Good day, ladies and gentlemen, and welcome to Honeywell's Third Quarter 2016 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, Tracy. Good morning, and welcome to Honeywell's Q3 2016 earnings conference call. With me here today are Chairman and CEO, Dave Cote and Senior Vice President and Chief Financial Officer, Tom Sloczek. 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 to the world and of our businesses as we see them today.
Those elements can change, and we ask that you interpret them in that way. We identify the principal risks and uncertainties that affect our performance in Form 10 ks and other SEC filings. This morning, we'll review our financial results for the Q3 and share with you our guidance for the Q4 full year of 20 16. And as always, we'll leave time for your questions at the end. So with that, I'll turn the call over to Dave.
Good morning, everyone. As we previewed during our update call 2 weeks ago, for the Q3, we reported earnings per share of $1.60 or $1.67 excluding the $0.07 we deployed to restructuring. We expect to return to double digit EPS growth in the 4th quarter, which yields our full year EPS growth target of 8% to 9% that we communicated on October 7. Q3 was a quarter of important changes in many areas that position the company for better performance next year. These include the split of the former Automation and Control Solutions segment, ACS the acquisition of Intelligrated the sale of our Government Services business, HTSI, and the spin of resins and chemicals.
Combined with nearly 250,000,000 dollars in restructuring actions, these changes are lasting improvements to the portfolio that yield benefits beginning in the Q4 and into 2017. And we expect year over year benefits exceeding $175,000,000 from the restructuring actions alone. In the 4th quarter, we'll lap the impact of our U. S. Postal Service project and productivity solutions, the UOP return to growth and expect the continued ramp of our Solstice low global warming product sales.
Darius and Tom will provide more details about 2017 during our annual outlook call in December, but we have a favorable setup. The 4th quarter momentum continues, Our long cycle businesses are improving and our inflections start to kick in. It remains a slow growth environment, but we've continued to invest heavily in the business in capital projects, research and development, hiring sales people, winning content on new aerospace platforms, improving our growth profile through strategic M and A and divestitures and executing on restructuring projects to improve our fixed cost position. With all the work we've done to improve the growth profile, our continued emphasis on the Honeywell operating system and our performance culture, we are well positioned for long term growth and are committed to creating long term shareowner value. On October 7, we communicated all the changes or moving parts that occurred in the quarter.
In our attempt to lend transparency to all the moving parts, we lost sight of the importance of conveying our confidence in our future, the Q4 2017 and beyond. For that miscommunication, I take full responsibility. Last week, we released a number of charts explaining why we were confident in our future. We've included several of those charts in this morning's package because we wanted to explain a bit behind each of them. We've continued to invest heavily, seed planting if you will, and the returns will be there.
We've outperformed historically and will continue to do so. We largely discussed Q3 a couple of weeks ago, so much of today's presentation focuses on the future and why we think Honeywell is an exciting place for you to be. So with that, I'll turn it over to Tom. Thanks, Dave, and good morning. I'm now on Slide 3 with a quick recap of our 3rd quarter results.
Reported sales of $9,800,000,000 increased 2%, primarily reflecting the impact of acquisitions. On a core organic basis, sales were down 3%. Our growth was led by process solutions, transportation systems and home and building technologies, but was more than offset by softness in business jets, defense and space, productivity solutions and UOP. The softness in UOP has moderated throughout the year to the extent that in the Q4, we expect high single digit sales growth in that business. The decline in segment margins in the quarter reflects the impact of OEM incentives, M and A integration costs and the lower volumes, partially offset by benefits from previously funded restructuring.
Earnings per share were up 4% to $1.67 excluding the restructuring charge deployed from the retroactive portion of the stock compensation accounting change. The individual restructuring projects in the Q3 have an average payback of about 2 years and provide attractive accretion in both 2017 and 2018. Free cash flow in the quarter was $1,300,000,000 that's 103% conversion on net income. We continue to put substantial capital to work for our share owners. Our CapEx reinvestment ratio was 150% this quarter and we bought back approximately $1,900,000,000 worth of Honeywell shares through the end of the third quarter.
Let me move on to Slide 4 to discuss the segment performance. In Aero, the sales decline is consistent with what we previewed. The negative 6% headline number reflects the softness we described in our business jet OEM revenues and in Defense and Space, but also to a larger degree, the increase in OEM incentives. I'll discuss the incentives more later, but in the Q3, year over year increase in OEM incentives drove 4% of the minus 6% decline in the top line growth for Aerospace. Excluding the impact of OEM incentives, the commercial aviation OEM business was down 8% with the business jet softness being partially offset by steady growth in air transport.
Our commercial aftermarket business was up 1% on a core organic basis. We're seeing continued repair and overhaul demand within air transport, but the softness in the business jet market is impacting the aftermarket and we've seen fewer engine repair and overhaul events as a result. Defense and Space was down 6% on a core organic basis, driven by program completions in U. S. Space and International Defense and lower volumes for commercial helicopters, primarily related to oil and gas.
While disappointing, we are encouraged by the double digit increase in Defense and State's year to date orders and backlog, although as can appreciate, much of this activity is longer term in nature extending into 2017 and beyond. Transportation Systems sales increased 3% organically in the quarter, driven by new program launches in light vehicles gas segment, where we saw growth of nearly 20%. Aerospace segment margins were down, reflecting the increase in OEM incentives and lower volumes. In Home and Building Technologies, sales were up 5% on a core organic basis, driven by growth in both products and distribution businesses. The products business grew 1% organically, thanks to more than 15% growth in China and strength in the Americas Environmental and Energy Solutions business.
The distribution business was up 8% organically in the quarter, driven by continued strength in the global distribution business and energy and services contracts within Building Solutions. The segment margin rate declines excluding the impact of M and A were primarily due to the mix of products versus distribution revenues this quarter. In Performance Materials and Technology, sales were down 3% on a core organic basis, driven by UOP, partially offset by strong global megaproject conversion in process solutions, which was up 3% organically. UOP sales were down 10% on a core organic basis, driven primarily by declines in gas processing and licensing and partially offset by higher catalyst shipments. Notably, UOP's backlog was up 15 at the quarter end.
Demand for our catalyst continues to be strong driven by reloads as a result of increased refinery turnarounds. Advanced materials sales were down 2% on a core organic basis as demand for our Solstice line of low global warming materials within Fluorine products continues to be strong, partially offsetting the significant market pricing headwinds within resins and chemicals. These resins and chemicals headwinds are obviously now behind us as a result of the AdvanSix spin. DMT segment margin was up 80 basis points to 21.6 percent driven by strong productivity and cost controls, higher catalyst shipments and the favorable impact of acquisition integrations. Finally, in Safety and Productivity Solutions, sales were down 8% on a core organic basis.
