahead.
Thank you. Good morning, everyone.
Hey, Jeff.
Good morning.
Hey. Just a couple things. First, I just wonder if you could elaborate a little bit more on aero margin. It was very strong. Was there any unusual timing in incentives or program closeouts or anything like that? First question.
I wouldn't say there's anything unusual. We obviously had a very favorable mix as reflected by the commercial aftermarket, and that was probably a little bit even more favorable than we had anticipated.
Okay.
I wouldn't say there's any kind of one-time charges other than the impact of a more favorable mix of business than we had originally projected. Does that?
Yeah.
That's really the punchline.
You might be thinking about it in the incentives comment, Jeff, the 270 basis points expansion, most of that was a combination of the volume mix and productivity that we generated. I think the incentives were probably 0.5 of the 270, so a small piece of it.
Okay, great. Just trying to kind of wrap up just the cash flow outlook overall, could you just update us on what you're thinking about CapEx? Has pension income moved around at all here at year-end? Does the outlook here anticipate any additional share repurchase in 2018 at this point?
Yeah. Starting with CapEx, Jeff, we've been peaking in 2014-2016, north of $1.1 billion or so. That'll be down in the $900 million range or less in 2018 and will continue to go down. We've got continued emphasis on our working capital, hoping to get another half a point of working capital turns. The HOS Gold tool set is helping us with that. On pensions, the plan at the end of the year was funded close to 105%. Right now it's funded probably 110% or more. Those assets are driving more income, if you can believe that. From a cash perspective, it is a non-event. With the plans fully funded, there are no contributions for the foreseeable future. We think that's in pretty good shape. We'll continue to drive the conversion. Our cash conversion in 2016 was 86%.
We told you we're trying to move towards 100%. We hit 90% in 2017, I think the prospects are good to drive that further in 2018.
Yeah, Jeff, it's kind of reflected in the cash guidance for 2018. I think even if you only take the midpoint of our guidance, it's a fairly healthy increase. As we discussed at length last year, we're going to continue to make progress on cash generation and cash conversion, just like we showed in 2017, where we reached a magical 90% level, That's a starting point.
Great. Share repurchase, I'll cede the floor. Thank you.
On share repurchases, Jeff, right now the plan is to do what we normally do, as I said. We will be offsetting any dilution that comes up as a result of option exercises and contributions to employee benefit plans. As I also talked about on the repatriation, there's an opportunity materializing. The timing needs to be further analyzed. Our priorities overall remain the same, we prefer to prioritize bolt-on acquisitions that can be accretive to our businesses. Like in 2017 when the market was a bit more frothy for us in terms of M&A opportunities, we chose to deploy it towards share repurchase. We did $1.5 billion in the fourth quarter alone, $2.9 billion for the full year. We were able to take the share count down for the year over 2%.
That's the kind of approach that we'll continue to head into the year with.
That's right. Thank you.
Thank you.
Thank you. Our next question comes from John Inch with Deutsche Bank.
Thank you. Good morning, everyone.
Hey, John.
Good morning.
All right, guys. Can we start with just the core volume? You gave the update on December 13th, Tom, you thought core growth would be 7% to 8%. It is 6%, but your numbers are solid with great cash flow. I guess my question is, did something happen at the end of the year? Like was December an anomaly at the very end to cause the core growth expectations to shift lower by a point and a half?
No. As you can imagine, fourth quarter is a big volume quarter for our businesses. Aerospace, in particular you have a lot of OEM customers, and we're partnering with them to meet their delivery schedules. Those change, and sometimes the deliveries push out, which was the case for Aerospace. Most of that slight moderation in the growth rate was due to Aerospace OEM. But as you saw, the growth in Aero and Honeywell for fourth quarter organically was still very strong, and we had a better mix in Aerospace of aftermarket, as I said.
Yeah, you did. Aero was the primary factor then. That's the message?
A little bit in PMT as well.
Okay.
Lower margin stuff in PMT, no trends per se, more binary kinds of things. These are large transactions in most cases.
The shift from Windows to Android, you guys have called out increasing traction in terms of orders. How does that dynamic work? Are you still selling the Windows-based products? Do you have to write down inventory? What's actually going on here? I'm trying to understand how that perspectively impacts the financials, probably in your margins, I'm assuming, in 2018 for that segment.
