Ladies and gentlemen, please take your seats. Our program is about to begin. Ladies and gentlemen, please welcome to the stage Mark Macaluso, Vice President of Investor Relations.
Good morning, everyone, and welcome to our 2016 Annual Investor Conference. Thank you again for joining us in our lovely new location. The interest in today's event has been outstanding, as you can see by the attendance. I'd like to take the opportunity to acknowledge the Honeywell senior leaders in the audience. For your benefit, they're all wearing the white name tags with the red logo. You can speak to them throughout the day. Of course, we encourage you to spend as much time as you can chatting with everyone in the technology demonstration as well across the hall. For those of you listening via webcast, you can find today's presentations, including any non-GAAP reconciliations, on our website at www.honeywell.com/investor. You'll see today's agenda in the front of the book and as well a fact sheet in the appendix.
The fact sheet contains a wealth of information regarding our businesses, key performance metrics, achievements, and results. Of course, it wouldn't be a Honeywell event without a bunch of acronyms, we've included a glossary of important terms in the appendix. Again, all this is available on our website. This is a good time to remind you that today's presentation contains forward-looking statements. These statements are based on our best view of the world and of our businesses as we see them today. These elements can change, and we ask you to interpret them in that light. We identify the principal risks and uncertainties that will affect our performance in our Form 10-K and other SEC filings. With that, let's get started. We have a lot of momentum across the portfolio and expect this to continue over the course of our five-year plan and beyond.
Today, you'll hear each of the leaders speak about the key inflection points we see as we head towards 2017. We'll demonstrate how HOS Gold is driving growth and margin expansion through breakthrough goals and innovation. We have an exciting portfolio of new differentiated technologies and innovations, many of which are on display in the room next door, all of which focus on the key themes you'll hear throughout the day. Our subject matter experts are available to discuss the technologies and answer any questions that you have. Dave Cote will begin the day with an overview of Honeywell's great positions in good industries, our path to accelerating sales growth and margin expansion, and progress on our HOS Gold and software initiatives across the portfolio. As expected, Dave will also speak to the recent events on Honeywell and discuss our announcements from yesterday.
We remain focused on Honeywell's growth story and the strong operational performance that will continue to differentiate us from our competitors. After that, Andreas Kramvis, our Vice Chairman, and Krishna Mikkilineni, the Senior Vice President of Engineering, Operations, and IT, will discuss the evolution of HOS Gold and roadmap to outperformance across the 64 Gold business enterprises, as well as how software is driving the next leg of profitable growth across the company. Fresh off an overnight flight, Shane Tedjarati will highlight our continued progress in high-growth regions and how his leadership team is deploying the successful playbook across new regions. We'll also hear from Anant Maheshwari, President of Honeywell India, on the growth and opportunities we see in that region. What you'll hear is that our initiatives are working, and we're focused on the right verticals, driving growth in the world's fastest-growing economies.
We'll also hear from each of the three business presidents on specific strategies for growth, including a preliminary outlook for 2017, an update on key end markets, and our competitive differentiators that will help us to continue to outperform. In addition, there's been a lot of M&A activity over the last two months, as you've seen, including the acquisitions of Movilizer and RSI Video Technologies announced yesterday. We'll share more on how these transactions that we see as unique opportunities to grow inorganically in each of our businesses. Finally, as always, Tom Szlosek will discuss our strong performance track record, provide an update on the first quarter and full year 2016 outlook, and discuss our capital deployment framework. There will be adequate time for Q&A throughout the show. We ask that you wait to ask your question until you have the microphone.
Overall, a lot of exciting content to share with you over the next five hours. With that, as always, it's my pleasure to introduce Honeywell Chairman and CEO, Dave Cote.
Okay. Given it appears to be topical, I thought we'd start with this first, not to continue or belabor the point, but rather to try to get everybody off of the point and spend the next six hours focused on the Honeywell growth story that we think is compelling. No, I have not lost my mind. No, I'm not looking to stay in this job forever and eternalize the position. We purely saw this as an opportunity to make a lot of money for Honeywell shareowners and UT shareowners. We really thought this would work really well. We had somebody, a potential partner here, who actually felt the same way, a couple of different points in the past when they thought making an offer for us made a lot of sense. I made a good offer, I thought, full and fair on February 19th.
It would've worked out very well for everybody. $3.5 billion of synergies. They'd get 0.6 shares of Honeywell stock. We thought the application of Honeywell management practices when it came to becoming a Chinese competitor, software, what we do with cost management, HOS Gold, would have transferred extremely well. We always were going to maintain a strong investment grade credit rating because that's, you heard me say for 14 years and in the rating agencies meeting I have every year, extremely important to me. We also thought this would be a great chance to create a best of both, really excellent core growth portfolio. We saw it as an opportunity to add a lot of value in.
I know there's been questions along the lines of, "Well, wait a minute, have there ever been two big companies put together that work really well?" With kind of the seeming answer being, no, it never works. Well, the fact is, there are a number of them, and there were 10 others that we could have added in here and just didn't. At the end of the day, they're not interested. If they're not interested and that unwilling, well, we've got plenty of other stuff to do, so we're going to go do it, and that's the whole point of the story today. For those of you who are thinking, geez, even though you never said never, this is the first time that it ever actually happens.
Does this mean you now have your 450 elephant gun out and you're just running around the world looking for stuff? The answer is no. This was just kind of a unique opportunity, a unique point in time with under-managed assets at a good price that we thought we could really do something with. It really was unusual and specific to that. The other question that normally comes up is, yeah, but what about those share sales? Like it's an insight. It's not. This is a case where I actually sold, in this case, less than 10% of my total holdings. I still have over 60 times my annual salary in stock. I hold all my options in cash in the 10th year. Now remember, there's a 10 year cliff on all these things.
We require a rule I put in place when I first came to Honeywell that I have to hold those shares for a year after I exercise. I sold my first shares in February of last year. The shares I sold this year were the day after that year lapsed. It's really nothing more than that. It's, I guess, what the Three Stooges would have called a coinkydink. Nothing more than that, and I don't think you should read any more into it than that. At the end of the day, I still have a huge commitment to Honeywell, and by the way, that's worked for me. This has been a pretty good run and I've been able to participate in it, and my guess is I have more personal commitment to Honeywell and ownership than anybody in this room.
It really does matter to me to do a good job with it. Another question that we've been dealing with is, oh my God, the plane. Let's take a look at the plane. You saw another version of this. First of all, start in the upper right corner. There's a bunch of products that there absolutely is no overlap. None at all. Even though those were shown on a competing chart, there is no overlap on any of this stuff. The other point, plane supply is not bid as the total innards of a plane. It's bid in pieces. If you take a look at all the names under there's a significant amount of competition for every one of those pieces. There is, yes, some overlap, but it's minimal overall.
For those of you who have said things like, "Well, wait a minute, the EU blocked the GE deal based on this." Here are the facts. The EU did not block the deal. They put conditions on it that GE refused to meet. Honeywell sued GE. GE paid Honeywell $100 million. Additionally, about three years later, because GE and Honeywell both took this to the international court in the EU, the EU International Court ruled against their own commission because their argument had been that if you do a bunch of stuff on a plane, that alone is anti-competitive. All that stuff that you've been hearing is incorrect, and these are the facts. We go on to the real part of the story, which is Honeywell. Our growth prospects are excellent. Everything we just talked about is history. It's done.
What we'd like everybody to focus on now is going forward. What is Honeywell going forward? Our story is excellent. Hopefully, you saw it from the press release today, but key messages that we want to make sure come across to everyone, we outperformed last year, we're doing the same this year. It's going to continue onward. Our business model works. With our portfolio, we have a great foundation. Our culture gives us sustainability, and we get constant improvement through our process focus. The organic growth inflection that I've been predicting for a couple of years now since the unveiling of our second five-year plan, that kind of has a Chinese overtone to it, Shane should appreciate that in the High Growth Regions discussion. We've been predicting that this would be coming towards the end of this year into 2017, and you'll see that's the case.
Margin rate expansion, lots of runway for people who feel like this is just a concern about margin rate. At some point we're going to run out. Yes, at some point it does run out. That is years away. Capital deployment, we've got a great story, and we're going to spend more time explaining to you what we've done in software because we've always been doing a lot. I don't think we've done as great a job of explaining it to you, we're taking a better shot at it this time. The business model, as we've talked about, upper right, having a great portfolio makes a big difference. If you take a look at what we've done over the last 14 years, I oftentimes say we had a growth portfolio that might have looked like this.
We keep adding to the top, taking off the bottom so it looks like this, five years from now, it'll look like that. We're going to continue to move the growth profile upward. The process focus that we get on the bottom right gives us constant improvement, all that stuff we do on the cultural side really does make a difference. That's where sustainability comes from. The Honeywell culture is real. It's not something that we just talk about and doesn't exist. It really is real. Where do we stand on the five-year plan that I showed a couple of years ago? Starting on the left on the sales side, you'd say even with acquisitions, given the headwinds from currency and world GDP growth, that's going to be sporty to get there.
There's no doubt about it, I'd say, given that we've only got a couple of years left to go on it, going to be tougher to do. Segment margin side, we're doing extremely well there. All our initiatives, I'd have to say, worked better than I ever expected. We really had high expectations for margin rate. We didn't put all of that in our commitment just to give ourselves room, everything's working. This has been a great time to have that kind of margin rate improvement. You'll see from each of the business leader presentations, there's a lot of runway left on segment margin rate as they work to get to their long-term targets. You've seen this chart before. This is just an update. Gets across the point that we really do have great positions in good industries. We've got nice diversity of opportunity.
There's never any one thing that makes the company, by the same token, there's never any one thing that's ever going to kill the company either. We feel very confident about our portfolio and the positions we have. You'll hear more of this from each of the business leaders as they go through their story, end markets for us are actually doing just fine. You can see on the Honeywell exposure side that there's no one thing, again, that's so big it's going to make us or kill us. Our position is pretty damn good, whether it's security and fire or just being on the right platforms in Aero, all the different platforms we're on in defense and space. You're going to see that the oil and gas cycle for us is bottoming this year, so it's already reflected in our numbers.
What we've been able to accomplish in PMT with Solstice and the new applications, some of which hopefully you saw with the fluoropolymers, fascinating stuff. Turbos just keep on going. That's going to be a great business for us for a long time to come. This is the stuff you should look for in each of the businesses. These are some important themes that you'll be hearing from Tim, Alex, and Darius. Those key platforms that we've been talking about that we're going to ramp do start ramping. We've done a great job on the HTF7000. Turbos keep doing well, RMUs are going to have quite an impact for us. In ACS, software becoming a bigger and bigger piece. A lot on the connected worker side. Chindia continues to do extremely well for us, Elster is a great add here and in PMT.
In PMT, in addition to Solstice and the UOP HPS synergies, I think the other important thing you're going to want to pay attention to is we do believe that this year is the bottom as how the oil and gas cycle affects us. Getting to the inflection. By the way, I should make a point that I had this chart done long before we started on our potential transaction. This is not in reaction to that. This is rather a statement about the organic growth inflection that we are seeing. We fully expect that next year, organic sales are going to be up 4%-5% for us and driven by these elements in each of the businesses.
You can see each business contributes, but a big chunk comes out of Aero with what they're seeing with their platforms and in PMT with the things we've talked about on the oil and gas cycle, even at $30, and what we see in fluorines. For me, this is quite encouraging about where we're going next year. Oil and gas, I thought it would take a moment to say, yeah, there were things I was wrong about. There were also bigger things that I was right about here. I was making a couple of points a year ago. One was that the oil decline wouldn't affect us that much because we were in the mid and downstream category, and the lower oil prices were going to translate to lower gasoline prices, meaning more money in consumers' pockets, meaning more spending, meaning more demand for refined product.
All that was true, except consumers didn't spend the money. That economic recovery never happened, it did affect us more than I ever expected. The bigger point, though, and the one that I'd like to reinforce, is that I kept saying because of that diversity of opportunity that I referenced upfront, that you didn't have to worry about us. We would still perform because we had other stuff that was going well enough that we could offset whatever we were seeing there. If you take a look at our performance last year with 10% EPS growth, I think you'd have to say that was pretty darn good, especially relative to what our peers saw. The next step is the 2017 are bottoming out this year. Darius will talk a lot more about this.
We see 2017 as a year of growth for our UOP and HPS businesses for all the reasons listed below. We've got a great install base, the modular refining, the catalysts are starting to ramp up. Elster gives us a great position. They've created new businesses like you probably saw outside with water purification. These things are starting to pay off. We think this is the bottom year of the cycle for us. HOS Gold, I could say that Krishna and Andreas are going to spend a lot more time talking about this. As course, as you start evolving on something new, the most important thing to do is change the logo. Yeah, I know. We did. We just think this one's a lot cleaner, easier for people to understand, different than the one you saw last year, the point's the same.
The intent is the same. Nothing has changed there. Why do I like it? Because it brings everything together into these 64 gold units. It allows a more multifunctional approach. You'll see from Andreas' stuff that focusing on breakthrough goals, especially the number that are focused on software, is significant. It really does something to grab the mindset of the organization and get them focused on things that are going to help them grow. What we want to be able to do is have that small company speed matched with big company efficiency. That's what this is all about. From what we've been able to see so far, this is going to be quite powerful for us. We're quite enthused about it. Shane will talk to you more about high growth regions. I know there's sometimes concerns about, geez, those markets aren't doing well.