The Safety business was down 3%, primarily due to softness in the general personal protective equipment business and lower demand for retail products. The Productivity Solutions business was down 12% on core organic basis due to a tough comparison to the Q3 of 2015 and continued channel headwinds in Productivity Solutions. We will not face the U. S. Postal Service headwind next quarter as we've said.
Segment margin was down 90 basis points excluding M and A to 15.2 percent, primarily reflecting the lower volumes. Slide 5 shows our path to the 4th quarter EPS of 1.74 dollars to $1.78 It's very consistent with what we have previously articulated a couple of weeks ago. We expect UOP to grow at high single digits on a core organic basis, driving significant sequential quarter to quarter EPS improvement. Catalyst sales are expected to be up about 20% in the quarter and licensing and equipment sales will be up about 15%. Additionally, in Process Solutions, we expect to see the normal 4th quarter pickup in our short cycle products and services businesses.
We continue to closely monitor the oil and gas market, but all in all, our outlook has improved. We expect a 2% to 3% improvement from safety and productivity solutions and 0 point 0 $3 to $0.04 from restructuring. I spoke earlier about the rapid paybacks we expect on the restructuring we funded in the Q3. All in, we have a funded pool of about more than $400,000,000 restructuring projects. All other is a $0.05 to $0.06 headwind reflecting the removal of resins and chemicals and the government services business from the portfolio, the normal one time M and A costs from Intelligrated and an expected lower number of option exercises resulting in lower income tax benefits.
This works to a Q4 earnings range of $1.74 to $1.78 per share, that's a 10% to 13% increase from the same period in 2015. Let's turn to Slide 6 to provide some further color on our Q4 outlook. We expect that sales declines in Aerospace will continue into the 4th quarter, particularly in Business Jets and Defense and Space. We expect our total commercial OEM business to be down nearly 20% with growth in air transport and regional more than offset by declines in Business and General Aviation. In our aftermarket business, repair and overhaul will moderate slightly on lower events and lower aircraft utilization, while growth in spares should be steady, primarily due to the new JetWave installations and channel and customer demand.
The backlog in Defense and Space, as I said, is improving as we head into the Q4, but we still expect the business to be down in the mid single digit range on lower volumes globally. And finally, Transportation Systems, we see continued global gas turbo penetration offset by slower diesel penetration, which will drive flat to slightly higher core organic sales in the quarter. In HBT, we expect organic growth in the low single digit range in both the products and distribution businesses. The reported growth is much higher, reflecting the Elster Smart Energy business where we have significant rollouts in the UK and expected strength in the Americas Gas business. On the product side, sales in Environmental and Energy Solutions business will continue to improve, driven by new product introductions in the Americas and strong double digit growth in China and India.
In the distribution segment, which consists of the global distribution business and building solutions, we expect strong backlog conversions, specifically in our energy business and in EMEA and China. Our global distribution business will grow at a slower rate due to very tough comps from the Q4 of 2015 when this business grew nearly 12%. Margin expansion will be driven mostly by productivity net of inflation, the benefits of restructuring, higher volumes and commercial excellence offset slightly by the impact of the Elster acquisition. In PMT, we see a return to growth in UOP driven by continued strong orders. Orders were up 9% in the Q3, particularly in the catalyst business.
We also see some traction on the equipment side. Our orders over the past 3 months were over $700,000,000 and we're expecting a similar amount in the Q4. Importantly, we see oil prices stabilizing in the $50 range. Generally, activity is picking up across the globe, including in China, and some projects that have been delayed or stalled are now resuming. Our year to date book to bill is 1.1 and was closer to 1.3 in the 3rd quarter.
And our win rates across all lines of business in UOP are strong. UOP should grow by high single digits in the 4th quarter as a result. In Process Solutions, sales will be down in the mid single digit range on lower mega project sales growth. However, this should improve in 2017 as we replenish the backlog on anticipated healthy project orders in the 4th quarter. Finally, in Advanced Materials, core sales growth will be north of 10% driven by Solstice, which will grow considerably this quarter and from higher volumes in specialty products across all lines of business.
The significant increase in segment margin will be driven by the higher catalyst shipment content, volume growth in flooring products from Solsys and the favorable margin impact from the spin off of AdvanSix. In Safety and Productivity Solutions, we're finally past the headwinds associated with the U. S. Postal Service deployment. And as a result, we expect the business will be flat to slightly down in the 4th quarter, which represents a nearly 800 basis point improvement sequentially.
This is also supported by a slightly easier setup in industrial safety driven by prior year oil and gas related decline. We should see things improve overall from here, especially with the addition of Intelligrated, which we continue to be very excited about. We've taken aggressive cost actions to address the slowdown in the Q3. This should provide additional runway for margin expansion in the 4th quarter and into 2017. With more than $1,900,000,000 in share repurchases this year, our share count will be approximately 1% lower in the 4th quarter.
And finally, as a result of last quarter's adoption of the stock compensation accounting standard, we now expect that our tax rate will be approximately 25% in the 4th quarter and about 24.5% for the full year. Let's turn to Slide 7 to discuss our expected full year segment margin. On a reported basis, we expect to be down 70 basis points, but this belies the significant operational improvement we expect to deliver approximately 80 basis points. We continue to realize volume leverage in our growth segments and work with our suppliers to drive down material costs. Additionally, by deploying the Honeywell operating system and our restructuring capacity, we continue to reduce our fixed costs throughout the enterprise, including in our plants and our administrative functions.
These are permanent improvements in our cost structure that will drive significant margin expansion as growth more fully permeates the portfolio. Offsetting this operational goodness are the upfront effects of investments we're making to improve the future. You'll recall that we are completing the 1st year of our 9 recent acquisitions. This 1st year is heavily burdened by cost for inventory accounting, amortization of intangibles, deal costs and integration costs. This will be an approximate 50 basis point headwind this year.
OEM incentives are a 60 basis point headwind. I have a later slide on what these OEM incentives mean for our future growth, but given the conservative accounting we deploy in this area, we're experiencing a $0.25 EPS headwind in 2016 that will not repeat. Finally, the foreign currency movement from 2015, principally the strengthening of the U. S. Dollar has driven approximately 40 basis points of margin rate headwind.