Yeah. We're still selling both types of products, as a matter of fact, the majority of the installed base in productivity products is still most of the software is still written in Windows-based code. We foresee continuing robust sales on the Windows product offering. As we discussed on multiple calls last year, Android is becoming a much more prominent part of our portfolio offering. We've launched some new products in Q4. We launched some in Q2, then we have a pretty big launch coming up here also in Q1. The great news for us, as we highlighted in the announcement, is we've already secured some major wins with these new offerings that are Android-based. It gives me a lot more confidence around the future of the productivity products business.
rest assured, the Microsoft-based mobility offerings, we're still selling those fairly aggressively, and they still make up more than 50% of our sales.
It's the customer, Darius, that incurs if they want to shift from Windows to Android, it's their prerogative. It's not as if Honeywell is somehow on the hook to pay migration costs, something like that, right?
Exactly. They have to convert their software from Microsoft-based to Android-based, and we're offering our customers a choice. Some of them are making that conversion, others are maintaining their current platforms.
Cash was very strong in the fourth quarter, despite obviously the business putting up very robust growth. How do you manage the 2018 cash in terms of growth and acceleration in the economy and the demands in working capital, but then trying to get working capital out of the system? I guess I understand you want to keep a conservative guide, but do you think there's upside to cash given the backdrop of macro improvement, or was it a little bit of an anomaly in the fourth quarter, given how strong it was?
John, I'm an optimist, I always believe there's upside. I think there's a couple of factors going for us. Number 1 is working capital has been a point of emphasis. We had our senior leadership meeting kick off early in January, and I can tell you that was one of the 2 major highlights that we talked about. Number 2 is Tom talked about the reduction in CapEx, and I think it's important to note we're not constraining CapEx. It's just that we have gone through a fairly substantial investment cycle, and we just see that waning a bit. If we see great projects, we're going to continue to invest. Nevertheless, we anticipate that CapEx number being lower this year and even potential next year.
3 is just we're looking at all these working capital levers and all the businesses at what I'd call pretty aggressive targets in terms of working capital. Also, last thing to add is we're still assessing a lot of these moving pieces when it comes to the new tax legislation, particularly as it relates to cash taxes. Because as you know, we have 8 years to pay back the one-time fee, that's offset somewhat by the reductions. We still have some work to do in terms of the overall impact for the year, and we're going to be working, Tom and his team are going to be working through all those details.
Got it. 1 last one. As inflation, Darius, comes back into the U.S. economy, how are you thinking about managing the company in terms of, say, pricing, the trade-off between pricing and cost, that sort of thing?
Yeah. That's a good question because that can be a very dangerous phenomenon. I can tell you that every 1 of the SBGs, that's something that we already implemented last year, is that they're really watching their inflation, the impact on their product cost. I am very confident in saying that all of our businesses have a very good process to monitor their inflation of products and making sure that they're passing that through to the marketplace. Frankly, the inflationary environment for raw goods is not new. It's really been in place last year as well, particularly in the second half. We've been watching that 1 carefully and put the processes in to make sure that we monitor proactively.
Got it. Thank you.
Thank you.
Thank you. Our next question comes from Steve Tusa with JPMorgan.
Hey, guys. Good morning.
Good morning, Steve.
Just to follow up on John's question on cash flow, just to be clear, you raised your net income guidance to reflect the tax rate, but you're basically not raising the cash number because of the uncertainties around the cash going out the door on the transition. Is that how we should read the lack of guide on raise on free cash?
Our original guide that we gave you in December, Steven, was under the provisos of the old law. Every year, we anticipate some cash benefit from the tax planning that we do. In fact, in 2017, we did realize some benefits there. It's not as if we've had just taken the foot off the brakes on tax planning and the cash management around tax planning in that original guide. When you look at 2018, there will be some benefit, certainly on the U.S. side from that lower cash tax rate. It's offset by the payment of the mandatory toll charge. We need to continue to study the developments in the legislation before we step out and say it's going to be a huge impact. The guide range that we gave was fairly wide in any case, from 5.2-5.9.
I think we're still comfortable at this early point, sticking to that range.
Okay.
Steve, as you know.
Yeah
we had substantial overseas cash and retained earnings. At least for the next eight years, that is going to be a bit of a cash drag because we got to pay for that one-time tax hit.