In some cases, that's true now. In most cases, it's not, it's more important to keep in mind the macro trend that we're dealing with here. If you start with that chart on the left, this is % of world GDP, not % of growth, actual % of world GDP. It shows 1990, 2015, 2035. The blue line, look at the U.S. Used to be 27% of world GDP last year, 22% on its way to 20%. This comes from Global Insight. Look at other developed regions. You think about Europe, Japan, Australia, Canada, those kinds of countries, was 52% down to 38%, going on its way to 29%.
Any of you who visited any of these regions would say, "Yeah, I could see that happening." Look what's happening in high growth regions, from 21% to 40% last year on its way to over 50% of world GDP in 20 years. You can't miss the macro trend. You have to be a part of it if you're a company like Honeywell. You can see on the right-hand side, we're doing that. % of sales has grown from 10% to 23%, and our census in these countries has grown from 18,000 to 55,000. This is a strategy that works, Alex has got a great story about what he's doing there. In terms of how we're going to continue to grow, first one is you've got to become the Chinese competitor. Our competition is not the other multi-industrials. Our competition is the local guy.
That's an easy thing to say. It's a very tough thing to do when it comes to making sure that you actually know what you're talking about, and doing it. East for East and rest, which Shane has talked a lot about, One Honeywell matters. We're not just a bunch of little different businesses when you go to China or India. We're Honeywell, that's how everybody feels and acts. Software. You've heard me say this a bunch of times, but seems like putting it on a chart like this might make it easier for people to relate to. If we take a look at the total company, we have 22,800 engineers, you would think of it as, okay, you guys do jet engines, auxiliary power units, control systems, chemicals, turbochargers, not a lot of software.
Fact is, if we take a look at our 22,800 engineers, almost half of them are developing software. If you said, okay, we're going to take a look at what a company does based on the composition of its engineering, you would say, this is a software company, not mechanical, not electrical, not chemical. It's a software company. It's true in every business. If you look over on the right-hand side, you can see that in Aerospace, this includes turbos. It's 46% of their engineers, ACS 54%. PMT, which you think of as a chemical company, 50% of the work is being done by software engineers. Why are we so successful doing this? CMMI Level 5, which you've heard me talk a lot about in the past. We're the first large Western company to achieve that Level 5 compatibility. Why is it a big deal?
If you're an industrial company and everybody's talking about Silicon Valley, the Silicon Valley guys are dealing with a digital-to-digital experience. If you're in Honeywell, you're dealing with a digital-to-physical experience. Those are two very different things. In your digital-to-digital experience, if things don't work for a week and a software fix needs to be sent out, you get it, then it works. If you're running a refinery, you can't be out for 10 seconds. That results in a four-hour shutdown. That results in a two-day startup. You can't do that. Stuff has to work and work 100% all the time. CMMI Level 5 is a huge accomplishment and a leg up for us. Andreas will tell you about the HOS goals. 77% of them are software related. Again, we do this at three levels: simulation, product enablement, and creation of a business.
In the Internet of Things, we don't just have the capability, we've got the things. You put all that together, that gives us a huge leg up in what's going to be a macro trend for the century. You can see it reflected in our M&A. Every single one of the deals that we announced last year has a software component of some kind, either connectivity, data analytics, actual software, ability to use our software. There's a connection to software in everything that we've done, so it's added not just channel capability and technical capability, but software capability. Margin rate, was talking about this earlier. On the left side, you can see where we were in 2016, what we're saying we're going to do this year by business, our 2018 target, and the longer term targets that we established a couple of years ago.
You can see we're still a long way from there, those longer term targets are entirely doable. If you take a look on the right on how we're doing versus our peers, you can see versus our three high margin rate peers, as I call them. Last year, we're still about 350 basis points below where they are. You've heard me say in the past, if you're trying to run on untrod ground, that's one thing. If you're just trying to go where others have already gone, it's a lot easier. That's the position we have here. We're in a great spot to do this, and it's going to continue. It's just growing sales faster than fixed costs. All our below the line stuff is staying flat or going down, so decreasing as a % of sales.
Functional transformation still has 150 to 200 basis points available just from that. What we do in HOS Gold and HOS for factories, the new products we've got, becoming more effective in sourcing. There's a lot of room left to grow margins here. There's a lot of runway, and it's going to be an important dynamic for us going forward. Capital deployment. We talk about this every time it seems. We still break it out into these four. If we take a look at what we've accomplished since the last Investor Day, I think we've done a pretty good job overall. PMT is continuing to invest. It'll be over $1 billion in these projects that are yielding 30% and 40% IRRs, and it is what's going to contribute to the inflection.
I promised to grow the dividend faster than earnings starting in 2014, and you can see we did that in both 2014 and 2015. When it comes to M&A, we deployed a little over $6 billion last year with the deals that I just showed you on the last chart. We've taken an opportunity to buy back shares during this time, and Tom will show you that we've actually been able to reduce our share count by about 20 million shares since the last Investor Day. Overall, I think, again, a very good, balanced capital deployment that stacks with being a very good cash generator, and you saw that that happened for us again last year. To bring it all together, we think we've got a great foundation for growth with this high ROI portfolio.
The organic sales inflection that I've been predicting for a couple of years, largely driven by PMT and Aero, and of course continued growth in ACS, is real, is happening and you're going to start to see it reflected towards the end of this year. That margin rate runway, yeah, at some point, that runway does run out. We're far from being at that point. We've still got a long way to go when it comes to expanding margins. That's all upside for us. When it comes to sustainability of performance, last year was our sixth consecutive year of double-digit earnings growth, something that I don't think any of our peers has matched, especially if you take out the impact of buyback. I think you'd look at it and go, on an operational basis, what the Honeywell guys have been able to accomplish is significant.
We've done a great job growing cash. Our free cash flow conversion continues to be strong. We generate a lot of money. That gives us a lot of flexibility to add more value for our shareowners. The dividend has been growing at a pretty good clip, and it gives us the opportunity to do M&A and share repurchases. Our business model works. Same business model we've had for years. We stick to it and it works. For the rest of the day, as Mark was just talking about, we'll go from talking about gold and software, the two are connected, to High Growth Regions that you've heard me talk about a lot in the past and more today. I just think this is a macro trend that is not going to go away and most multifunctionals are missing it.
We'll get into each of our businesses with the PMT team led by Darius Adamczyk, the ACS team by Alex Ismail, the Aero team by Tim Mahoney, we'll wrap it up with a financial review from Tom Szlosek. We think this is an exciting time to continue to be a part of Honeywell. It's an exciting time to be in Honeywell. Certainly, all of us like it and we find it rewarding, not just financially, but psychically. It's a great place to work, I think, and people enjoy being able to come to work and accomplish something. With that, I'll turn it over to Andreas Kramvis to start the discussion on HOS Gold and software. Andreas?
Dave. We're going to talk about the work we're doing in HOS Gold. I know as I observe every quarter the results we come with, this kind of people are wondering, how are these guys doing it? Maybe in this session, the next 20 minutes, you're going to get another glimpse of what's behind a lot of the performance. HOS Gold was launched two years ago, it's on the basis of the great processes we have in running our factories on getting productivities. It's the next step of splitting the business into 64 units, to get, as Dave said, the big company resources and the small company agility. This means we are closer to the marketplace. We can really be very specific on the market and what it needs, particularly on the technology we can bring to the market with empowered people.
There's a lot of concentration on what we call breakthrough initiatives. Let me explain to you what are breakthrough objectives and initiatives. Most commonly, we are looking at projects which have a two to four-year horizon. If someone said to you, "I'm going to get a breakthrough in one day or in one quarter," competition's going to do the same. The kind of things we are looking at is new market creation, because that's where you get the great margins and you establish yourself. Moving to adjacencies, establishing major new technologies, getting major cost advantage. We have industrialized this process. 200 years ago, 100 years ago, people had an industrialized R&D. Invention was happening when it happened by serendipity. We have established a process to industrialize this to make sure it happens.
Each one of our units is required to come up with at least three objectives, three programs, which are funded. This is not hypothetical. We grade where we are across the enterprises. If you're going to win the race, you're going to come with breakthrough objectives, you need to have a very solid operating business. Without that, you cannot really If you're not in good shape, you can't really get in the race. We have very few businesses on the left. Most of our businesses are moving to the right. I tell you today, more than two-thirds of our businesses are in stage 2 and stage 3. Stage 2 means we're running a great business. We are deploying these projects. We're incrementally spending and proving what's going on.
This is one of the things that gives me the great confidence of the kind of momentum we have and what is coming in the pipeline. Stage 3, we are routinely outperforming. I would like to give you some examples to get your hands around. Three years ago, I used a number of slides to talk about the breakthroughs we had in UOP, and Darius and Rajeev will talk a bit more about it in a while. But for those of you who were there, we talked about a breakthrough in the Oleflex technology, going from gas to chemicals like nobody else, methanol to olefins, Uniflex, organic processing of plants, processing of package plants. These are things that create new markets and bring new technology. You'd say, "What happened?" I'd like to put it in the following chart.
We have margin on the left and growth on the bottom. In a normal market, when what has happened has happened in the oil market, volumes go down, and in this case, have been from 30% to, God knows, 60%-70%. And of course, margins will go down because everybody's scrambling to get the remaining business. What happened to Honeywell? Look what happened here. The margins went up. How do you do that? You do that because you have breakthrough products that nobody else has. And if you look at the performance of UOP and HPS, it's best in class, a book-to-bill ratio of 0.98. I don't believe anybody can claim that within 20 or 30 percentage points. You can see the rest of the items there, and particularly 270 basis points up. Again, there's a foundation to this. It does not happen by accident.
There's a program, and there's a reason. If I go to where businesses perform well and the markets perform well, generally growth, the market's good, you grow, your margins go up. Honeywell's margins, where we have this methodology operating, are really going through the roof. And you're going to hear about Solstice, our continued penetration in Turbo, the terrific work that's being done in China, our scanning and mobility business. There is a fundamental foundation in getting these things done. This is another example of how we look at these 64 businesses. The ones on the left are outperforming, and they're in generally good markets. The ones on the right, particularly the last 3 ones, are really in the oil market. And look how they're doing. They're doing exceedingly well, outperforming the markets, which is what we want.
Now let me just switch on to what's happening in the next five years, and how we are looking at breakthrough objectives. We are looking at 74% of our breakthrough initiatives contributing to our total growth the next five years. 77% of those, so if you do the calculations, about 55% overall, it's coming from some software-enabled activity. The word software is very confusing. There's embedded software that's in a product, and we've been doing that for many decades. There's networking. We've had effective networking in buildings like this, again, for decades. Of course, now there's the new areas, cloud and mobility. And what you're seeing in the takeaway is that we already have $1 billion of what we call standalone software. This is software that goes outside the product, gets delivered in a disk or gets downloaded.
By the way, this $1 billion is not the kind of things you put on the balance sheet, and it's going to come because you got a deal. This is real high-margin product. We have $21 billion of products which are enabled by software. Again, let me recap, and Krishna is going to go into detail here. We are experts in embedded software. We have leading-edge software at the next level, which is network and, of course, control. We've been doing that for a hell of a long time. Now we are punching through with very major initiatives in cloud connectivity and mobility. These are very well organized. Just to summarize, this is where we are. If you take our businesses today in terms of being enabled by software, Aero is 62%, ACS 79%, PMT 23%.
The blue line is very important because it's the standalone very high-margin software, already above $1 billion over the next five years, going to $4 billion of very high-margin business. With that, I'll hand over to Krishna, who's going to give you some more color and detail.
Good morning. As Andreas had mentioned, software has been part of our DNA for a long time. If you look at our products, they live very long time in customer premises. The software goes from a very simple kind of stuff that gets embedded into sensors, actuators, devices, and things like that actually are instrumenting the customer's premises. The software that gets loaded on premises or onto the cloud, onto the general purpose computing. Now more recently, the software that gets sold standalone as a mobile app or a web app. If you look at that whole spectrum of software and then ask the question, how much of those products that we provide, kind of hardware, but that are enabled through the software, the value creation is happening through the software.
All of that put together between the embedded stuff that is enabled through software, the standalone, and the connected stuff, is close to $23 billion. That's why you have the half the software engineers in the company, or half the engineers in the company that are software doing that. Now, as we move forward over the last few years, the orders of magnitude in the technologies that has happened here. Now it's got to a tipping point in terms of things like the untethering and decoupling that is happening through mobility, and this whole hyperscale data, and the data collection, and the data management, data manipulation capabilities, and this whole hyperscale internet connectivity of devices and things and assets and all of that.
All of that is happening now, we got to be able to bring it to the heritage we have with all of its install base, or that lives in customer premises for decades. That's what actually creates, if you think about 150 million homes or tens of millions of buildings or tens of thousands of aircrafts or industrial plants. All of that, now we take the technology that is there, that is happening in the tech world, and bring it to the industrial world. That's where they call it Internet of Things or connected world. If you look at the internet companies or digital companies that are wanting to connect to things and go to the physical world, there is inherently, as Dave had mentioned, there is some amount of reliability issues, security issues, data ownership issues, all of those that you see.