Based on our hedging positions, we expect this to turn to a similar size benefit in 2017. So as you can see, we expect to end the year with segment margin of 18.1%, but are well positioned for 2017 as the favorable operational impacts from the Honeywell operating system continue and the impact from the other factors recedes or flips around. I'm now on Slide 8. We're reaffirming our full year EPS growth target of 8% to 9% or $6.60 to $6.64 excluding the anticipated 4th quarter pension mark to mark adjustment of about $1,500,000,000 This is based on current discount rates and asset return assumptions as of September 30 and is driven primarily by the decline in interest rates. The sales and segment margin guidance you see here is consistent with the preview from October 7.
With a lower than anticipated net income principally in Aerospace, we now expect that free cash flow will be between $4,200,000,000 $4,300,000,000 for the full year. Slide 9 summarizes the end market dynamics that we anticipate in 2017 versus what we're experiencing this year. First, in homes and buildings, we'll continue to see steady growth, driven by new product introductions, connected offerings and the expansion of our installed base. Next, the dynamics we described for commercial aviation will continue in 2017, including declines in business jet market, steady performance in air transport driven by program ramp ups, including on the A350 platform and a reasonably stable aftermarket. What will change in commercial aviation is that the massive 2016 headwinds from OEM incentives become a modest tailwind.
We expect the declines in defense and space will moderate a bit in 2017, but we anticipate that demand in our commercial helicopter and domestic space businesses will continue to be slow, will no longer have the impact from our government services businesses following the sale of HTSI. And in addition, our long cycle backlogs are improving, as I noted earlier. More than 3 quarters of our expected 4th quarter sales are firm which is above where we were at this point heading into the 3rd quarter. To moderate the effects of the overall declines in aerospace, we've made significant improvements to our cost structure while investing for growth, including sales headcount, research and development and in new products like JetWave. We anticipate stronger performance in our businesses that serve the industrial and workers end market.
We'll no longer have the U. S. Postal Service comp and Intelligrated will contribute to growth. We also expect our safety sales will improve over the course of the year. The vehicles market will continue to be strong with increasing global penetration of turbos and growth in light vehicle gas applications.
We also expect modest improvements on the commercial vehicle side in 2017. And on a global basis, we expect turbo penetration to be approximately 40%. Lastly, Advanced Materials will be a strong contributor highlighted by more than 25% growth in our Solsys product. Solsys is meeting or exceeding all expectations and is expected to be about $1,000,000,000 business for us by 2020. Let me turn to Slide 10 for a preview of 2017.
We've not finalized our 2017 planning. And as Dave said, Darius and I will provide a full update in December upon the completion of the process. We expect a continued slow growth environment, but also believe that the inflection we've mentioned are still intact to enable us to grow faster than the markets we serve. With that said, we're taking a conservative approach to the planning framework specifically relative to business jets, defense and space and commercial helicopters. While we're targeting double digit EPS growth, we're not counting on a recovery in these specific end markets to achieve that.
We continue to work on the things we can control and we see the result of this in the forecasted 45 basis points to 75 basis points improvement in the margins on low single digit core organic sales growth. Still, we're constantly pressed on why we feel confident in our ability to deliver in 2017. So let's spend a few minutes explaining the rationale underlying our outlook. Let me move to Slide 11. First off, we've continued to deploy large amounts of shareowner capital.
We've increased our dividend 15% in each of the last 2 years and including the $500,000,000 of value created through the spin off of AdvanSix, that's nearly $2,400,000,000 of dividends alone in 2016. And we're committed to further growing the dividend faster than our rate of earnings growth. On share repurchase, we've been very active in 2016 and have already matched our total repurchases for all of last year. You'll recall that it takes about $1,000,000,000 of repurchases each year to keep our share count flat and we've been doing twice that amount. M and A activity has significantly accelerated over the last 18 months.
For the past few quarters, we've been dealing with the incremental acquisition and amortization costs from these deals. And as that begins to roll off, the contribution from this M and A will really be felt. And the M and A benefits do not even take into account the sales and commercial synergies we expect from combining sales forces, leveraging Honeywell's channels and high growth regions and from general commercial excellence that we drive in our own businesses. Needless to say, we expect M and A will be a significant value driver in 2017 and for many years to come. Slide 12 recaps the deals we've completed.
Each of these businesses participates in an attractive fast growing market where they are perceived as leaders in their space. They are accretive to Honeywell's growth rates. We believe there is a big opportunity for us to expand a number of these businesses into high growth regions given the Honeywell presence, leadership teams and infrastructure already in place. Many of these businesses also have a strong technology and software component and that will drive superior growth and improving gross and segment margins. I also don't want to lose the point that we continue to find strong new talent through our acquisition that makes the combined companies better and further drives our software and technology initiatives.
Let me turn to Slide 13. We've talked extensively about OEM incentives. What you need to remember is, 1, their investments that have gotten us on a number of attractive new business jet and air transport platforms that build upon our already strong installed base. 2, we expense these incentives to our P and L as they're incurred, a more conservative treatment than most of our peers. 3, there's a very clear visibility to the incentives.
They're negotiated years in advance and any accelerated recognition of the cost does not change the aggregate cost, only the timing of the recognition as you saw in the Q3. And lastly, 2016 is our peak for these investments. They're still significant, but they begin to decline in 2017 as you can see on the chart. We are excited about the extensions to our aerospace franchise that these investments are enabling. You can see on Slide 14 some of the other investments that we have made to grow our business.
We talked extensively over the past few years about our capital expenditures. We have been investing in about 1.6 times depreciation for the last several years. The returns on the incremental investments like Solstice are phenomenal, twice that of any M and A deal we could do. And while they do temporarily dilute free cash flow, the investments are essential to our growth. We are nearing completion of this investment cycle after which we expect the reinvestment rate to normalize to between 1.01.2 times depreciation.
We also continue to invest in research and development at a rate that's approximately 7.5% of sales, including R and D that's customer funded. Our R and D is fueling the next generation of Honeywell products, including our software offerings. To ensure we have enough feet on the street to win in our end markets, we're also investing heavily in our sales force. You may think of this as a short term investment, but it's not. A salesperson really isn't productive enough in his 1st year on the job.