Yeah. Okay. Just on the EPS guide, a little bit of a higher kind of operating base. You guys clearly beat ops this quarter. I think you tweaked up your margin assumptions, yet you are, and I think share count is coming out a little bit lower than we expected exiting the year. You're only raising for the incremental tax benefits. Is there something else that's below the line or anything else we have to be aware? Just building a little bit more contingency and hedge into the plan?
I think not a lot has changed since December. We actually expected a more robust fourth quarter, as we said earlier, from a top-line perspective. Overall, the momentum in each of the businesses is strong, and we expect that to continue. Maybe there'll be some upside on the top line, but in terms of large things that we're concerned with that we haven't articulated, there's nothing of that sort here. Most of the assumptions we talked about in December are still intact. Steve, just maybe to add onto it. First of all, as you know, roughly 60% of our business is short cycle versus longer cycle. We're in a new year, so I think early on in the year, it's best to be prudent and just really a little more on the caution side to really see how the business evolves.
Having said that, I am a lot more bullish on the year heading 2017 into 2018 versus 2016 to 2017. The comps are a little bit tougher, nevertheless, as I look across the entire business portfolio, I cannot think of a single business where I would view it as a down arrow versus 2017. Overall, things look good. We have to see, and see that the business materializes and comes through on the P&L. I think, kind of first quarter, we will see how things go. After that, we will be back to discuss it with you and see what adjustments we need to make for the year.
Okay. One last one. In your March Investor Day, can you just maybe describe, not what the targets are going to be, but are you going to give a refreshed longer-term view financially? Just asking about framework and format, how you guys are going to approach that.
I felt like I did that last year. Kind of the low to mid-single digit, 30-50, that kind of range. I think we will probably, just to give you a little bit of a preview, I think you should expect to see something in that similar range going forward. We will give a refresh on that outlook. I do not know if it is going to be as precise as laying out every year, because I think once you get out four or five years, I think it is a little bit more unknown, and we go through a recession or something, you end up kind of not looking so smart. I think that the kind of framework that provided last year's March will be, kind of should be your expectation for this year.
Okay, great. Thanks, guys.
Thanks.
Thank you. Our next question comes from Steven Winoker with UBS.
Hey. Thanks, good morning, guys.
Morning, Mr. Winoker.
Hey. Close enough, right? I've been called worse things. Darius, maybe just talk a little bit about the key messages and the difference for managers at the HSM, the leadership meeting that you just had. I know you mentioned cash, but just a little more on sort of how you're kind of trying to steer the ship and give folks priorities as they think about 2018.
Yeah. No, first of all, the key message was that I thanked them for a really nice 2017. I think we had a very nice year across the board, and I think it was a good time to recognize the kind of outstanding effort that the team contributed. That was sort of the first key message. In terms of priorities for 2018, I'd say two or three. Number one, working capital, I talked about that. We want to drive free cash flow. We want to drive free cash flow conversion. I just want to emphasize, too, that this is sort of where a very healthy and well-funded pension plan is actually hurting us from a cash flow conversion perspective. I always emphasize that because that somehow gets forgotten.
The second point is software, and software not just in our connected enterprise, but really the incorporation of software into anything and everything we do. Software and a sensor strategy for any and all products that Honeywell launches. The third one was much more about innovation, making sure that we leverage the latest and greatest technologies available in the marketplace today, and making certain that those are reflected in our NPD pipelines and so on. The last one is that we have different behaviors that we're trying to incorporate in the company, and we reemphasize leveraging and exhibiting those behaviors in everything we do. Those were some of the key messages from our senior leadership meeting.
All right. That's helpful. Secondly, as you think about the kind of follow-on effects of tax reform for your customer base and their decisions about how to spend that money and whether or not that kind of works its way back to your own growth rates, and your own decisions even. I'm really seeing kind of mixed messages out there from corporates in terms of what they see in their own customer base, kind of considering additional spending that's just sort of macro-related versus maybe tax-related. I'm not sure it matters. Maybe a few thoughts on that potential for acceleration.
I think for us, undoubtedly, this is a very constructive outcome. We're supportive of tax reform. We're very pleased with what ended up happening. I think it's going to be good for U.S. business. For us, we certainly see a much greater level of bullishness on the part of our customers, which should translate to continued investment. You're right, their CapEx is our revenue, and we do expect some level of investment to accelerate. I think it's a little bit early. I think we sometimes forget that the details of this are still becoming clear. It's only 30 days old, and what the implications are for us. For us, we've been bullishly investing in the U.S. already.