Whereas for the years in an industrial companies, you really can't afford to do that, whether it's in your home or whether it is a building or a refinery or aircraft. You can't do that. This is exactly the value proposition that we have been providing to our customers, safety, availability, efficiency, and optimization of their assets. That is what the physical companies are doing, and that's what we have done, and that's what we bring to the digital world. That's what helps us now to be able to say that, how do we take that heritage that we have, and look, the systems that we have been designing have absolutely embedded those as design attributes. Our systems are inherently safe, they're inherently available, and they're inherently designed for high performance, and they inherently work with optimized set of assets that what we provide to the customers.
Think about the value that creates for our customers, and think about the value the digital technology creates. The digital technology that you all carry today. It gives you visibility, it gives you connectivity, it gives you a frictionless flow of information, and it gives you a supply-demand agility to connect the supply and demand within and across enterprises. If we could actually take the inherent attributes we have as our systems and then add to the digital technology attributes, the value we create and the offerings that we're doing now in terms of both the services offerings and product offerings, and a lot of that tend to be high-margin offerings. That's what we bring to the connected world. You'll hear a lot more later on today, but you just take the connected plant example.
Combine the process knowledge, combine the controls knowledge, and combine that with connectivity or you call it Industrial Internet of Things. Then you start to think about the operating margins, a typical refinery which could be in the tens of millions could improve. With a lot of different things, about asset optimization or asset availability and things like that. Look at the connected homes. When you have all the devices we supply into the homes and the install base we have, and then think about the energy efficiency, think about asset availability, and think about the safety and insurance premiums and all of that. There is a lot of value that this technology, combining the digital technology with the physical presence we have, we could create to the customer. That's what we're doing. You'll hear a lot more as the business presentations go on.
Fundamentally, three things. I've been around personally in software for a long time. Looking at that and saying, okay, with the shifts that are going on in technology now, what do we need to do as a company? While we have the diversity of products we have across the company in multiple industries, could we take a common set of building platforms and leverage that across the company from scale and speed point of view? That's what we've been doing. Number 2, can we create the development machinery we have with the CMMI and things like that, and improve that for cycle time and agility. The last, could we complement the domain knowledge of the capabilities of people, the engineers we have, with the more contemporary technologies and create a more of an elite workforce?
I'll go through very quickly on each of those. In the physical things. Things have to be instrumented with massive amount of sensing and actuation for closed loop control. That's where the Internet of Things starts and ends. We have a whole set. We're blessed with a whole bunch of sensors, and sensors deal with the physical world. We're absolutely building, over a long period of time now, a bunch of sensor platforms. We're now systematically making them smarter, connected, and I would probably even call it sentient in the sense that there is some amount of analytics built at the edge. The materials businesses we have across the company.
All the materials, whether it's catalysts or fluorine products or coatings we provide, all of them have to be enabled from a formulation and discovery, through characterization and design, to simulation and scale up and launch, through a bunch of software where the chemical engineering and software engineering sitting together and in fact, creating a domain knowledge intensive software on top of off-the-shelf applications that you buy from outside. That's another set of platforms that we're building. The third part of it is, this is a heritage that Honeywell has for a long time, the controls. Controls at every level. Controls is what creates stability and safety. We are building those control platforms and all the way from hardware to a software and putting that together with the data sciences. Look at the value that the controls actually provides.
In terms of being able to drive the efficiencies and availabilities and optimizations across the industries, as you see on the right side there. That brings me to now the Internet of Things, the internet side, the information sciences. There's a lot of technology here that we're not obviously inventing here, but we're leveraging that. There is enough tech companies that built enough scale and speed. We're building a set of platforms in the areas where we believe that there is enough out there, we should leverage that, build that around so that we could use that across the company. Where we can bring domain knowledge and differentiation, both on the edge, on the analytics, that's where we're having each business actually focus on. As a company wide, we're creating those set of middle things that you see on this stack as a set of platforms.
The key part of that stack is the data. Even the data itself, we're absolutely creating a set of data layers so that we are able to provide that analytics and insights for the customers and the services revenues that it generates with either utilization of higher level of utilization of assets or fault detection or predictive maintenance, all of these things that you hear people talk about. That really depends on the data, not only what our products collect, but also from the data that is externally available. All these platforms now really have to be pulled together. At the end of the day, customer really doesn't care how all these platforms are done internally. For them, it comes together as a system. That's exactly what we're trying to do, putting those things into systems and that are at internet scale and that are reliable.
As I mentioned before, you take the attributes that we have, the safety, availability, and efficiency, and optimization, bring that to an internet scale advantage, then we obviously have a little bit better advantage than digital peers. Similarly, with looking at the install base and the domain knowledge we have and the level of sensing we have, we could actually bring an advantage compared to the industrial peers. This is why we think the systems advantage, putting all that together as a company, trying to drive the speed will help us. The development machinery. Over the years, Honeywell has been known as a Six Sigma company, and that's been part of our design for Six Sigma culture in driving our development machinery.
As things evolved, we brought in CMMI to make sure that we have the dependability of software, and then we went into the agile development, user experience, all of that. At this point in time, what we're saying is, look at all of the things that are going on in the contemporary tech world. Bring some of that agility and flexibility and speed focus and the customer centricity into our development machinery. It's already well-oiled machinery. Now could we improve that for speed and flexibility? That's what we're doing. Then the last but not least here is that all of this could be the great platforms, good machinery. It will not work unless you have elite set of people that really are making all of this work and creating value for our customers in a better way than anybody else could do.
This is where we are looking at the domain engineers, application specialists we have had for a long time, and coupling them with some of the IT and contemporary skills. Then this is what you heard Andreas mention about 70+% of our breakthrough objectives across the company are driven by software. The goal enterprise leaders in each business are pulling these folks together as a multifunctional, cross-functional, cross-domain skill people. I think the trick is going to be who is going to be the digital or physical. It is about bringing them together and making all of this work together in a highly reliable way.
That's why we believe, because we think that we have a good way of building a common set of platforms, a continuously improving development machinery, and a great set of domain knowledge coupled with contemporary technology people, that we will create sustainable customer value and thereby the shareholder value. With that, let me pass on to high growth regions and Shane Tedjarati. Thank you.
Thank you, Krishna. Good morning. Now to the growth story in High Growth Regions. The growth story really continues with us addressing in the way that we've done in the past decade by the main issues and concerns and economic challenges of the fastest-growing regions of the world. As Dave mentioned, High Growth Regions right now represent about 40% of the GDP of the world, driving more than 55% of the growth. Despite the variability that we see across, I would address some of them, including the concerns in China and Middle East, et cetera, there's still tremendous amount of growth to be had. We have to be there, as Dave mentioned, and more importantly, we have to be local, which has been what we've been driving for more than a decade now.
If you look at across High Growth Regions, again, back to the portfolio discussion that Dave had. In everything we do, we look at the whole portfolio. This one is also the geographic portfolio. There's still a lot of goodness. For every concern, there's still a lot of goodness peppered across all of these regions. China, with its new normal, I'll discuss it specifically. I know many of you will be coming to our China conference in June. I encourage those of you who haven't signed up with Mark to do so. There's still a lot of goodness to be had there. There's 6% growth, I'll discuss why we are in a very good position to be there. India, I think, for the first time, we feel that in the past couple of years really is beginning to take off.
Our business there, our performance shows very well. Middle East, Russia, Turkey, that we call MERT, another Honeywell acronym there. There's quite a bit of goodness there. Still Middle East actually has become now the second largest contributor to growth after China in the High Growth Regions. ASEAN, good bunch of economies there, lots of population, growing middle class, et cetera. Of course, Africa, we'll talk about that a little bit. What are the macro trends that are driving this growth? The biggest one there is really urbanization and the emerging new middle class. Nearly 800 million people are going to be urbanized in the next 10 years, that really bodes well for us. As they come to cities, they become consumers of Honeywell's goods and services.
They travel more, they drive cars, they want more comfort, more safety, more security. All of this stuff is good. The thing that I'm really excited about is the 1.2 billion people that are becoming the new emerging middle class. The difference between that emerging middle class is that they're the less than $10K middle class. They're not your $50K, $60K middle class. If you have not been in China for 10 plus years doing Chinese middle class and Indian middle class, it's very hard to be able to address that emerging middle class. That's why Dave has been driving becoming the Chinese competitor. That's why we are very well positioned. That middle class represents, in the next 10 years, the increase of 200 million household represents all of Western Europe and U.S. There's still a lot of growth to be had there.
We are very well positioned for that. The new normal in China is not just an acronym. We do really see that the Chinese government means it. It's driving investments and policies in taking this economy from just an investment-driven economy to a consumption-driven economy. It's not going to happen overnight. There's still a lot of infrastructure, there's still a lot of export, there's still a lot of construction. Going from the frenzy of 8%, 10%, 12% growth that was just not going to be sustainable when the economy is this big to more consumer oriented, more investment in the environment, in regulations, more investment in emerging industries. All of these bode extremely well for us. I'll talk about each of these for you. Last year, our ACS performance in China just showed how well positioned we are to take advantage of these.
In fact, all of our businesses except for the basic infrastructure in oil and gas, which was flat and not growing. Double-digit growth in ACS last year in China. All of that coming really driving from E3 products, from new channels, new urban infrastructure, air and water. We have a slide on air and water to share with you. Aero continuing to deliver well with the airlines, deliver well on C919, strengthening our positions in the industry. The urbanization is going to continue to drive the passenger seats and the travel. Of course, overseas travel is becoming a very big deal in China. With PMT, UOP, and HPS synergies, we're beginning to execute and bring the goodness of becoming the Chinese competitor to PMT. I'll have a couple of slide to show you about that.
New offerings addressing the latest regulatory and environmental concerns of China, like the foam blowing agent in China. These are all things that we feel that allow us to continue to drive growth and gain share. All of these things I want to talk to you about, give you a little summary of what we've been building, what we call HGR 1.0. Really building starts with strong financial performance. We don't believe in building infrastructure for 3 years and then delivering the results. From day one, we've been delivering the results. A great presence now across all of these geographies. If you pick up the phone and call Mark and say, "I want to go to Brazil, I want to go to Mexico, or to Middle East, anywhere," we now have a tremendous presence everywhere where we can actually show what we're doing in the market.
Country leadership with very strong management operating system. East for East is real. A few years ago, when you were visiting us in China, it was in laboratories. Today, it's driving a big portion of our growth. East to West is now real. We talked about the fact that if we invented it, if we address China's issues, those can become the solutions of the rest of the world. It was theory, it was in labs, I'll show you how it's really working now. Really becoming the Chinese competitor is a mindset in everything we do. Here's the financial performance. Past 10 years, we have 3X'd the high-growth regions. In some of the geographies, we've 10X'd them. We've consistently grown them with a CAGR of 12%, which is three or four times that of the global GDP growth.
We're now roughly around 23% of Honeywell's growth. It nicely balanced across the geographies, China being the main geography there, but also the Middle East, India, Brazil, Southeast Asia, et cetera, and across all of our businesses. This is not just a single trick pony. It's across all of Honeywell's portfolio. The presence is really impressive. 140 offices. We have now 70 manufacturing facilities, 55,000 employees across high-growth regions. I'll give you an example of four years ago on HGR 1.0, when we started, we had, outside of China and India, very few really strong marketing people. Today, outside of those geographies, we have 800 marketing people understanding what's going on in the market, understanding what the customers want, what would it take to win them over, and how do we tailor our services and our solutions to them.
The rest of the geographies, like Central and South America and Africa, we've got presence. We now have leadership, both country leadership and business leadership, sales, marketing, and support across all of these places. A very diverse team that speaks numerous languages. Our staff meetings are United Nations meetings. We have local leadership everywhere, and that's key. Whether you go to Vietnam, whether you go to Indonesia or Brazil or Mexico, you'll see the flavor that's happening there. To China and India, East for East. This is beyond just a simple HBS article. This is real. We've done it for now well over 10 years. We've been at it by building great engineers that do work in China for China, in India for India.
Looking at the mega trends, over 11,000 engineers, 1,500 patents already there, 4,000 pending, 35 factories that are connected to them with sales and marketing people that are sitting in the same rooms, with strong local sourcing, which is now more than 90% in TS, more than 60% in ACS, et cetera. Driving the revenues. We have 35% of the revenues of ACS. This is no longer laboratory stuff. This is really driving a highly competitive advantage for us. It's across the board. It's not just ACS, which you're familiar with, so I'm not going to give you the examples there. Look at turbos, for example. A few years ago, most of what we did was West to East type of turbos and localization. Today, East for East is driving, both in India and in China, tremendous amount of our wins.
Actually, we started in India with building small turbo gas and diesel, both for China and for India. Today, China is the center of excellence for small turbo gas, and India is the center of excellence for microturbo diesel, driving a lot of wins in that area. Even in PMT, our application engineering that is driving growth in refrigerants and nylon materials across the various different industrial and consumer growth areas. We have engineers there that are looking at the issues in China and in India and driving growth. Also in HPS. I wanted to give you another example there with plant crews, where it's not just about cost, but it's also about a different business model where we can actually create it more modular, more easier to implement systems that actually partners, hundreds of good partners can actually deliver results for us.