So we have to ensure we have enough sales employees in place today to support tomorrow's business. The same applies in our high growth regions where our headcount has grown nearly 14% in the last 3 years and we have funded more than $260,000,000 restructuring so far this year. Slide 15 has more detail about capital investments in Performance Materials and Technologies. These projects And We expect more than $1,000,000,000 in sales in Solsys revenues per year by 2020. After that, and this is timely, we'll see additional demand generated by the Kigali amendment to the Montreal Protocol, which was just agreed to this week.
In UOP, we continue to add catalyst capacity in the U. S. And abroad to support our large installed base in both refining and petrochemical segments. On Slide 16, we profile another breakthrough technology that we're investing in, the connected aircraft. Our vision is to create a fast, seamless online experience for passengers, pilots and operations staff on the ground.
To supplement our core product, we've invested in M and A in this space with EMS, Aviaso, Satcom 1 and Com Dev and those investments are beginning to pay off. With Com Dev's content on 95% of commercial satellites, we have insight into the networks and services are going to be needed for connectivity now and in the future. EMS and SATCOM-1 provide us with antenna, modem and router technology, which is helping us to optimize the way data travels through the aerospace ecosystem, providing our customers with incremental value versus the competition. Lastly, Avi also provides the software and data analytics necessary to serve airlines. And we have recent wins with Etihad Airways, Finnair and Lufthansa Cargo to support this.
With all these capabilities, we're now able to supply an aircraft with a big data pipe, JetWave, that is a 1000 times faster and costs 20 times less per Megawave than the previous systems. No one has the solution that we do with JetWave. Combined with our legacy expertise around avionics, mechanical equipment and services, we're positioned to win in the emerging $7,000,000,000 connected aircraft space. As you've heard Tim say, we anticipated the connected aircraft business to be larger than $1,000,000,000 for us by 2020. Let's turn to Slide 17 to talk about another great position in a good industry, turbochargers.
As you see as you've heard us say before, we're in the golden age of turbos. Turbocharger adoption continues to be driven by regulations around fuel economy and emissions. To comply, automakers are downsizing engines, but to preserve engine performance, they look to our technology, which provides 30% more torque, 25% greater fuel efficiency and 20% lower carbon dioxide emissions. In the graph on the right, you can see that these factors are driving incredible growth in penetration. Today, more than 1 third of all vehicles have a turbocharger and by 2020, we anticipate roughly half of all vehicles will have 1 on board.
And every year when we look at our data, our long term forecast for turbo penetration improves. This is a fantastic growth story for us both in the short term and long term, particularly as adoption of our light vehicle gas applications continues to ramp up. We continue to win more than 40% of the OEM platform competitions globally. Slide 18 highlights another aspect of why we're so well positioned for the future, our software capability. We've been developing software for a long time, much longer than industrial Internet of Things became popular.
More than half of our 23,000 engineers globally are developing software, more than 75% of our HOS Gold breakthrough goals are software related. While our expertise has traditionally been in software that is embedded within our products, we also have about $1,000,000,000 of highly profitable standalone software revenue. And that number is expected to grow significantly over the next 5 years. The engineers are building on our strong industrial heritage to blend physical products with software. Last year, Honeywell became the 1st and only large Western company to announce that it is 100% compatible with capability maturity model integration at CMMI Level 5 across all global operations and in every business.
This is a big deal. It means we can develop products faster and at a lower cost than many of our competitors. We also continue to make investments in our engineering base to ensure we have the best pool of talent driving the software growth at Honeywell. Let me turn to Slide 19 and talk about high growth regions, which represent about 40% of the world GDP and collectively are growing north of 4%. When you compare that to the other 60% of the world, which is growing at less than 2%, it's clearly essential that we are there and we need to be local if we're going to be successful in HDR.
We saw these trends early and made the right investments to ensure that we get on our fair share of growth. Since 2003, we've increased our census in high growth regions by 2 20%. Our presence is impressive, 140 offices, 70 manufacturing facilities and over 58,000 employees. And thanks to our investments, Honeywell's business in Highgrove's regions has grown at a 12% CAGR. Today, HDRs represent about a quarter of our overall sales growth.
We expect that number will continue to grow. Slide 20 conveys the attractive trends and dynamics for the markets in which we participate. Flight hours are growing and passengers are demanding an on the ground experience when it comes to connectivity. Our aerospace business is leading the way with Jetway. Turbo penetration is increasing.
We have the global scale and industry leading technology that is being adopted by automakers around the world. When it comes to the Internet of Things, we have over 11,000 engineers working on valuable software solutions that are helping our customers optimize their operations. In high growth regions, we're addressing demand in the world's fastest growing economies through innovative local products and solutions. In PMT, we've invested for growth through capital expansions. It's too early to call a recovery, but we are seeing signs that the bottom may have been reached in oil and gas, including month over month improvement in rig counts and drilled but uncompleted wells and a stabilizing oil price.
We have a broad catalyst portfolio that allows us to capture a large percentage of upcoming catalyst reloads in areas where we participate. We also have leading modular gas processing technology for midstream gas applications and strong positions in refining and petrochemicals. We've also invested in capacity for Solstice, which is being rapidly adopted by automotive and building customers throughout the world to meet the demand for low global warming products as HFCs are phased out. And nearly half of Honeywell's current portfolio is dedicated energy efficiency. The future is bright for Honeywell.
The people and technologies we have and the investments we have made are tied to favorable trends in fast growing industries. All of this is going to drive future growth. With that, I'll turn it back over to Dave. So to summarize, we've made the right investments, we've taken the right portfolio actions and we have industry leading products and services in the right markets. The future will be quite good for us.
We continue to invest heavily to drive positions on winning platforms in aerospace, in research and development to bring new breakthrough products and technologies to market, in salespeople and repositioning and in capacity expansions in highly profitable businesses, including European Fluorine Products. We'll see the benefits of this next year 2018 and many years to come. You'll hear Darius and Tom talk a lot more about this in the outlook call that we'll have in mid December. So with that, let me turn it over to Mark for Q and A. Okay.
Operator, we'll go to our first question.
The floor is now open for questions. We'll take our first question from Scott Davis with Barclays.
Hi. Good morning, guys.
Hey, Scott.
You've had a few weeks now. I mean, we've had 3 weeks in October and UOP is a pretty lumpy business. I mean, your confidence seems to be really high that that comes back in 4Q. Is that based on what you've actually started to see in October or just a function of the backlogs there, so it should get start should start to get released?
Well, this is mostly orders that are already there and that the guys have actually been doing a fair amount of the production already to be able to ship in the Q4. So we have a high level of confidence on UOP. Tom, anything you want to? No, the visibility to the installed base is pretty good. Much of the business is reload activity and we're tied at the hip with the customers.