If you think about our elevated CapEx that's been in place for the last two to three years, a lot of that investment went into manufacturing jobs, particularly in states like Louisiana and others. In addition, we're aggressively hiring a lot of software engineers, particularly in our Atlanta COE, and we're going to continue to do that. We have and will continue to invest in the U.S. Will this, longer term, as we assess further investments, does this make U.S. a more appealing place to invest? Absolutely. We think that this makes the U.S. a much more appealing place to invest. As we contemplate further investment, U.S. will be near the top of the list.
Yeah, just to add a little color on that. Steve, when you look at the momentum that we have in the U.S., overall, we closed the year out 3% organic growth or so in the region. The fourth quarter was pushing close to double digits. I think there was some anticipation of what was coming, possibly, and we'll see how that goes. Far so good at this early point in January, as we look forward. It's hard to make that direct connection between the benefits from the legislation, including the expensing of CapEx and our order rates. We're looking for it, for sure.
Okay, I'll leave it at two. My other colleagues can get questions in. Bye.
Thank you.
Thank you.
Our next question comes from Andrew Kaplowitz with Citi. Please go ahead.
Good morning, guys.
Hey, Andy.
Good morning.
Darius and Tom, we know you have more difficult growth comparisons in Aero moving forward, but you did 5% growth in Q4 and you averaged over four in the second half of the year. We've heard some more positive commentary on business jets. You guys have talked about the potential turn toward the end of this year and next year. How do you look at the business at this point? The one to three, I'm sure there's some conservatism for the usual suspects, like space and maybe TS, is the overall environment actually still getting better, would you say, in aerospace?
Yeah. As we discussed, we think the environment is still getting better. I think what's also important to note is that we're coming off a much stronger year 2017 than a weaker year, which is 2016. All in all, we're still very bullish, and I'm very excited about our prospects, more excited than going into 2017. Nevertheless, the baseline is a little bit different. In terms of specifically on your question on aerospace, yeah, I think the framework there on the business jets is similar to what we've been saying. We expect some level of acceleration, but more likely in the second half of 2018, not early, particularly as some of the new platforms are launching and deliveries taking place. That's a cautious optimism reflected in the growth rates, but probably more later rather than sooner given the year.
Appreciate that, Darius. You mentioned that you're seeing short cycle growth in Process Solutions. In December, you suggested you really hadn't seen any evidence of bigger projects coming back. You guys see the same things that we do, tax reform and Brent oil prices being very high. Do you have any expectation that larger projects could begin to come back? Are you seeing any signs of them yet as we sit here today?
Yeah, I think, overall, our pipelines are very strong. I think you have to remember that our PMT backlog is up 10% on a year-over-year basis, and we had positive orders growth in both UOP and HPS in Q4. I would tell you also the pipeline and the project pipeline is strong, and I think what's important in terms of the price of oil is sustainability, is that what we don't like to see is it bouncing around. To the extent that it stays at this level, is right around, is a very healthy environment for investment. As long as this is sustained, I become that much more bullish on our outlook in PMT, particularly UOP and HPS.
All right, guys, I'll leave it at that. Thank you.
Thank you.
Thank you. Our next question comes from Scott Davis with Melius Research.
Good morning, guys.
Good morning, Scott.
I asked this question of a couple other corps, but I haven't really gotten an answer that seems helpful yet, and I'll throw it to you guys. This new tax act thing seems to have somewhat made it simpler to do tax planning globally. Maybe creates an opportunity for you guys to unwind some structures that were created in the past that, whether it's supply chain related or otherwise, is there a cost benefit at all from the simplification? You guys probably have 700 different corporate entities or something crazy like that, right? Is there any chance that you can unwind some of that stuff and just.
Some inside information there. I think, Scott, it's funny. If you could see us in the room, I'm actually smiling at Anne Madden. I think your point is spot on. What I think is underestimated today is that there is an opportunity to simplify a lot of our legal entities. That is an effort that actually we've already launched. Anne is leading that effort. I also think that something that's underestimated is the level of complexity in this new tax structure in terms of versus where we're going versus where we are today. I applaud the new tax code, and we think it's extremely helpful for U.S. business. It will require us to restructure ourselves, and we do believe that new structure longer-term will be simplified. It will cost us less. We'll make it a lot easier to do business.