We talked about air and water, probably the two biggest issues and problems, not just in China, in India, in the Middle East. In some of the emerging countries in the Middle East, air and water are also the biggest pressing problems in those societies. What we've done with these-- some of you who have been to our China labs, you would see these products, the Air Touch products, and the whole family of air purifiers. Today, they're some of the best performing in their categories. We sell over 1,000 a day of these on Jingdong. In fact, even in India, just a couple of months ago, we launched them, and our air purifying products is the number 1 category on Amazon in India. Our car product for purifying indoor air in the cars is number 2 on Amazon in India.
This is not just the China story. As well as the one Honeywell retail stores, where we can bring everything that Honeywell does at home and bring them to the retail stores. The story is very good. We're building brand, and we're actually reaching to customers and allowing them to be online and to be more safer and more secure. East to West. This is a very different concept than just shipping products, putting them in boxes, and hoping for sales. This is really connecting them to the markets everywhere, having sales and marketing, having an understanding of the dynamics of the emerging middle class. We have held many road shows now for ACS and for other businesses across in Brazil and Malaysia, South Africa, Mexico, Thailand. This now has become a real business for us.
We're expecting to 4x the revenue for East to West over the next five years. We're very confident that this trend of being able to innovate in the East and be able to address those products and services to the rest of the emerging world is a very good one. That Orchid thermostat, for example, has become one of the best sellers. 20,000 units sold in Latin America, Southeast Asia, and Middle East in just the last year. BCC mindset. Again, it's not just about product development, but it's also about how do we do everything. This is a very good example of a business that we used to lead a couple of decades ago, and we were not competitive anymore in PSAs, in UOP.
Through becoming the Chinese competitor headset in everything, local understanding, local adaptation, localization of products, reducing the cost, we've now come back to this market and we're winning. We had great wins in China and we'll continue to win in this area. That's our core strategy. It hasn't changed. It continues to evolve, but it's the same story. It's becoming the Chinese competitor, East for East, connecting everything we do together across all the geographies, and focusing on key industries and energy and cities and really bringing them all together through One Honeywell. A good story of how we've evolved. Dave talked about this growth pattern evolving and going up the chain. A very good story of that is in ACS in China, where we started with a 10-year plan where 10 years ago, where China was the world's factory in urbanization and infrastructure.
We continue to grow, continue to evolve our business there, where we today, in the current five-year plan and the upcoming five-year plan, going out, going green, becoming in the emerging sectors. We've participated in all of that. We've been able to grow ahead of both GDP and industrial growth because we've continued to evolve, we continue to be relevant, and being the Chinese competitor is actually key to that. We believe that in China, despite the new normal, in fact, because of the new normal, we can actually continue to grow and distinguish ourselves from the rest of the people who are dissing it and say, "With the new normal, we can't grow." I'll touch on a couple of geographies. Middle East and Turkey. I was just in both of these regions. I came back a few days ago. Terrific opportunities.
In Turkey and Central Asia, opportunities across infrastructure, new airports that are being built, MTO opportunities, gas opportunities. It's just fantastic. In the Middle East, because most of the infrastructure are actually owned by the state, we actually have created this go-to-market by verticals in airports, airlines, oil and gas, smart buildings, healthcare, et cetera, and it's really working. Middle East has now become the second largest contributor to growth for us. I would like to invite Anant to come on the stage and tell you about India, but also about another very exciting thing that we're launching. Anant.
Thanks, Shane. India. We've built a very strong position in India over the last decade or more, with more than 15,000 employees, seven manufacturing sites, five engineering centers, and reach into more than 200 cities through our channels. You hear about the big growth megatrends in India about smart cities, about refinery upgrades, new airports, and a lot of connectivity that's happening in India. We are right on top of those trends with the HGR playbook. Some recent examples of our wins include Shane talked about the gasoline turbocharger. We were the first ones in India with it, leveraging our China strength. The wins with the low-cost airlines like IndiGo, the wins that we've had in defense, and moving forward with software innovation for ACS. Smart cities is something that we hear all across the high-growth regions.
You don't get to a smart city if you don't have smart buildings in that city. This is one example of thought innovation that we began in India, and has very rapidly in the last year, moved for us across the world. Last year, we looked at smart buildings and started asking the question: what is a smart building? We realized in a study that we did with Ernst & Young, that there is no real definition which is consistent across the world of a smart building. There's a lot about green buildings, which is a great thing because green buildings help the environment and reduce cost to run the building. Therefore, green is very powerful across the world. Not similar amount of work has been done to see whether the buildings are safe or productive.
We came up with a very simple, consistent definition for smart buildings across the world, converted that into a tool, a score, that you can compare the smartness of buildings across the world, across different verticals. We applied that methodology to a range of verticals like airports, hospitals, hotels, education institutes, residential towers, or even offices. Very interesting results when we did this survey first in India. After that, we created a contest in India to identify the smartest buildings in India. We ran this contest with the largest media group in the country and got KPMG to actually physically audit the smart scores of the buildings. The results of that contest and the first survey that we did are very interesting, right on that slide.
You see that the average score of the winners of that contest, the smartest buildings in India, is 92 out of 100. The scores are illustrated there for green, safe, and productive. The actual score of the larger sample of more than 2,000 buildings, the average smart score of buildings in India is 33. Huge difference between the 33 average and the 92 of the winners. Naturally, after we did all of this, our customers, both current customers and prospective customers, are coming up to us and asking us, "What do those smart buildings do that we don't do? How can we become smarter? What do we do to get in?" This score is really built on 120 plus smart things or systems that go into a building and make it smarter. Honeywell does a lot of those smart things.
We really can now help our customers and prospective customers to move to become smarter buildings. After doing that in India, we took this across the world to China, Middle East, and the U.S. Very interesting results as we compare it across the world. It's the first time that you can truly compare smart building scores across the world, across different cities. We've now been to 42 cities, done over 4,000 buildings in these cities, and getting great engagement from local governments, from industry associations in these cities to really help them take this movement forward. This is really the first time that you can think about open standards and comparable standards across the world for smart buildings. We are now working with our partners and customers to ensure more technology can go into the buildings and make them smarter, make them green, safe, and productive.
It completely lines up with the growth upside that we are seeing in connected buildings and connected ACS. Shane, back to you.
Thank you. Really exciting, and I'm really excited about this because urbanization is a story of buildings, too. This will continue to pay a lot of dividend for us. The growth engine, we are very confident about it continuing. Continuing to be about a third of Honeywell's revenues, and continuing to drive more than 50% of its growth with the foundation that we've built. I talked about HGR 1.0. What is HGR 2.0? Don't expect a completely different set of strategies and all that. This has been working for us. What should you expect? More intensity, in terms of everything that we're doing, continue to drive financial performance to world-class levels. We have a methodology that we self-assess all of the businesses every year. We self-assess ourselves against this eight great point. We really are hard on ourselves.
As good as we are, we know we can get better. In core capabilities like geographic expansion, channel, and strategic pursuits and branding, as well as in our core strategies, which is BCC, mid-segment, East for East to rest, and following the growth of our customers and strategic M&A. We no longer are talking about just basic building blocks, like building the foundation or just becoming a local company. We're local almost everywhere. We're talking about really taking the game up a couple of notches to really being competitive everywhere and to really drive world-class performance everywhere. To do that in an integrative fashion with everything that Krishna and others have talked about with IoT, with cloud, with breakthrough technologies, et cetera. HGR 2.0 is here, and we're doing it in earnest.
With that, I would like to ask Krishna and Andreas and Mark to come back up here, and we'll have some Q&A.
Okay. Deane Dray. Right there.
The microphone fire brigade there. Thank you. Question for Shane. I thought it was interesting when you rattled off a number of the high-growth regions, you started with Vietnam. Probably not by accident. There was an interesting win last quarter with UOP that I think caught people by surprise, but if people understood how deeply UOP has been involved in Vietnam for so many years, they shouldn't be surprised. Maybe just give us a sense, real live example, how UOP is positioned in Vietnam, and it's so much more than just catalysts. It's also equipment and setting up some of the first refineries in the country, and how that is an example, and how do you build from there?
You told the story. Yeah, it is. Actually, UOP is a terrific story in Vietnam. In fact, Vietnam across the board has been a great story. We've nearly more than 10Xed our business in Vietnam in the past four or five years, and a lot of it is driven, again, by being local, and having Vietnamese staff both in Vietnam as well as in UOP headquarters. We've had Vietnamese experts going back and forth to Vietnam for well over a decade now. Rajeev is here. He sponsors it himself. With all the refineries, with the petrochemical plants, as you said, not just in catalyst, but equipment, and also now the one UOP and HPS story in Vietnam. As well as raising capability. We are seen as the trusted advisors with PetroVietnam and with other major players to raise their capability, to train them, to create simulation capability.
We are actually building the foundation of the petrochemical industry in Vietnam for them. It's a very good example of it. It's not an isolated case, but it's a very good example.
Great. Scott Davis, Barclays. Right in front, Scott.
Shane, you didn't mention in your east to west stuff in your comments about EM, you didn't mention currency at all. We've had a lot of cross currents in many ways.
Yeah.
EM currencies have been a bit of a mess. You also have a lot of local capacity that you can export-
Exactly
out of. Are you guys thinking in terms of Is currency helping you make the decision, I should say, to utilize those export bases and think more in terms of east to west?
Right. We've had currency issues, of course, across, and despite all of that, we still have had very good growth. If we go with local currency adjusted, our growth rates are even much higher, but of course, we can't do that for good reasons. Because we are more and more local, for the local business, actually, we were able to cushion that currency risk to some degree. We're also from time to time, always flexible and looking at where it does make sense to take advantage of lower cost supply chain and others, we would do that. We wouldn't do it in a jerky situation from year to year. We're not in the business of hedging currencies in that way. Okay, well, currency dropped here, let's move our manufacturing there. That's not what we would do. It's a nice portfolio to have.
Where the currency movements are and how it affects us. Being local really helps.
Great. Stephen Tusa, JPMorgan. Right behind you, Steve.
Can you talk about the opportunities emerging in Iran? I think you guys have a decent installed base there. Siemens announced a turbine deal there, I think today, maybe. Is there an opportunity there? Is that emerging? Is there a window for you guys, and how is Honeywell positioned?
Absolutely. Obviously, anything to do with Iran, we've been really on side of the angels, driven by Dave and Kate and everybody to make sure that we're totally compliant with everything as a U.S. company. We believe that that bodes well long term for us. Everybody wants to work with people that are obedient to the laws and are driving integrity. Iran is a great market for us. It could be in terms of a delta growth, it could be one of the top five growth markets we have. We continue to have a terrific position with UOP and HPS, but also with all the aerospace. The Honeywell brand is extremely well known in Iran. Very well known, both in the local language as well as the Latin alphabet.
Our non-American staff have been there now after this sanctions lift, and our clients and our potential partners really are excited about bringing American technology. What's happened over the past few years because of the sanctions, there's been a lot of countries with lower technology that were not sanctioned that went there, like Chinese competitors and all that. What happened was they took lower grade technology but upped the price. A lot of those things have started falling apart, which means that they're going back to their loyal, old, tried and tested American technologies that they really like. I think we have a lot of opportunities, and as the sanctions ease for American companies, we'll be there, we'll participate, we'll be local.
Okay. John Inch, Deutsche Bank.
Hey, Shane. For those of us who don't live in China, the outsider's view is that that country's got a lot of issues that could go on for a very long time. I'm sure Honeywell is going to do very well. My question is around the Chinese level of competition in a challenged market. Are you seeing that perspectively really ratchet up that could put some sort of competitive dampener on your trajectory in some manner? Then as you become this local Chinese company, is that allowing you in some way to leverage that positioning to tackle other countries in the region? Do you really have to approach these other Southeast Asian countries on a country-by-country basis? In other words, your Chinese commentary really is about the China market, then you have to be-
Yeah.
You can't become a China guy in other places in terms of exporting or whatever. Really, the competition level is my principal concern.
Yeah. I think we have to go on the assumption, on the basis that the Chinese competitors are going to grow, are going to continue to get better. We have to assume that they'll continue on the curve, and quite a few of them have gotten to be world-class. Now, on the bottom of the pyramid, there are hundreds and thousands, and they will change, they will drop off, and so on and so forth. As they come up, they're becoming better and better. Our assumption has to be, yes, they will. We won't fear them because we're in the market. We understand the market. We respect them. We will compete with them. The thing is, if you have your eyes closed and you're only competing with the Western companies, you don't understand the trend, you cannot respond to them.
I think actually the Chinese competitors are here to stay. I think the next 10 years, 15 years, 20 years, they're here to stay. Some of them will become global. The multinational companies who have become Chinese, like us, are the ones that are going to be relevant, are going to be able to compete with them. We're competing with them elsewhere in the world, and we're often winning.