Yes. Again, let me ask it a different way. I've covered you guys long enough to know
that this stuff gets some push from December 20 to January 3, it wouldn't surprise me in UOP because that's just the nature of the business. So I know you've got the orders, but your confidence in actually seeing in 4Q versus 1Q 2017 based on what you've seen in October? Is that has that changed? That's
what I'm trying
to ask. I didn't ask it very well. No. No meaning confidence is better or?
Yes, no, no, no. We're in the same place as we were. We feel good about it. I suppose there's always that chance that it can happen. But the lumpiness is not so much moving from that we missed a shipment as it is that when the shipments are going to occur, they're already planned.
They've already got the orders. They're already producing. We don't see any issues there.
Okay. I was just trying to get my arms around that because that's tough for us to model it. My only other question is the PMT capacity investments you've made, when you roll that stuff out and you start producing in 2017, do you make a margin on that right away? Or do you have to hit a certain level of capacity utilization before you really start to make a margin on that?
There's typical startup costs, but it's a disciplined startup process, So I mean, of course, in the first few months, you're not running at full optimization, but it isn't very long after that, that you do achieve the impacts of the volume that are coming through. Okay. So you're not losing money out of the
gate per se. You can actually start making money day 1, but obviously that margin ramps up when you get when your utilization goes higher. Is that just
am I correct? That's the expectation, yes. Yes, that's true. Yes, it's not a drag from the beginning.
Okay. Just trying to get my own drag. Okay.
Thank you, guys. I do appreciate it.
Thanks, Scott.
And we'll go next to Steve Tusa with JPMorgan.
Hey, guys. Good morning.
Hey, Steve.
Funny, we're talking about slippage on this call. You guys have done a pretty good job over time of calling annual guidance over the last 10 years. So it's an interesting question. But when it comes to aerospace, you're exiting the year at a pretty negative trend line on organic. I mean, is there something about the comps next year that gives you confidence that you can kind of hold Arrow close to the flat line organic?
I'm just kind of thinking about the direction of that business definitely suggests that it should be down next year organically. I'm just kind of the early read on that.
Well, let me put this in the context of total 2017, because I'm assuming that question will come up also. We're going to plan sales conservatively based on what we're seeing this quarter and that will include aero being on the more negative side when we think about business jets and commercial helicopters. So we want to make sure that we're consistent with what we're seeing and that we're not Pollyannaish in any way with our sales planning. HTSI and RNC will also be coming the government services business and the resins and chemicals business will also be coming out. So we'll have had like 3 quarters of those businesses being in, in 2016, they'll be out in 2017.
We'll also have a number of pluses. So we'll have the impact to restructuring, aero incentives begin to decline. We've got the impact of all the acquisitions that we did and you understand the 1st year hit we normally take from there. Interest expense should be a positive. UOP, SPS, Solstice, those should all be positives.
And we're going to put all this together and have a much more in-depth discussion in December after we've had a chance to go through all the AOP planning and Darius and Tom are going to take the lead on that. And that's why we feel comfortable in saying that even in the slower macro and we think more difficult aero side on bizjets and commercial helos in particular that we feel comfortable with the statements we've made about 2017.
And that's still kind of
Steve, but hopefully that helps.
No, that helps a lot. And that's still embedded in the thanks for the follow-up, by the way. Allow me to ask a follow-up. And you think that's embedded in kind of the low single digit guidance that you're given? You can still grow the company even with Arrow down?
Yes. Okay. And then one last question for you. When it comes to buyback and kind of capital allocation decisions, who's kind of steering the ship right now? I mean is that collaborative with Darius?
Is that what is the who's making the call on perhaps doing a bigger buyback? The stock obviously took a hit. Your presentation on that money suggested it was overdone. So who's making the call on the buyback at this stage?
Well, consistent with our policy over the last 15 years, I try to make all of these decisions with no input from anybody. Of course, it's collaborative. We make no decisions here without trying to get input from everybody and making sure that everybody weighs in. So yes, as you might imagine, we have a lot of discussion about it. And from time to time, we let Darius out of that closet that I talked about in the last call, so we get his input on things.
It's obviously collaborative. Darius is involved, Tom is. We discussed it with the Board. It's not a surprise to anyone when well, except maybe externally when we do announce it because we want to be thoughtful in what we do. And the way we've always tried to run the company, not just on buybacks, but any decision is that we want all the input, all the opinions, conflicting, agreeing, whatever they are.
So that at the end of the day, we make the best decisions. I've always felt like we get measured on the quality of our decisions, not on whether somebody was right or wrong from the beginning. And that's how we handle the buyback decisions also. Okay. Thanks a lot.
I was going to add one element to that, Steve. I mean, we're obviously subject to the blackout periods in trading of our stock. And so that comes into play from a timing perspective. But as we've referenced in the past, we do have some programmed 10b5-1 types of plans in place that do a modest amount of activity based on certain levels of trading in stock.
Yes, that's right. You're ready to make a big splashy headline. Thanks.
Thanks, Steve.
And we'll go next to Nigel Coe with Morgan Stanley.
Thanks. Good morning.
Hi,
Nigel. I do want to echo the comments from Steve. It's amazing how quickly a decade of execution gets lost in noise. The transparency you provide around this second half miss, I think, is well appreciated. So I just wanted to say that.
So Aerospace, the near term outlook is pretty ugly. Bizjet, we all know how bad that is right now. But how when do you see the cost of the point between Bizjet moderating, the declines moderating and then the ATR OE starting to pick up? Is that a second half twenty seventeen kind of event or do you think that's earlier than that?
I'd say the ATR side has actually performed fine and we're going to continue to see things like A350 pickup. So that's going to be a benefit to us. The bizjet side and commercial helos should I would suspect they're going to continue to be a market drag for us next year. So when we put all that together, aerospace is still going to be an important performer for us overall. You saw a fair amount of the restructuring also occur there.
And we think it's going to be a good performer for us in the long term. But 2017 is still going to be a little bit tougher overall, I think when you put all that together.
Is it too early to have confidence in growth? Or is it too touch and go to make that call?
Are you talking about growth of the
business overall? For 2017, yes.
For 2017, we want to go through the AOP planning to make sure that we understand all the pieces. But at this point, I think we're probably going to plan this more conservatively than less. So I'd say overall probably lower sales next year than this year will be the way that we'll plan for it. But we haven't we really haven't gone through all our planning process yet.