Can I quantify that for you right now? I can't, because we literally just started that work a couple of weeks ago. I do anticipate it'll be a source of value for Honeywell and our shareholders.
Okay, good. That's the only good answer I've gotten so far, so thanks for that. I wanted to ask about business jets in the context of this tax act, too, and that you get all this money coming back, and seemingly it doesn't seem like anybody's bought a business jet in a while. You guys have always had really good forecasters, were known for a long time as being the best source for a business jet forecast. What are your guys saying, and if you commented on this earlier and I missed it, I went out for coffee, sorry, but what are your guys saying as far as the potential impact on guys having a few extra bucks sitting around and buying some planes?
I think, probably the right answer is it's a little bit too early to tell because we'd like to see that reflected in the order rates on the part of our business jet customers. One would have to believe that this should have a positive impact on the overall demand. I think for now we're kind of sticking to what we said before, is that we anticipate some uptick in the second half of this year and stronger environment in 2019. Like I said, I think it's just a little bit too early to tell the real impact. The new tax code is 30 days old, and difficult to project at this point the impact it'll have. Logic would tell you that it should be an up arrow for us.
I think the other thing we have going is the mandates and some of the software aftermarket offerings that we do on the business jet side. Even though OEM might not be clicking away at double digits, we certainly are getting new technology investments for existing platforms.
Fair enough. Thank you, guys. Good luck.
Thanks, Scott.
Our next question comes from Gautam Khanna with Cowen and Company.
Thanks. Good morning, guys.
Good morning.
Two questions. First, I just wanted to ask, given tax reform, how does it change, if at all, the profile of the types of acquisitions you're looking at? Does it encourage you to go bigger? Does it do anything to the criteria that you'd set out earlier?
I don't know that it dramatically changes it. I think given Maybe the only thing that's certainly very helpful for us is that the ability to bring back some more cash to the U.S., it certainly makes U.S.-based acquisitions a bit easier to execute, because now we have that more access to cash. In terms of focus I think our financial metrics are set up such that the hurdles are that the adjustment in the tax rates will be reflected in the financial metrics we look at. Does it dramatically change the calculus? I'm not sure, other than we'll have more firepower in the U.S., which is important, and it's important to have that kind of flexibility.
I would add to that, though, that we've not really been constrained in where we're looking. Our M&A team and the businesses haven't been saying, "Well, let's not look in the U.S. because we don't have cash." We've always been able to accommodate that with our capital structure. That will continue to be the case even more so now.
I appreciate that. Just one follow-up. Darius, how do you keep the potential spincos focused ahead of the spin? Just to make sure that everyone keeps their eye on the ball and doesn't get distracted as they move into the new world on their own.
I think both through our attention, we view these as our businesses before and after the spin. I think we want to make sure that these are incredibly successful. We have very focused management teams in both the spin's businesses that are doing a great job in running their businesses, but also getting ready for the spins. I'm very confident that the teams in those businesses are focused on delivering now and after the spins take place. I think there's also proper incentives that are aligned to the success before and after the spin as well, which we've taken care of and put in place.
Gautam, this is not an effort that's being done in some far-flung part of the company. The SpinCo team that's executing on the transactions actually reports into Darius and I directly. We do involve the businesses being spun, but we want them focused for the most part on executing on their operating plans, and that's the way we've structured it. The two objectives of the spin team are one, day one readiness for those organizations. We have a very strong cadence and operating system around that in terms of systems, in terms of people and staffing, and doing all the regulatory filings and so forth. That's very rigorous. Secondly, it's stranded costs. With 20% of the revenues from the RemainCo going with the spin, we need to right size the company, and so that SpinCo leadership team also is in the process of managing that cost structure.
Darius and I get regular weekly visibility to it. We put on some of the most senior people in Honeywell to do this, and we're encouraged by the progress we're making.
I think just to add to it, we have a full-blown, what do we call de-integration team, which is staffed by senior leaders whose full-time job is nothing but to focus on making certain that we have a successful spin in place and execute the business and integration. We have the right level of focus on this.
Thank you. Appreciate it, guys.
Thank you.
Thanks, Gautam.
Our next question comes from Peter Arment with Baird.
Yeah, thanks. Good morning, Darius, Tom.
Hey, Peter.