With the China coming
Yes, as well as them wanting to go overseas. The challenge for them is three things. One, none of them have really good global brands. Very, very few. Very few. You can count them on one hand. None of them have really good, sustainable channels that they've developed. Most importantly, they don't have the culture and the management operating system. We have those three things, and we've become Chinese, so we can actually do that. That window is closing because they will learn. They will learn just like the Japanese learned, just like the Americans learned, just like the other businesses learned. Your point about whether what we do in China, is it relevant elsewhere? It is relevant, but only to some degree. You have to still understand Vietnam to its core. You have to still understand Indonesia to its core and be local there.
What we do in China is relevant in two ways. One is our culture of doing things differently. We can export that culture elsewhere to do things differently around the world. What we develop in goods and services in China, often those same issues become the issues of the rest of these countries. That's east to west. The third thing is Chinese multinationals are globalizing. They need our help, which is what we call follow the growth. The Sinopecs of this world, the AVICs of this world and all that, they're going all over the world. China Construction in Africa and Algeria, everywhere. That also is a trend. If you're not there, you're not growing with them.
Great. In order to stay on time, let's end there. We're going to have a 45-minute break for lunch, technology demonstrations across the hall. Shane, Andreas, and Chris will be available for the rest of the day. We'll be back here a little before 12:05 P.M. to get started. Thanks.
[Break]
Ladies and gentlemen, please take your seats. Our program is about to resume. Ladies and gentlemen, please welcome to the stage Darius Adamczyk, President and CEO of Performance Materials and Technologies.
Good afternoon. Welcome to the PMT portion of Investor Day. Hopefully, everybody is getting settled there. We kind of had a bit of a quick start here to get going. We have something exciting to talk to you about this afternoon. In terms of the PMT story for 2015, despite the very challenging market environment that we faced in 2015, as you look at our performance versus the market, or you look at the performance versus the competition, we had an absolutely outstanding year. A couple of proof points about that is you look at generation of over $600 million of revenue from many of our new breakthrough initiatives. If you look at the margin expansion of 320 basis points last year, I think just terrific performance. That is not the most exciting part.
The most exciting part about last year is that we positioned the business for continued growth in 2016 and well beyond. A couple of proof points of that are $3.3 billion in the revolutionary Solstice has now been secured. It is revolutionizing the Mobile Air Conditioning space, home insulation, aerosols, and other new applications I will talk to you about later. We also transformed the business last year to be able to operate effectively in a $30 oil environment. Of course, we did a lot of that on the cost side of the business, the fixed costs and so on. The more exciting part of it is we repivoted and focused on our installed base to enable us to grow independent of the oil price. Whether oil price is $30, $50, or $100, we have a path to continued growth and performance in PMT.
In terms of makeup of PMT overall, a little bit over 50% of the business is oil and gas oriented. Out of that 50%, 15% is upstream or 7% in terms of total PMT. That is important. It is important because we have less cyclicality than some of the other players. As you know, the upstream segment is the one that is typically the most cyclical. Also in last year, we made a few very exciting acquisitions and we strengthened a couple of the key parts of our business. The first one being in the midstream segment in partnership with ACS. We bought Elster. The portfolio that went with us is the gas regulation, gas metering business, very well aligned to some of the mega trends in terms of the clean hydrocarbon, which is gas. We are very excited about this new expansion in the HPS business.
The second play was in Sigma-Aldrich, a substantial expansion and tripling of our play in the research chemical segments, which we find very interesting. It's acyclical, profitable, growing segment. We picked that up right at the end of last year. You're going to hear from Rajeev and Vimal in a minute, so I'm going to not spend a lot of time on UOP and HPS, but I do want to spend a couple of minutes on why we win in the advanced materials part of the business. For fluorine products, we talked about the Solstice molecules. It's truly a revolution that's been ongoing for several years now. In Resins and Chemicals, we're the lowest cost producer of caprolactam, of resins, ammonium sulfate in the world with a highly integrated supply chain that gives us a very unique advantage.
In specialty products, we have world-leading brands such as Aclar for healthcare packaging, such as Spectra for ballistic protection for militaries, for first responders. Now with the acquisition of Sigma-Aldrich, we've a whole new platform for growth, that being the research chemicals business, a tremendous new addition to the portfolio. As always, the way we measure success in PMT is how do we do versus our competition. As you can see, and just to remind you a little bit about this chart, on the Y-axis, you should see the change in segment margin. On the X-axis, you should see the revenue growth. In every single one of the segments that we play in, we led. Just really good performance in a very challenging market conditions. In terms of the markets we play in, yes, we're in a challenging oil and gas segment in 2015.
I think 2016 will continue to be a challenge, overall, this market as well as every other market we play in, is a growth market. Our commitment to you is that given our product development, our focus on innovation breakthroughs combined with our CapEx expansion, we're going to grow 2x to 3x for every market that we play in. I'll point special attention to this chart. It's actually my favorite in the presentation, but I think it's an important one. As you look at PMT performance during the last cycle, which was in the 2008, 2009 time frame, price of oil went down about 36%. PMT profitability dropped by 36%, or I'm sorry, 18%. As you look at this cycle where price of oil is down nearly 50%, we were actually up 6% and on an FX neutral, we would have been up 11%.
There's a couple of reasons for that. One is the obvious one, which is we reacted quickly. We reacted decisively to the markets that were ahead of us, both on the cost and revenue side, and we persevered in some very challenging market conditions. More importantly, we're a different business than we were six, seven years ago. We're fundamentally much more installed base focused. More of our revenue comes from the software side of the business. Our CapEx is showing up and our margin are continuing to expand. Our exposure to a lot of this cyclicality is not as big as it used to be, and we've adjusted and now are well positioned to whatever the price of oil happens to be for the future.
As we look at 2016 and 2017, and frankly, I'd much rather talk about 2017, because we do see 2017 as being a strong bounce back year, both in the oil and gas segment, but not just because of that. More of the revenue from our breakthroughs are going to kick in. The CapEx expansions are going to kick in. We have a lot of things aligned to a much greater inflection point in 2017 as we look forward to that year. This year, 2016 will be sort of like last year, roughly flattish performance, which we believe will continue to substantially outperform the market. As we look at the makeup of our business. As you can see, over the course of the next four to five years, we're going to become much more installed base focused. Two primary drivers.
The first one being software, whether our point solutions or our industrial Internet of Things business, which is going to be the predominant growth driver in PMT. The second one, which is kick in of a lot of the expansion of the apps that we brought. Okay, here we go. That's better. In terms of a lot of our CapEx expansion is actually going into the aftermarket, the services reflected in our catalyst play in UOP and HPS. Then lastly, our services business, our revolutionary service in Assurance 360, as well as some of the new services that now we're offering in UOP, are also going to enable us to substantially grow that aftermarket services business. You can see the makeup is going to be dramatically different, less cyclical, but substantially more profitable. The fluorine product story is a terrific one.
This is a business that even last year grew at a double-digit pace on the top line and more than 2x that pace on the bottom line. This year, same kind of target on the top line, but 3x that rate in terms of the bottom line. Now you're starting to see that impact of that CapEx coming through and delivering financial results. I've talked to you a little bit about the Solstice molecule, which is extraordinarily exciting, and it's going to give us many years of double-digit growth to come. What's more exciting is some of the new applications and some of the new breakthroughs that we're developing in this business. As you look at a whole new play in software, which is going to help our supermarket customers optimize their energy spend around their refrigeration needs.
Also, new applications for the Solstice molecule, whether it's new fluoropolymers or flexible foams, which are lighter, more durable, and ideal for customers in Aerospace or automotive. High-Growth Region. Shane talked about High-Growth Region. I think part of that success story he talked about for Middle East has been in PMT. PMT had actually a tremendous year in terms of growth in a High-Growth Region, and this is something that we have to have and do have tremendous expertise in given in the oil and gas space. Two-thirds of our growth will come from High-Growth Region. I think there's another story here that's also important, because as you think about the next BRICS or the next set of key countries that we need to monitor, the next trillion-dollar economies, that being Indonesia, Turkey, Poland, Mexico. We're extraordinarily well-positioned in every one of those geographies.
Despite some of the challenging market conditions we faced in 2015, we had a major win in each of those geographies. A little bit more just to dovetail a bit on what Andreas talked about. HOS Gold is ingrained in everything we do in PMT, and it's the way we run the business. Just to give you an overview of this. We build the base business based on about a 5% compound annual growth rate. On top of that, we build our breakthroughs, which gets us to about an 8% compound annual growth rate. We actually internally run the business to breakthrough upside, which gets us to about a 12% compound annual growth rate. Why do we do that? We do that because there's generally more bad things happen than good, and you have to account for breakage.
You should have the confidence that we run to a whole set of different internal targets, and we have room to make some errors, and some of the breakthroughs, frankly, won't work. We have so much headroom built in, and we have 100% confidence in continued delivery over financial commitments. The second part of this page on the right side is also important. These are examples of some of our breakthroughs, over $2 billion worth, and not a single one of these is tied to the price of oil. This is part of that repivoting effort that we took on at the end of 2014 and 2015. Because independent what the oil is, we will continue to grow. A quick update on acquisitions. We had a very exciting end of 2015. We literally completed three acquisitions in a matter of two or three weeks.
One, we bought the rest of Thomas Russell. You're going to hear a little bit more about Thomas Russell from Rajeev. A really nice story is Thomas Russell's, the gas processing modular, faster gas. This business used to be a U.S. business that was very tied to the unconventional segment. As you can imagine, the unconventional segment in the U.S., not doing particularly well at the moment. What Rajeev and his team have been able to do is to leverage Honeywell, the global presence, the presence in HGR, to transform that business, and the last several hundred million dollars of bookings, none of which have been from the U.S. A really nice leverage of HOS Gold, global Honeywell presence, and the kinds of things that we can do when we take on new acquisitions. Elster, terrific new business in the midstream space.
If you recall, I presented two years ago when I was still running HPS, and I talked to you about how important the process instrumentation business was. We were a distant player at that point in time. We're now the third biggest player in the industry in process instrumentation with our growth, as well as the addition of this segment. Lastly, the Sigma-Aldrich business, which I will just tell you we bought at a very attractive multiple. It's going to be highly accretive performance. It's a new platform. We tripled the size of our play. We had a brand in this segment already called Burdick & Jackson. We now augment it with Sigma-Aldrich. We think that's going to be a very exciting new platform for growth, very profitable, ac yclical business that's growing at roughly two times GDP type of rate.
Exciting new play for us. As you can see, last year, 2015, we essentially reached the top end of our segment margin that we committed to in 2018. We talked about a 21.1% in 2018. We reached that essentially last year. Internally, we have stretch goals set aside, and we think about the continued shift of our business towards the installed base, the growth in software, the growth in the breakthroughs, as well as the CapEx coming in line. We think we have upside that goes beyond the 23%-25% kind of a range. That's what we're targeting for internally, to deliver over the next three years. Just a quick update in terms of our capital program. This has been a tremendous success. The projects are on schedule, on target. We're delivering the financial commitments that we targeted.
I think there's a story here that's a bit lost, and I wanted to highlight it. We're still very early in this CapEx cycle. As you can see, as we bring these plants online and putting in a lot of the fixed assets in place, we're already seeing the benefit reflected in our ROI. Our ROI last year went up by 150 basis points. Over the course of the next five years, we expect 800 basis point expansion. You have a real good proof point last year, despite the very early onset of some of those fixed assets. Really strong performance here. You see the impact of the CapEx expansions coming through. On that note, I'm going to invite Vimal Kapur and Rajeev Gautam to talk to you about UOP and HPS. I think Rajeev's up first.
Don't think I need this. Let me see. Working now?
I think so.
Yeah. Okay, great. Thank you. As Darius said, given the price of oil and gas, we had a strong 2005. We outperformed our peers, and we outperformed the market. How did we do that, and what does that mean for 2016 and beyond? First, I think maybe some of you know this, we have a very broad portfolio, broader than anybody else in the industry, any of our peers. We cover refining petrochemicals, gas, all aspects of it, and we have some very unique and differentiated technologies. Some part of the market is always working for us. Our differentiated technologies are, for example, our olefins portfolio or our modular solutions portfolio, our huge install base, and these were all critical for us in performing the way we did in 2015. This will continue.
What's happening in addition, as you look to the future, is the aromatic cycle is now kicking in. The paraxylene to naphtha spreads actually never went down below 350. In the last month, they went up to 400. This is kicking in, and we've already had licensing and reloads in this area, and this will continue. The second part of the portfolio that's going to work is clean fuels. Regardless of what happens to the price of oil, well, I suppose if it drops down to 10 or five, that may change anything. But at least at 30, India and China are implementing the clean fuel standards to Euro 5 and Euro 6. That's happening. In fact, India has accelerated their schedule by a year, this thing is really positive for us. Gasoline demand is strong.
Lastly, the catalyst will continue to be a big story, gas. We have, as Darius pointed out, no presence in gas. Now, as you will see, I will talk about it, we have opportunity to grow. The drivers that impact gas in the international space are not necessarily the same ones that impact the domestic space. Our roadmap, our playbook for growth remains the same. Have strong, unique, competitive technologies to win in the core. Have new differentiated technologies like Oleflex and gas to chemicals and MTO, and grow with that, then have breakthrough strategies. Of course, back in 2009, our breakthrough strategies were modular solutions and gas. That became a very big part of our business, as you can see in 2015. We'll continue to grow these.