Understood. And then as a follow on, the $1,000,000,000 forecast for Solsys in 2020 is obviously a big number. Can you just remind us where is the backlog right now for Solstice? What is the current revenue base? And how do you think the Rwanda agreement, how do you think that expands the scope for Solsys?
Yes. So just rough order of magnitude, we're probably a $400 or so 1,000,000 business currently and that continues to grow nicely as we said. I mean, it's more right now mobile air conditioning, which is a brand new segment for us. But as we continue to progress through, we get into buildings and blowing agents and other things. So it becomes a broader application for us.
As far as the new regulation, it remains to be seen how that agreement will impact us, but our forecasts are not dependent upon anything that happened this past week. We do see it as potential opportunity. We kind of need to sort through and fully understand those impacts post 2020. I would say though, Nigel, it's clearly a good development and world's focus on low global warming potential products makes a difference. If you take a look at the HFCs that our product replaces, HFCs are over 1300x worse than a single molecule of CO2.
If you take a look at HFOs, our invention, it's actually 0.8 a molecule of CO2. So like 1500 times better than what you would see from HFCs. So it's a significant new product. There's a recognition that HFCs do have a big impact, negative impact on global warming potential. And Solstice, our HFO, is just a tremendous solution for it.
And faster it gets adapted, the more quickly governments will actually be working to stem the tide of global warming. So we think it's going to be quite important.
Okay, great color. Thanks very much.
And we'll take our next question from Andrew Obin with Bank of America Merrill Lynch.
Yes, good morning.
Hi.
Yes, I missed the previous call because I assumed nothing bad was going to happen. So I was out of the office. Well, so I'm going to have a follow-up question. Just on these incremental aero incentives, my understanding that these are in fact tied to faster shipments to customers than previously agreed. And if that's the case, what's the impact on revenue and profit for Arrow in 2017 from taking higher incentives in 2016?
Yes. So Andrew, let me clarify that. The incentives become due and are reported and recognized in our financials when the milestones that govern that incentive are reached. The milestones are generally development or performance related milestones. They vary by customer.
So for example, if you hit the first test flight or entry into service or other types of engineering milestones, those could trigger an incentive being owed and due and it's recognized in our financials. When you look at 2016, our P and L has been significantly burdened by about to the tune of $0.25 as I said earlier of EPS by incremental OEM incentives. Next year, that this is the peak year and it starts to tail off next year. We get a modest tailwind and then it really accelerates into 2018 2019 in terms of the tailwind, yes.
No, but I just want to understand accounting relationship. Do incentives because my understanding is that incentives, higher incentives do relay and hitting milestones earlier as you said does translate ultimately into faster shipments to the customers. Is that the right way of thinking about it? Is there a connection?
It's not a direct connection because I mean the incentives for us are largely based on the development process and bringing the aircraft to production. And so while you might incrementally get to faster production, you still have to have orders, you still have to have selling and those cycle times generally are unaffected by our incentives are generally affected by those activities.
Okay. And just a follow-up question on that.
I should add, these are good investments for us to be making. We expense everything as incurred. We don't put it on the balance sheet. So we take our hits as they're occurring, unlike others who put it on the balance sheet and you see it over time. So for us, while it's painful in the short term, it sure as heck helps where you're going in the long term.
And these were decisions that we made several years ago to make sure that we were on the right platforms with the right kinds of products and services going forward. So this is pretty smart money. It's painful in the short term, but it's smart money and positions us extremely well for the future.
Got you. And just a follow-up question on connection between global airline passenger and traffic and your commercial aviation aftermarket, you guys were up 1. My understanding that global passenger traffic was up mid single digits. Is there a reason for the disconnect? Is there destocking, deferred maintenance or anything else driving the difference?
Thank you.
Well, this is one that's always kind of interesting when you look at aftermarket versus flight hours, because while flight hours develop pretty consistently over time and they tend to go up 3% or 4% a year, even in a bad time, they'll go down for a single year and then pop back up again. So that trend is always relatively smooth. The aftermarket stream associated with it though bounces around in sometimes crazy directions. If you recall the recession for example where flight hours were down 3% or 4%, aftermarket was down something like 20% or 30% in that same year. So the long term trend is generally consistent with what those flight hours are.
In the short term, it can bounce around quite a bit. So being able to explain the difference between say 3% and 1% is easily within the realm of typical variability. The other thing I'd add to that, Andrew, is that you've got combination of both air transport and business jets in that 1%. We talked a little bit about the slowdown on the business jet R and O activity as I was going through the slides and that has contributed to this.
Thank you so much. Hopefully, we'll go back to non eventful and good hunt quarters. Thanks a lot, guys.
Yes, it will.
And we'll take our next question from Steven Whittaker from Bernstein.
Thanks and good morning all. Appreciate the patience and color through all the questions. It's really very helpful and in some parts very entertaining. Listen, I just want to first follow-up the earlier comments on UOP and 4th quarter confidence. And the specifically, if you look at the incremental, you've got this 20% growth and whatnot orders on the catalyst side, where are the incremental catalyst volumes going to?
So if you think about refining versus petchem for that part of the growth and is there any impact at all from 1st wave Gulf Coast crackers that have been delayed?
Well, that's a level of specificity, Steve. I have to say, we'll have to get back to you on that one.
Okay. But in terms of I think just so you know in advance that this is an investor discussion based on just I think. Just hope you're sitting on this one. Like it's like a bad relationship where one bad thing happens and all of a sudden everything else comes out, right? So in a lot of investor discussions, I've been certainly defending Honeywell's growth in Aerospace and margins versus the margins in Aerospace over time.
The assertion is that Honeywell has somehow been trading off growth for margin expansion when you look at specific platform wins. And as you say in Slide 13, large wins on the right platforms to accelerate growth. I'd like to give you an opportunity to maybe address that directly to a lot of investors out there who are concerned about this from kind
of a higher level perspective.
Yes. It's one I always kind of wonder, so what data are they looking at when it comes to I assume this is the market share question, Steve.
Mostly. Yes.
Yes. Because if you look at the data, it actually looks very good for us. And to your point, we are selective on the platforms that we pick. I've always been shocked at the investor reception when one of our competitors says that they've won 32 of the last 25 competitions. And when you say, geez, now they're winning over 100% of all the competitions out there, how is that possible?