Darius, just a quick one, sticking in the aerospace, obviously the United Airlines selection, I thought was certainly very favorable for you guys. Just kind of talking about the competitive landscape, we're months into this deal with one of your bigger competitors. Certainly the headline reads that it would be more competition for you, at the same time, seems like there's going to be a lot of opportunity. What are you guys hearing in terms of your sense of post this merger that you'll see other opportunities for growth?
To be honest, Peter, we haven't been really focused on the merger of others. I think what we've really been focused on is executing our strategy. I continue to be extraordinarily excited about our vision for Connected Aircraft. I think it's industry leading. It's reflected in our rates. Certainly been a factor in the United win, we're getting more and more traction every day. I feel good because if you think about the real estate and the scope on an aircraft, we have the avionics and we have the mechanical systems, and with an integrated play and integrated offering, I think we have a very compelling vision for the kind of value we can create for aircraft owners, maintainers, passengers, pilots, create a more efficient, more safe experience for everybody. That's not visionary. That's not a dream.
That's something that we're executing, selling, and generating revenue in today. We feel that's a very unique place to be in the aerospace industry, frankly, we're the only ones that are executing it. I think probably our biggest opportunity or challenge at the same time is just being able to communicate that clearly and add value to end customers. As you can tell by some of these wins, we're doing that more and more effectively.
Okay, that's helpful, Colin. Just a quick one, Tom. The sensitivity around for your defense business with the CR impacts, how do we think about that? Is there any near-term impact or what's the right way to think?
Thankfully, we got another reprieve. It's one of those things, it's more timing than anything else. There's a slight risk that volumes push out depending on shutdowns and so forth. I don't think we are anticipating any significant adverse impacts from those activities.
Appreciate it. Thanks, guys.
Thank you.
Our final question comes from Andrew Obin with Bank of America.
Yes. Good morning.
Good morning, Andrew.
Hey, just a question. The focus on economy was all on the U.S., European macro metrics are actually looking better than the U.S. right now. Is China. Can you just talk about what you guys are seeing in Europe and what you guys are seeing in China and other emerging markets? And specifically on China, if you're seeing any signs of deceleration. We've been getting a lot of questions from investors on that.
Yeah. No, we're extremely bullish on China. It was an absolutely terrific year for us in China. I think close to a 30% organic growth rate in China last year, could it be a slight downtick from that rate? Maybe. We continue to see double digits and planning on double-digit growth rate in China for us. We're bullish there.
And that was every-
Every business. Every business grew. I think we really kind of figured out the calculus as to how to be successful in China, acting like a local company. Our whole value chain now is localized. The great news, and the one that I'm really excited about is, we made similar progress in India. I think, we're really firing on all cylinders in China and India. Back to your Europe question, we're also bullish on Europe. Europe is continuing to grow. We're seeing growth in Western Europe, not seeing a lot of trouble spots here. As we head into this 2018, as I said, I continue to be bullish on a global basis, in terms of our prospects for growth. Overall, strong environment.
Just to follow up on your Aero 2018 outlook. You said on the call that none of your businesses are going to be negative, but just sort of this 1%-3% growth does imply that perhaps commercial OE is negative on wide-body deliveries. How should I think about sort of subsegments within Aero?
Well, I think number 1 is the aftermarket and the services business are going to continue to be strong, both through sort of what I call the proactive segment, as well as the break-fix. We talked about the business jet OE, which our plan is that acceleration as we get deeper into the year. On the narrow bodies, obviously, this is going to be really aggressive growth for our customers. That's sort of the rough framework that we're planning for in 2018.
within your framework, none of the subsegments are negative into 2018.
No. On the OE side, we'll continue low single-digit kind of growth all-in, is the plan. That could change quarter-to-quarter, and vary quarter-to-quarter based on customer delivery schedules. I think we're planning on an overall commercial OE growth rate in that range.
just similar level of conservatism across your guidance. Thanks.
That concludes today's question and answer session. At this time, I'd like to turn the conference back to Mr. Darius Adamczyk for any additional closing remarks.
Thank you. We've begun 2018 with significant momentum, including strong order rates, a growing backlog, and favorable U.S. tax legislation. We are excited by our prospects both in near term and long term, as Honeywell will continue to outperform. I'm looking forward to speaking to you next at our annual Investor Day on February 19th, here in Morris Plains. Thank you.
Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.