In fact, in the modular space, we have what we call a new modular solution expansion of that space. We have a new set of breakthroughs that we are starting now. These breakthroughs give us growth vectors into billion-dollar markets in a way that's not cyclical with the oil and gas business, and I'll talk about that too. Let's talk about refining. That's one vertical a lot of us are interested in. It's still growing at 1%, 1.2%. Maybe that's not so exciting, but the markets we serve, the CapEx spend in there is actually growing at 5%. That's our market. Capacity replacement, capacity in Japan and Europe shutting down, capacity in high-growth regions coming on. Regional factors, national interests, channels to market for suppliers, that's driving capacity and refineries. More importantly, environmental regulations and the changing product mix.
The clean fuels that I mentioned, that's happening and happening now. The gasoline demand is huge, when you combine the two together, when you look at that part of a portfolio, there's a great demand for those technologies. Of course, we are going to grow at 8%, not 5%. That's our plan. The way we do that is one component of that is on the right-hand side. We have and still do, of course, license our technologies, license and provide engineering packages. That's been a traditional model. Now we are providing that as prefabricated solutions, fabricated in shops, delivered on site, put on the foundations, and we start it up. What this gives, of course, us is instead of making $20 million, we make $100 million revenue, 5-10 times the multiple. We are already doing this.
For the customer, it de-risks their project. Fixed price, our eyes on the site. They aren't exposed to the vagaries of local labor markets and uncertainty and security and so on. It gives them an accelerated schedule they can get with a stick-built unit. As you can see, this gives a great opportunity that we're capitalizing that already in the clean fuels market to deliver that at accelerated schedule. Petrochemical markets never slow down. They've been growing at 5%, this is a great bright spot for us. As I said, the aromatics-- in fact, the CapEx spend is growing at 5% CAGR in this area. The aromatic cycle is kicking in, we have been licensing. In spite of what has been said, we have been licensing technology in this area, in the petrochemicals area. Look at the right-hand side of the chart.
That blue bar is licensed technology. In 2015, we licensed technology. The red is the catalyst initial fills and reloads. This was a really bright spot for us, this will continue to perform as the aromatic cycle comes in even stronger. Gas processing. Here, the story is how do we grow internationally? In 2013, we had 0% growth. In 2015, we had 11% international component of our portfolio. Gas was 11%. We look in 2016, we are forecasting 40%. This is not based upon a hope. We have already won these projects, these are in a backlog. This is a remarkable transformation on how we have gone from being a wholly domestic market to having international sales, we'll continue this. Let's go to our breakthrough story.
As I said, these are the breakthrough initiatives that we have that give us growth vectors into very large billion-dollar markets in a manner which is a-cyclical to the price of oil. We have purposely chosen these. We can do many things, only so many things we can do at one time. These are two examples of that. Take industrial wastewater. This is not where we are trying to enter into the market in the low-margin systems business. As you would expect of us, we are providing differentiated technology solutions. The biotreatment technology is a good example of that. Significant OpEx and CapEx advantages. Couple that with a strong presence in the refining and petrochemical business, great uptake of this technology. Really remarkable how that's going.
The next step for us is to go into the food and beverage market, which is the next more profitable one. That's a good example of the kind of thing we are doing in our breakthroughs. On the right-hand side is connected performance services. As you can imagine, we have a very large install base, refining petrochemical gas across the globe. We license this technology. Our confidentiality agreement's in place. This data we have access to. We can take this data, improve their performance using our know-how. We can improve their optimizer plan, improve their yield. We can improve their reliability and uptime. We can reduce their energy. We even provide training to their people. Our customers want us to use the data to do this. I have a very big, highly technical service department.
I just don't have enough to give everybody what they want 24/7. That's what they want. Fortunately, we have a strong software business in PMT in Honeywell called Honeywell Process Solutions. We have all the knowledge and domain. We have put that into the software system, and we are providing that to our customers as a connected performance service as a subscription model. Hopefully, I've given you some idea of how we went through 2015, and then how we will continue in 2016 and beyond. With that, let me invite Vimal Kapur to come talk about Honeywell Process Solutions.
Thanks, Rajeev.
Thank you.
Okay, Honeywell Process Solutions has gone through a big transformation over the last four years. If you see this chart, 700 basis point of margin improvement over the last 16 quarters. And one of the enabling factor for that has been our equal focus on CapEx- and OpEx-driven business models. What HPS has done very successfully is that greater than 50%, and I will emphasize, greater than 50% of our current business is coming from OpEx. And we are part of the OpEx, which does not get cut, because when customers are running their plant, which they are, they do not cut the OpEx for HPS because the plant will imminently stop working because we are a critical equipment to make the plant work all the time.
The fundamental shift of our business to have a pretty large OpEx-driven business model, apart from CapEx, which is equally critical, has been part of our change here. Another thing we like is a constant journey to improve our margin, including 2015. If you see the chart here, we had a dip for Q1. We quickly recovered, as Darius pointed out. We continued our run for the rest of the year. The question is, are we going to continue for the next years to come? Can we get another 700 basis point? That will be a hell of a story. Of course, we are going to continue this journey. Dave talked about it. Darius talked about it. We are going to add more margin to HPS. How we are going to do it? Through growth.
We operate in a market which is more than $30 billion, and we have little over 10% share of demand. The market grows anywhere from 5% to 10%, depending on what segment you look at. Now, granted, right now, the CapEx situation is not as favorable as we like it to be. The OpEx-driven businesses continues to grow at a high rate in normal times. Even in last year, all our businesses for aftermarket services and software did not shrink. They actually grew. That is a proof point that these businesses grow at a pretty attractive rate in good times and bad times. Now, if I look at starting from the top, if I look at the CapEx part, I do believe relative to competition, we have two distinct advantages, which steps us out. We can get more share of demand.
First is UOP. I am going to come to that in the next chart for a minute. Second is Elster. The Elster acquisition is a great win for Honeywell. It makes HPS number one gas instrumentation company. Darius talked about overall position as number three in the field instrumentation. In the gas instrumentation, we are number one. When you look at the overall relationship we have in ACS part of the business with the utility companies, that positions us very well now in this whole segment. Many of you would have attended CERAWeek last week. The customers are talking about two things. One is price of oil. The second thing they talk about is environmental actions they have to take to make their businesses more compliant to the current time. Gas is obviously the quickest action they can take.
The gas growth is imminent, our position there being stronger is going to give us a growth relative to the market. When I come to UOP, this has been a hell of a story for us for the last couple of years. Since HPS became part of PMT, we have been executing really well on sales collaboration, and you can see the wins we are having across the board in all the segments, refining petrochemicals, gas plant, winning in Iraq, Kuwait, Egypt, Russia with the support of UOP. That's 101 of any business to collaborate together and win in the marketplace. We have figured that out. What we are really doing is hard to imitate by our competition. That's innovation of joint product development with UOP. Taking the UOP expertise and embedding that into HPS products is a real proposition which we sell today.
32 key UOP processes are available today, which embed the knowledge of UOP experts into a process control system. What it's worth for our customers? What? It helps them to start plant faster, on a life cycle basis, the productivity of operation is much more higher because the knowledge is already embedded in. That's just the start. We constantly keep thinking very hard, what are the other innovation stories like these we can create and keep differentiating ourselves in the marketplace? This is not about we bundle the things and hopefully some wonder will happen. It's not about that. It's about creating the real value for our customer by which we can have a step out growth for us.
When you put the two together, while the CapEx cycle is what it is, we think with the support of UOP, and Darius talked about the growth in refining petrochemicals and gas processing. We play in all those segments. Coupled with the UOP support and Elster, that does give us a fair bit of confidence that in this tough time, we'll drive growth in the CapEx cycle. Let's go to the OpEx cycle. 10,000 sites is HPS is present today, a fact not very well known. HPS has been in the business of providing service support to our customers for 30 plus years. For many of our competitors, this is a breakthrough initiative, but for us, it's a business for many years. This is critical for them to run the plant efficiently.
The right and center is Assurance 360, which is center of the chart. Darius briefly talked about it. In this tough time, customers are looking for means to do the maintenance and operation of their plant far more lower cost at a much higher result. That's how do you have two competing things. That's what we are providing with Assurance 360. We are committing them results of a performance of their equipment, which is process control system, at a lower cost, which is wall-to-wall cost for them. $80 million worth of Assurance 360 contract is what we won in 2015, number in 2016 is going to be higher. The driver for that is cost. Driver for that is also skills. We hear a lot about people skills not being available.
Customers are expecting us to solve the skill issue, which we can because we have a scale. That's really playing in the center of our services business. Also two important trends, which we are really leveraging to grow our service business are at a very high growth rate. Cybersecurity, obviously a big concern across the customer base. We just need to do everything possible to support them. Our strategy is pretty simple. Focus on our customers, 10,000 sites, create an offering worth $2 million per site. You can now do the math. That becomes a total available market for us. Aspiring for a $200 million business is not out of whack there. We are being pretty reasonable on what we are driving, and we have a substantial business today with capabilities and thinking about 44% year-on-year growth, it's pretty realistic there.
It's another growth lever in our aftermarket. Finally, our systems migration. Our customers have a very old install base, and we provide services and offerings to them to migrate the install base real-time without plant disruption. A unique proposition which Honeywell provides and our competition does not. That becomes another lever for us. When you put it all together, it does give us a pretty robust plan. That's why our services business continue to grow in good times and bad times. Finally, IIoT. Krishna made a case for IIoT and how we have the play in this. I'll make three simple arguments on Industrial Internet of Things. First, the trend is real. Internet and process control systems were, by the way, invented together somewhere in 1970, both of them.
The two ran together independently for several years, and now the opportunity is they converge and create incremental value for the customers. That's what Industrial Internet of Things is all about. About Honeywell, there are three unique cases here by which we have a pretty compelling story. One, we have a software business today. We are not going to create a software business. We run a business today. In that business, we are to create new offerings. That's a smaller hurdle than creating a new business. Our offerings are really focused on production efficiency, enterprise optimization, and process reliability. Rajeev talked about Connected Plant Services. That's basically hitting the production efficiency lever for our customer. That's an example of driving a joint offering in Industrial Internet of Things. The second is access to customers. 10,000 customers are already there with Honeywell.
We don't have to invent new customers, and I'm not counting on the customer base that UOP has today. Having a customer and having a business gives us a start. Finally, the domain expertise is the only way you can solve the problem. If you want to get to the higher level of process reliability or in a production efficiency, it requires you to know the customer issue and the customer problem, which we know. All in all, we do believe we have the levers which are required to create the strong business. If I sum it up, our story, HPS performed very well over the last four years. We think we have a game plan. We have the levers to deliver the growth in next couple of years to come, including 2016. That, I'll hand over to Darius to wrap up.
Thank you, Vimal. Just in terms of a wrap-up, as I pointed out at the beginning, we had a terrific 2015. Growth of our breakthrough initiatives, embracing HOS Gold, operating near the top end of the segment margin range. I think the real important thing is what we accomplished in 2015 in terms of repivoting to our installed base, creating a whole new set of software platforms for growth, including Industrial Internet of Things, which Vimal talked about, leveraging what we already had. They have more of the CapEx coming online, both in 2016 and 2017, where you should expect to see that further inflection of that investment. The agility of the business, and I think this is important, to adjust quickly to market conditions way back before they even hit, because we actually started transforming the business late in 2014.
In summary, should have every confidence in PMT continuing to deliver our financial results independent of the price of oil and exceed our financial targets. Thank you. On that note, I'll turn it over to the ACS team and Alex Ismail.
Ladies and gentlemen, please welcome to the stage Alex Ismail, President and CEO of Automation and Control Solutions.
Good afternoon. It's good to be back on stage and update you on the progress we're making across ACS. I'm going to be presenting today with John Waldron, who runs our Sensing and Productivity Solutions business. I have four messages for you today as we are exiting 2015 with strong performance. The first message is we continue to have a portfolio well-aligned with long-term favorable macro trends. We're seeing a growth momentum from connectivity, energy efficiency, productivity, safety, and security solutions across our business. Our HGR businesses, as you've heard from Shane, continue to perform very well, and specifically in China and India. The second message is we are positioned to outperform. Our technology and market leadership is sustainable. Elster creates for us a new growth platform. We're seeing acceleration from smart meters and getting a lot of momentum from our high-margin software and connectivity solution businesses.
The third message is really about our runway for margin expansion. As you know, we're becoming a more integrated business across ACS. We've combined businesses, we've rationalized supply chain, and we're driving rationalization across the board with a long runway for our factory HOS implementation. The last message is really about driving additional upside. We see upside from HOS Gold breakthroughs, you've heard Andreas talk about it, but we're seeing as well upside from our robust M&A playbook being very successful in ACS. I'm going to come back on all of these themes across the day, but I'd like to give you a quick overview of ACS. In 2016, we expect sales to be between $15.3 billion-$15.8 billion, 110-140 basis points of margin expansion when you exclude M&A. You could see on the left-hand side here, the overall breakdown of our sales.