And I think you're getting a little carried away with what do they count and what do they not count. If you take a look at our avionics performance, it's quite good and there's a future stuff that we'll end up talking about at some point. If you take a look at the concessions that we're paying right now, for example, that you would look at that and say, all right, yielded a bunch of good platforms also. When you look at the amount of R and D that we spend in aerospace, it's kind of I don't know what the heck they're pointing to when they say it. It's one thing to be able to say some of this stuff.
It's a little different when you actually have to back it up. And I just have a tough time seeing it. I don't know where they're getting it from.
Okay. All right. And then finally on the capital deployment front, you guys have repeated the kind of window or envelope that you have to work with over a few years of something in the order of $25,000,000,000 But there's always a big difference between what you could spend and what you will spend and when and how, discussions you're having with huge pipeline that Anne and company and everybody has developed. What's your level of optimism again in the kind of types of M and A activity that investors should be prepared for?
Well, it's always tough to predict, as we've said before, and we're going to continue to do both divestitures and acquisitions in a way that causes us to improve the overall growth profile of the company. The problem of course is you can't predict them. You can't say, okay, it's $2,000,000,000 a year, dollars 5,000,000,000 a year, it's going to be 0 1 year, dollars 6 another. You just don't know. So we have to take our opportunities as they arise and we'll continue to do that.
We do have a good balance sheet, like having that. We think that gives us the opportunity to be smart when it comes time to doing a deal or when it comes time to having the capability to repurchase. And we'll continue to be opportunistic on both.
Okay. All right. And I guess, let me just one last follow-up there is, in terms of kind of software solution stuff versus kind of consolidating products, is kind of everything on the table or directing more one way?
Are you saying from an acquisition perspective, Steve? Yes,
yes, yes.
Yes. There's well, the nice thing about having so many opportunities and so many places for us to go, All the stuff you talked about is interesting, whether it's technology, software, stuff that does a better job of connecting the digital physical world. So there's a lot of places for us to run here. It's really a question of what's available and is the price right. We're still always going to be very conscious that price makes a difference.
If you pay for a strategy because the strategy is right, well, what ends up happening is the seller is the one who made all the money on the strategy, not you. But we're going to be we're going to continue to be thoughtful about how do we do that.
Okay. Thanks guys. Good luck.
Thanks, Steve.
And we'll go next to Howard Rubel with Jefferies.
Thank you. I'm not going to ask an aerospace question. I think I know that market pretty well. Instead, I'd like to talk about Well,
I was prepared, Howard. I was prepared for that and for some day for them to actually pronounce your last name correctly. Well,
you're taking my taking the words out of my mouth, but I'm going to try on restructuring for a moment and because you talk about it as being a permanent change to the way in which you're going to be able to compete and run the business. How can you give us some of the nuts and bolts behind this because it's a very large number and probably is very meaningful to several of the businesses?
Yes. Well, you can start, Howard, with aerospace. I mean, you know that over the course of the year because of the volumes and as well as driving HOS, we've deployed a fair amount of restructuring to that business. And a lot of that is pretty quick turnaround kinds of paybacks. When we did the disaggregation of ACS, we also went through a significant management spans and layers exercise.
So what we try to do is limit and reduce the number of layers that we have from the top boss down to the lowest level person in the organization. We've also tried to increase the span of control for each of our managers. So that also took up a bunch of the capacity that we spent in the Q3. And I'd say thirdly, in our supply chain, we continue to have lots of opportunities, whether it's continued integration of acquisitions that we've done or just addressing legacy sites, we've found opportunities and still have more ahead of us to invest in restructuring and attractive payback projects. So it's a combination of the reorganizations that we've done as well as the continuing address continual addressing of our ISV, our supply chain.
Then the third thing I'd say is, the acquisitions that we've done to achieve the cost synergies that we talk about, you do have to apply restructuring. And again, those do deliver anywhere between 6% 8% cost synergies on the acquisitions. A bunch of that comes from just leveraging our sourcing agreements, but some of it is from restructuring as well. And so those are the three principal areas. And as a result, you're seeing that 2017 tailwind from the pool of funded projects that we have, as I said.
And then the follow-up questions on software. As you are able to transition away from selling a product, but instead selling upgrades and I'll call it enhancements or increased applications. Can you, Dave, provide us with some I mean, to some degree, that provides some substantial margin headwind or opportunity rather or tailwind rather margin tailwind going forward. Could you provide some context of how you've been able to see that and what I'd call give us some hard examples because it could be quite compelling?
I'm sorry, Howard, I'm not sure I followed that one. Hard examples of what exactly?
Well, for example, in avionics, instead of having to sell a box, you sell software upgrade. And so the software costs you minimal amount of money, and yet it enhances the value of the aircraft or in okay.
Yes. No, no, I understand. And yes, you're correct. And of course, we expense all our R and D as we go along. We don't put any of that on the balance sheet either.
So we take the hits for the R and D, which can be substantial if you're trying to develop software. But once you do and you start selling the software pack just in the upgrade, so whether it's weather radar or runway incursion or excursion possibilities, the jet wave, as you start to get into that, it is substantial. The margin rates are significantly better.
I mean that applies not just to Arrow though. I mean it applies I would think to elements of home and building or process control? And I was just hoping maybe you can provide us with a sense of where you are today and where you might be in 3 to 5 years in terms of just the intensity of the business change?
I wouldn't put any numbers on it at this point, but your concept is absolutely correct. That is definitely the, let's say, the direction of the company and that's why we focus as much as we do on software and I think puts us in position for a very good future for the entire company. And we've got a bigger advantage here than anybody else with almost half of our engineers focused on software today. It puts us in a much better position.
Thank you very much, gentlemen.
Thanks,
Alan. Thanks, Alan. And we'll
go next to Jeffrey Sprague with Vertical Research Partners.
Thank you. Good morning, everyone. Hey, Jeff. Hey, good morning. Just want to get my head around restructuring for 2017, not benefits of what you've already accomplished, but kind of new actions.
And I think on the slide, if I interpret it correctly, you're saying the tax rate benefit from the share accounting change will be restructured away. I'm wondering if we should expect the same for any pension benefits that flow through on service costs? And are those the 2 main toggles that would actually define what your restructuring would be next year? Is there some other kind of expected gains or other things? Anything you could frame there would be helpful.
Yes. The way I would think about it, Jeff, is you probably noticed that over a long period of time, we do a lot of restructuring. If we've got some kind of unusual gain, we usually use it to restructure. We take a lot through operations generally every quarter. And it's one of those things where we want to constantly be investing and we're not going to run out of ideas.
So I wouldn't want to go into too much detail until we've had a chance to go through all our AOP planning. But I would be surprised if next year we didn't also have additional restructuring ideas as we went along and that we'll find a way to fund them. Fairly say it's a meaningfully lower number than 2016? Well, in 2016, of course, we had a big boost as we figured out how to do the additional restructuring in the Q3. I wouldn't anticipate that we do something that big again next year, but you never know.
I don't want to as you know, I never say never on any of this stuff, But the whole idea of how do you just constantly have a good pipeline of ideas and find a way to fund the really good ones so that you do the seed planting for the future. That's something we're going to continue doing. And just back to the OEM incentives, maybe one more time. Obviously, the accounting is very conservative. Wondering if you could give us a little thought though on the return metrics as you think about making the investments, right?
Obviously, the ultimate success or failure of the investment is going to depend on the commercial success of the airplane and units sold and all that. But what kind of return thresholds do you use when you think about these investments? And what kind of cushion versus weighted average cost of capital or whatever metric you use to kind of decide if you pull the trigger on this sort of stuff? Yes. I guess there's a couple of things that we end up looking at.
I won't put a specific number on the return because that's I just I don't think that's a good thing to say have public out there. But this has to be a high return project, the same sort of thing that we look at for any internal investment because that's what it is. And that's why we pay so much attention to what and say an external look or the customers look at what do they think it's going to be. We really go through this ourselves to say what do we really think is possible here and how do we make sure that this is going to generate a good return for the company. And I'd say our guys do a pretty good job of this so that we pick the right platforms.
And when you see the concessions that we are paying, it's been so that we could do that. So these are going to be high return, good IRR, very good IRR projects and platforms that we're on. We're pretty confident of that based on what we've done and what we see. Yes. Jeff, the way I think of it is we have a very disciplined process when it comes to considering whether we compete for a new platform that's potential opportunity for us.
It's as disciplined as an M and A process. So we consider all of the investments. These incentives are one aspect of that. I mean, there's a lot of engineering time and project management time that also goes into the outflows or the investments that you're making. And then of course, you consider all the future revenues and the models and so forth.
So it's as disciplined as M and A. And as Dave said, we have internal returns that we look to as the hurdles. And we'll go ahead with the ones that do meet those attractive hurdle rates. And for what it's worth, Jeff, we're very conscious of the time value of money. Okay, great.
Appreciate it. Thank you. Thanks, Jeff.
And we'll go next to Joe Ritchie with Goldman Sachs.
Thanks. Good morning, guys.
Hey, Joe.
Hey. So my first question is on Slide 7. When you take a look at your margin bridge for next year and you see all the headwinds that are basically going away, it's about 150 basis points. You're doing a bunch of restructuring this year. You think growth is going to get better next year and yet where the planning for next year is 45 to 75 basis points.
It seems really conservative. I'm just what am I missing here?
I would say, we've done our we think we've provided a lot of color commentary on 2017 at this point more than we normally ever would. And I would just say stay tuned for the December outlook call. We'll go through a lot more detail then with Darius and Tom to be able to explain what do we see and why. And we're going to be very conscious of having gotten burned on the macro environment this year. And as conservative as I thought we were being in the beginning, we weren't conservative enough.
So we're going to want to make sure that as we pull together a plan for 2017, that it's one that never ends up with the kind of sales surprise that we ended up taking this year.
No, that's fair, Dave, and definitely good to be conservative into next year. Maybe my one follow-up is really just on the M and A that you've done. Tom, I think you'd mentioned on the prior call that the growth was running at about high single digits and I think the accretion was kind of coming in towards the higher end of your range. I'm just wondering how much of the deal related costs, the inventory step up, how much of those costs go away next year? And then where are we still running at those same kind of growth in EPS rates for this year?
Yes. Well, first, if you look at the I mean, the deals that we've integrated this year, most of them were closed in the Q4 or the Q1. And yes, you had a lot of startup costs in particularly 1st 3 quarters of this year. Intelligrated, which we closed in late August, will add to those one time startups. But net net, when you consider amortization and inventory accounting and the other things, the year over year impact will be favorable on those deals.
But the more important thing is that the operations and the cost synergies that we get typically start to ramp in the second half of the first year into the second year. And that's where you start to see the margin rate improvement. So we'll go through the details in December, but this should be a nice contributor to what we have for 2017.
Okay, fair enough. Thanks guys.
And we'll take our last question from Christopher Glynn with Oppenheimer.
Thanks. I'll get my 2 upfront. Dave, had a question on your sales employee census data up 10%. Didn't look like it grew much in 2015 despite higher M and A, so the increase looks like a big organic component. Just wondering where the raw headcount is and where it's especially ROI sensitive?
And then my second question would be probably a follow on to Joe's. If you could quantify what the purchase accounting burden is in 2016 in terms of EPS?
Yes. On the first one on salespeople, a lot of those have been deployed to what we refer to as high growth regions. And the reason for highlighting it of course is that when you hire salespeople, there's a kind of training and familiarization that has to go on. So they're not immediately productive. It's the sort of thing that shows up in the future.
I won't difficult to quantify at this point what that's worth to us, say, next year and the year after. But it's another investment that where we take the expense upfront because of course you got to pay them while the sales numbers they deliver aren't quite enough to pay for themselves in those 1st years. So this is a good thing for us to be doing, a good way for us to expand our high growth region presence. But it's the sort of thing that's another investment for the future for us. On the restructuring side, I don't I know we've shared some data on I mean that restructuring of the purchase accounting yet.
But Tom, I don't know that I want to go through much more than what we've already disclosed here. Yes. I think we kind of keep it at an overall contribution. I mean for 2016 M and A is we guided at $0.05 to $0.15 of overall contribution to EPS and that is an all in number that takes into account all of those one time costs as well as the pure operations. In 2017, you can expect that to be a bigger number as a result of a lot of those costs going away.
So we can even kind of calibrate it when we provide that in December.
All right. See you in September.
All right. Thanks, Chris.
That concludes today's question and answer session. Mr. Cote, at this time, I will turn the conference back to you for any additional or closing remarks.
Yes. Thank you. On October 7, we went out of our way to be transparent. With our focus on transparency, I lost sight of how important it was to also convey our confidence in the future. Hopefully, our confidence in that future came across today.
So we look forward to sharing more with you in our December outlook call. Thank you.
Thank you. This does conclude today's conference. Please disconnect your lines at this time and have a wonderful day.