I'll point out to High Growth Regions, only 15% of our sales today. Obviously, a lot of upside for us. On the bottom, you're now familiar with the way we're breaking down our business, energy, safety, and security, our product and software businesses, and our building solutions and distribution businesses on the right being about 28% of our sales. Worth mentioning that we're channeling about $1 billion of product businesses through our distribution businesses. Overall, a balanced portfolio, leading position, and a lot of runway for us on margin expansion. Want to briefly touch on our end markets. We have great positions across our portfolio, market and technology, leadership in almost everything we do. We're serving very good industry with long-term favorable macro trends, 22% of our solutions are ending up in homes, 34% in workers and industrials, and 44% in buildings.
Wanted to give you a real snapshot of our 2017 outlook. We expect ACS to grow between 3%-5%, driven by four main levers. One, obviously, our core install base, think of it as more NPI leveraging HUE. We're getting a lot of momentum as we speak from our connectivity and software solutions. That's going to continue to grow. Obviously, we are performing in High Growth Regions today, and we expect to continue to do so. Finally, obviously, new capabilities from Elster and new acquired company will be tailwind for us, driving more sales synergies across our newly acquired company going forward. Leveraging our install base, accelerating software and HGR, and a lot of M&A upside. We're very excited about Elster. You've heard from Darius. Elster, we're seeing smart meters and analytics acceleration.
Just to remind you, 80% of the Elster portfolio is integrated into ACS, 75% is meters, and about 25% is industrial combustion. Elster plays in a $12 billion industry, growing pretty fast, and we're seeing acceleration from smart meters and analytics with double-digit growth in the U.S. as well as in Europe, and upside from this as more of the European countries are going to be announcing smart meters rollout. Elster brings to ACS very strong capabilities, leadership position in metering, a great industrial combustion business, very complementary to our portfolio in ACS, and obviously, strong software and data analytics. It opens up for us growth opportunities from the install base, $4 billion of refresh opportunities on an annual basis, as well as smart meter rollout. Elster integrates very well with the software platform that we have across ACS, serving buildings, obviously.
We have, with Elster, a lot of cross-selling opportunities across the board in the utility space in particular. Connected ACS. Let me switch gears and give you an update on our transformation across ACS. We've called it Connected ACS. Historically, if you recall, ACS used to operate with fully independent businesses. As a matter of fact, doing so, we've been very successful, but we've not necessarily fully leveraged our scale, our scale for growth and our scale for productivity. Today, on the growth side, we are very focused on breakthrough initiatives across ACS with 33 HOS Gold leaders driving this breakthrough thinking that you've heard about from Andreas. As an integrated ACS, we are now driving high-margin connectivity and software solutions and tackling high-growth region markets as one team in strategic verticals. We're seeing the early results from this. Our HGR countries are really outperforming.
On the cost side, basically bringing ACS as one, driving functional COEs, leveraging our scale, consolidating businesses, implementing the supplier [auto] playbook that TF uses very well, really reducing our footprint and our logistics across the board is giving us nice upside. It is working. We are making significant progress. I will remind you that historically, ACS used to grow operating margin at about 50 basis points annually. Since 2013, we've grown operating margin by 170 basis points, I personally believe we still have more runway ahead of us. HOS Gold, this is an update from the chart that you've seen last year. Very happy with the progress that we've made, consistent with what you've heard from Andreas. I'm going to talk about all these points, acceleration in software, acceleration in data monetization, new markets, new channels, intelligent edge devices, as well as acceleration in HGR.
That's over $20 billion of market opportunities that we're addressing with ACS across the portfolio and should drive for some nice growth upside. We win in the marketplace leveraging our install base and differentiating with a multi-channel, multi-brand strategy. We partner with over 250,000 channel partners around the world. We're in 150 million homes. We are in 10 million buildings. We're touching over 500 million workers annually, rapidly expanding this base of connected devices and starting to collect data and monetizing through new software business model. Our multi-brand and multi-channel strategy is a key differentiator in the marketplace for us. We offer differentiated brands to our channel partners and for a single job, we have multiple Honeywell brands accelerating our win rate. It is working. We're going to continue to do more of it going forward. Our businesses are focused a lot on high-margin software revenue.
By this I mean pure software. Our differentiation obviously comes from this huge install base, a lot of things out there that we're trying to connect, leveraging our brand and obviously our technology leadership. Millions of connected devices. You've heard from Dave, our capabilities in software engineering, our software excellence that we're driving across the company, that's a key differentiator for us. We are currently investing in intelligent solutions, trying to unlock the value of data and driving new business models across the board, enhancing our developer community, delivering customer insights through data and new business models. We are growing. This base in ACS of pure software is about $300 million today. It's growing at about 20% and expected to continue to grow in the years to come.
You have a few examples here of what we're doing in homes, in buildings, as well as in our workers and in industrial businesses. Buildings, that's 44% of what we do. We are here differentiating with a large install base that I was sharing with you, direct and indirect channels. You've heard from Anant and Shane how becoming the global reference for smart building is energizing our channels. We have here one of the largest install base and we're accelerating growth with a comprehensive portfolio of software solutions as well as hardware and we expect our building business to continue to do very well in the years to come. Wanted to share with you some powerful examples of new business models that we're bringing to the building space.
Award-winning platform at ISC West recently, multi-site management software on the left-hand side targeted at small building owner, bringing in the cloud a very unique offering of integrated capabilities between security and energy targeted at small and medium business owner. In the middle, our open software platform called Tridium. I've talked about it last year. This is a vendor-agnostic open platform, really enabling faster and better integration in the building space. On the right-hand side, an example from our fire business. It's a SaaS business model enabling our channel partner to really optimize inspection and testing across multiple buildings, thousands of fire devices to control and test. This is obviously providing as well a nice productivity play for our channel partner. We are transforming ACS and seeing a lot of momentum through new software business models and expect us to do more of it going forward.
Next is Home. Key differentiator here, this is about 22% of our sales. Obviously, we are installing over 15 million systems on a yearly basis. We're covering over 150 million homes today. A lot of differentiation comes from our software and hardware solutions. We have developed over the past three years a strategic partnership with big names in the marketplace, Samsung, Apple. We're part of the Apple HomeKit. This is going to drive for us a nice growth going forward. Expect our Home business to continue to do very well. Brand leadership, edge devices, software to really accelerate growth for us here. A few examples, again, in the Home space. I hope at the break you had a chance to see our global platform. We are providing on a global basis, the same industrial design, the same brand and customer experience.
One of our products here was one of the award-winning products at the last CES. We are offering water solutions, security solutions, air solutions, and comfort solutions. We're doing this on a global basis. In the middle, a new platform for our contractors, a SaaS business model here enabling our contractors to do upselling and predictive maintenance. On the right-hand side, Elster. We're very excited about what we're seeing. Obviously, smart metering, but as well acceleration of software and data analytics. It is interesting to see all the utilities around the world really starting to invest a lot more in data analytics. Great momentum in the Home space as well. Finally, on Workers and Industrial Solutions, about 34% of our sales.
Our big differentiations here comes from the fact that we're reaching to over 500 million workers every day and provide very differentiated solutions, software and hardware, in the safety and productivity space. I'm going to let John Waldron speak more about this. Remember, this is the business that we've entirely created through acquisition. We expect it to continue to do very well in the marketplace for us. Let's hear from John. He's got a great story to tell.
Thanks, Alex. You heard Alex say we serve half a billion workers each and every year. They and their employers want them to be safe and productive. We've assembled a portfolio to deliver safety solutions, productivity tools, and the software and analytics to make them all more productive for that workforce each and every day. We have a leadership position in safety, gas analytics, barcode scanning, voice automation technology, and many other segments that we participate in. We're bringing those offerings through our differentiated positions into the high-growth regions that you heard a lot about this morning. We've built local businesses in China, India, Brazil, Mexico, and other places around the world where the adoption rates of these technologies are two to three times greater and faster than they are in the developed markets.
What I'd like to spend a few minutes telling you a little bit more about some of the new solutions that we've brought to bear from some of the innovation that we've been delivering to create new markets from these great positions. You heard Krishna this morning tell you a little bit about the Honeywell Connected Cloud Platform. What I'd like to do is try to simplify that by using an example I hope is visible for all of you. You may not really know what Direct Store Delivery is, but this bottle of Coca-Cola went through quite a journey today to make its way into the room over to Mark James' desk. Direct Store Delivery is the work that gets done to take Coca-Cola from the distribution center to put it on the shelves in retail.
For 30 years, we've been delivering Direct Store Delivery applications to Coca-Cola, PepsiCo, Bimbo Bakeries, and many others around the world. That delivery person isn't just driving the truck. They're carrying in the Coke. They're interfacing with the store owner. They're dropping 30 or 40 spots along their way each day. They're also managing the merchandise on the shelf, and they're filling in the invoice that then gets billed back to create that revenue stream for the bottlers and Coke system. Every one of those systems that we've developed over the years has been bespoke for that particular customer. The cloud platform that Krishna talked about is going to give us the opportunity to build once and deploy many times.
We'll create connectors on the IT enterprise side for each customer and a suite of mobile applications that can be customized for each application at much lower marginal cost and lifetime support than in the past. By doing this, we're going to unlock much smarter outcomes for our customers. They're going to have better information about where their workforce is, how productive they're being. If they need to reissue an order or dispatch an employee to a different place, they can do that on the fly. Of course, they're going to be able to tie in safety applications to know what conditions those workers are in, and most importantly, so that they deliver great quality outcomes to their customers. Of course, with the Connected Cloud Platform, we'll be able to deliver license and support models traditionally in the software world. We'll also deliver enterprise licenses to our customers.
Along with that, we're going to unlock per-use per month subscription models, as well as per-use data models. How much information flows through that connection that we're unlocking for the customer, and many others. Ultimately, we will create an ecosystem of users and developers in many markets that you see here. They're able to benefit from one another by partnering with Honeywell. You saw this application outside in the demo area. We've taken a leadership position in the warehouse segment, where over the last 25 years, we've automated work for over 1 million warehouse workers. Each and every day, they're picking orders, restocking shelves, packing boxes, and doing the other things a warehouse takes to be successful. Whether it's Walmart or Tesco or Aldi, those customers are looking to bring that same level of productivity into their stores.
There's over 100 million retail workers around the world, that we think there's a huge opportunity to influence their business outcomes by delivering greater productivity, much higher levels of quality, and by having the right product in the right place at the right time, they can increase store sales. We think this is a big opportunity for us in the years to come. The second example I'd like to share with you is a new solution that our safety products business has developed by taking wireless technologies together with our leadership positions in safety gear and gas detection. We're the partner of choice for first responders and fire marshals around the world. Increasingly, they want to have real-time visibility and incident management capability when they're managing a large venue like the Super Bowl, like Wimbledon, like the World Cup soccer matches.
Finally, we've partnered with our friends at Honeywell Aerospace to create a voice automation system for inspection and maintenance. Whether you're United Airlines or Lufthansa, safety is everything. Every flight critical component on an airplane is inspected regularly and maintained regularly. Every airplane, before it flies, is inspected by its pilot and the grounds crew before every flight. There's a tremendous opportunity to deploy our voice inspection, maintenance, and automation technology into the airline industry to create a $multi-billion opportunity for us and our airline partners around the world. With all these systems and solutions, we're going to deliver greater safety and better productivity for sure. Most importantly, we're going to deliver a fantastic experience for the users themselves.
Don't believe me, let's hear from some of our users right now.
We use RAE gas detection.
It's a life-saving device.
I'm able to bring people in literally the week before a sale and have them productive and active, and they're much happier. The morale has gone up.
Now we use the Vocollect system, which has sped up productivity from doing approximately 16 per hour going to now where we do between 40 and 50 an hour.
We've been able to reduce the number of pickers by increasing our pick rate, which has allowed us to reallocate those heads to generating more revenue.
If I had to go back, it would be such an antiquated system that it wouldn't be worth it.
We have a lot of great stories transforming the portfolio across ACS, and I hope you appreciate it. HGR is one of them. This is 15% of our sales today, and today we're pretty pleased to see our teams outperforming in High Growth Regions and specifically in China and India. We are growing double digit, and I expect this to continue to be like this going forward. You've heard from Shane and Anant all the key initiatives that we're driving across ACS. Our playbook is really working. It's all about being aligned to China needs and HGR needs, leveraging China as a growth platform for High Growth Regions, innovating in key verticals, healthcare, energy, hospitality, airport, and really driving this investment into tier 3, tier 4 cities where the growth is really good today.
We're doing this across ACS while becoming, as you've heard from Dave, the Chinese competitor. We're seeing a lot of success across our portfolio. That means local design, local development, local supply chain, end-to-end capabilities to win. You can see some of the products and focus we have across ACS, focus on metros as a vertical focus, air and water as being a big growth area for us, and obviously mid-segment products across the board. Outperformance in HGR, and that's going to continue to be the same. Quick update on our segment margin roadmap. A lot of accomplishment since 2013.
NPIs, we've brought the businesses together, consolidation of businesses, driving ACS to be a much leaner organization, driving growth in High Growth Regions and connected solutions. Expect this to continue to be a lot of tailwind for us going forward with additional runway getting into 2016 and beyond. More margin from acceleration in software. I would say more growth from High Growth Regions, NPI and connectivity solutions, obviously getting the benefits from our productivity playbook and HOS.
Acceleration, HOS factory acceleration across the board, growth from our breakthrough initiatives. In 2016, we're going to be at the low end of our 2018 margin targets. We have a credible path to our long-term 20% target. To wrap it up, we have high confidence in our 5-year outlook. We believe we have a credible path to our long-term 20% target. We are positioned in ACS to outperform. We do have runway for margin expansion. We will be driving upside from HOS Gold as well as M&A. Thank you very much. I'd like to call back Mark and Darius for Q&A.
Steve Winoker from Bernstein.
Thanks very much. Darius, you talked about leveraging the installed base to really be repositioning PMT, driving growth of the installed base. Could you maybe talk a little bit about how you're going to do that in terms of your interest level moving into the hybrid and discrete applications within the existing installed base that you service in primarily continuous process focus up to this point?
Well, I think it's twofold. Number one is I think that some of the discrete applications is obviously an opportunity for us. We have a very exciting new PLC offerings, which is further going to enable that coming out in HPS. I think that's part of the story. We already have great presence primarily through a DCS system today. Now when we augment that through a PLC, we have a much broader play and access. What I was referring to in terms of our installed base was something a bit different. Both for UOP and HPS, we continue to have an opportunity to broaden our play, particularly in software, in terms of productivity, safety, reliability, and efficiency. The CPS business that Rajeev talked about, we think that's transformative.
Having the automation expertise, the process expertise, putting those two together, being able to optimize processes, even a very small improvement in yield can be worth millions of dollars to customers. Yes, the discrete piece is interesting, and we're pursuing it, there's even a much broader play.
Julian Mitchell.
Thanks. Darius, just a question around the sustainability of the good performance in PMT. I think Honeywell's been helped by very high exposure to midstream and downstream. What's your confidence level that mid and downstream can remain very healthy for the next two years, and they won't just follow upstream down with a sort of one- to two-year lag?
Yeah. No, I think it's high. As a matter of fact, I would argue that if you look, especially the refining segments, where the margins have held up remarkably well, I mean, this is in some ways the golden age of refining. To some extent, despite the fact that we're downstream and midstream focused, we're actually taking a bit of a hit on the refining side because a lot of the refiners, frankly, are not taking their downtime. They're not doing their refurbishments right now because they're printing record margins. They're basically printing money. To some extent, I actually see more upside in the near term as they're going to have to take some of those downtimes, which is going to be a benefit both in terms of the catalyst cycle as well as some of the other service work, reconfiguration work that UOP and both HPS do.
I think there's a lot of continued upside on our side.
[Joe Ritchie], Goldman Sachs. [Herb Hajjar].
Thanks. Darius, maybe staying with you for a second. First off, remarkable performance, just given the oil price environment. I guess my question is when you think about that 4%-7% organic growth, specifically, which of your segments, if you think about UOP, process business, and the advanced materials business, where do you expect to see above-trend growth in 2017? How much of that growth is actually known today versus what your expectation is on the product rollout?
Good question. Not to oversimplify the answer, but I actually expect to see it in all my segments because, I mean, let's go through them one by one. I do believe that this is sort of the down year in terms of the oil and gas cycle. As you think about HPS and UOP, we should continue to see an uptick. Furthermore, we're going to see an expansion in terms of the play in catalyst as more of that CapEx comes online, as well as expansion both of our services business as well as our complementary plays in things like industrial wastewater, which really have, no matter what oil does, we're going to grow. Growth story there. Fluorine products, I mean, you saw the kinds of bookings that we've had and the kind of backlog that we had, which will continue to grow.
Just a reminder, January 1st, 2017, the MAC initiative, which is the Mobile Air Conditioning initiative, kicks in in Europe. As you can imagine, there's another nice inflection point coming. Specialty products. We have leverage off the new acquisition. We're further globalizing the business. On the story that Shane told, we have tremendous opportunities to further localize the specialty products business given its brands and solutions. Resins and Chemicals will continue to grow given its cost profile. I actually see potential for growth across all those segments.
The ones that I would highlight is certainly Fluorines, and that's been secured, and it is secured. I have high confidence in all, but I would put that number 1. I expect to see a substantial uptick in both the UOP and HPS businesses as well.
Chris Quinn, who's right in front.
Thanks. Over to Alex here. Alex, just now that you've been running ACS probably close to two years now, if I'm not mistaken, we talk about small company speed, big company efficiency, where do you see the levers to push decentralization versus centralization? As you've been there for a little longer now, how are things changing in terms of how you're attacking some of the runway that Roger left you?
I would say two things, right? The magic of ACS is this front-end organization close to the customer. We're going to continue to protect this. It's this multi-brand, multi-channel strategy. It has worked for us for many years. It is working today, and we're going to protect this. What we're doing differently is really the back-end organization. Think of it as factories that we are organizing in regional COEs, consolidation of supply chain, creating logistics COEs, creating engineering hardware COE, and software COE to drive platforming. That's what we're doing differently. We're seeing early benefits from it, and it's working.
On the growth side, being an integrated ACS, when you think about going after high-growth regions, as Shane was earlier mentioning, we need to be an integrated ACS after key verticals, that's what we're doing, it's enabling us to really bring new products and as well drive incremental growth in the marketplace.
Good. Nigel?
A quick question on the new margin targets for PMT, the 23%-25%. I'm wondering, did you have a line of sight on that level of margin this time last year, or was that something that's happened over the last year, where you had very good performance and therefore let's try and go even higher?
Yeah. The way I characterize it kind of solidifies a bit clearer every year. As we build some of these new initiatives, we continue to expand our service portfolio. We see the impact of the CapEx coming through. We secure more and more of the Solstice business, which is highly accretive to our overall profile. Every year, you sort of build the business, you build a path, and every year we gain more and more confidence.
Good. Steve?
Emerson, at their investor conference, talked a lot about managing projects. They call it Project Certainty. Can you talk about how that compares to LEAP a little bit, what you guys have been talking about for several years?
Yeah
They also interestingly mentioned Exxon and one of their major controls guys, who you guys have kind of marched out every once in a while to talk about what you're doing there as well.
Is there some real standardization going on in the industry, or does one or the other have an advantage and a leg up here?
Yeah. I would characterize this imitation may be the greatest form of flattery, is maybe the way to put it. If you recall, we talked about LEAP two years ago. We do think it's transformed the industry because when you can now start executing your projects, both the hardware and the software components concurrently, not only can you dramatically reduce your cycle time in terms of project execution, you enable yourself to accept late design changes through our Universal I/O technology. I think that, to be honest, I think we started something that the rest of the industry has caught on. ExxonMobil is the example you used. They're one of the innovators in the industry. They've embraced this. We've had a good partnership with ExxonMobil for many years. Now you see others jumping on board. You're spot on.
I think that this is sort of their version of LEAP.
Just a follow-up question on the margins. With the new revenue that's coming through, you mentioned the returns are going up. I would assume that the new revenue that's coming on is accretive-
Yes
to margins.
Absolutely.
I think Andreas used to talk about a hockey stick at some point as this CapEx matures.
Yeah.
Is there any dilutive impact of stuff that's going on at UOP or HPS that would impact the good guy margin improvement that you're seeing on the new revenue that's coming on from CapEx?
No, not that I can think of. If you think about our model changing to much more of the installed base model, whether it be software-oriented, service-oriented, I think we have a lot more headroom for growth in the services business beyond just the catalysts in the UOP. All of that should be accretive to the current margin profile.
Right. Margins generally have sustainable upside-
Yeah
as opposed to any given quarter are going to pop because of mix or anything like that.
Correct. That's correct.
Thanks.
Howard Rubel.
Thank you. Alex, you didn't really talk about HBS, and we saw some news reports that indicate that you're evaluating what to do with that business. Could you discuss a little of the process that went into that move and how you think it helps the business longer term?
Well, I'm not going to comment on the rumors and the speculations, right? Our HBS business is part of the ACS portfolio. We like the ROI. We like the margin. It's a business targeting connected building and fits very well with what we are doing. HBS brings to ACS a direct channel model, and we like it as it is right now. Yeah, the margins are below the average ACS, clearly, but it's a high ROI business. It's a business that deals directly with end users, and as a result of that, we benefit from it across ACS.
Cliff Ransom. Behind you, Cliff.
One quick question for Alex and then one for Darius. Alex, I'm a believer in the whole data connectivity and big data and the benefits. There's a significant battle brewing over who's going to own the data.
We've gone through this with the airlines.
Sure
with engines, with lessors, with engines, with hospitals, with MRIs, and particularly in the water meter business.
Because some of the customers, i.e. utilities and municipalities, aren't very sophisticated. How are you sure you're going to be able to control the data in a meaningful way to really mine it properly?
Right. That's obviously a strategic aspect, right? What we're doing, we may not own the data everywhere in the world, but we're making sure that generally we can use the data as much as we need to for all our solutions, and it's obviously critical for us to drive new business models. We have, I would say, plans to do so, and so far, to a few exceptions, it's working pretty well for us.
Time will tell. Darius, in terms of the refinery and petrochemical upgrade cycle, that can't really take place until they get around to finally doing the turnarounds that they've put off for all the reasons that you identified. How are you going to know when that work finally begins? Obviously, with the current spreads, nobody wants to shut down any of these capacities.
Yeah.
There's finite flexibility in how long you can delay it. As I'm fond of saying, refineries don't break, they blow up. What are we going to do to actually make that work begin?
I think I would also add something else. The life of the catalyst starts to run out also, and that necessitates a change, and we're seeing that. By the way, because of the robust innovation cycle that we have in UOP, as we introduce a new catalyst, not only is the case there due to the life cycle of the existing catalyst, you actually get a yield boost with the new catalyst. Our catalyst business last year was actually robust. It was up double digits, some of it because we went proactively to customers who frankly don't want to necessarily shut down, especially in the refinery segment.
We said, "If you do shut down, you're going to get XY% yield improvement." That's really the magic of UOP, is that when you see that kind of a clear business case that, okay, I may need to take a shutdown for a few days. By the way, we can do these turnarounds faster than ever now. If the business case is clear, you can drive that proactively. Yeah. Yes, absolutely. That's true. We do think that there is a pent-up demand in terms of the turnarounds, and we think that that's ahead of us at some point in time.
Okay, great. We'll take a short 20-minute break. We're going to start promptly with our final session at 1:45 P.M. Thanks.
Ladies and gentlemen, please take your seats. Our program is about to resume. Ladies and gentlemen, please take your seats. Our program is about to resume.
This is coming to me at the same speed that I would have if I was downloading in my office.
Ladies and gentlemen, please welcome to the stage, Tim Mahoney, President and CEO of Aerospace.
Good afternoon. Thanks very much. We've got Bob Smith joining me. Bob is the Chief Technology Officer, so he's got all of engineering and technology for Aerospace. I'm going to spend a short amount of time kind of teeing up where we're at and how we're growing and continue to expand margins, et cetera. Turn it over to Bob. He's going to talk about decoupled growth, because I want to really invest a bit of time in that area. This is an area that we believe that we have a very high growth projection that is decoupled to the conventional parameters, which conventional parameters that we talk about from an aftermarket perspective are typically, let's say, flight hours and build rates. This is much more of a consumer, consumption-based, growth projection for us.
Terrence will talk about Transportation Systems, not just about turbos, but Transportation Systems. Some very exciting developments in this area, I'll close. What I'd like to do is leave you with a couple of points here in this chart, which is from a growth standpoint, this is clearly we're in a growth area, I'm going to provide a couple of proof points in a subsequent chart here. This really is about what we've been talking about, which is picking the winners, getting on the platforms that are going to have legs from a production standpoint, retaining the aftermarket to the extent that you can. If it has an aftermarket model, retaining that, meaning getting as much of it as you can under long-term agreements, then providing upgrades and enhancements to the customers over that life cycle.
From an operating margin perspective, this is really about providing high quality, differentiated, and value offerings to the customers, about driving transparency and efficiency. I would say that as we've moved into the HOS Gold role and framework that's been talked about numerous times today, what it's done is it's taken the Aerospace organization, which was somewhat monolithic, and broke it down into the Gold enterprise businesses. Enabled by the transparency that we have, we're operating the business more effectively and efficiently than what we have been in the past. Again, I think that this is a very provocative in an area that has got absolute growth relative to the innovation, the decoupled growth that we are experiencing and are going to experience in a larger way over the next couple of years.
When we think and talk about growth within Honeywell Aerospace, we think about this as a flywheel. If you start on the left-hand side, you must get on the right platforms. You don't need to get on every platform. You have to get on the platforms with the right amount of content, and that starts with the left-hand side. From that, you're going to have the aftermarket, which there's a conventional aftermarket which is tied to utilization of the aircraft, whether it's spares, R&O, or support solutions. When I say support solutions, it means that engines, auxiliary power units, avionics systems, you can provide those under power by the hour type of contracts for multi-years and secure that business for a long period of time. Then the third element to this is the decoupled growth.
It's independent of build rates, it's independent of flight hours, it's really based on utilization by the consumer or utilization by the owners and the operators relative to that. Bob is going to spend quite a bit of time in this area. The result of that is that this year and for the number of years, we're going to bypass the growth from a growth projection of all of our peers, both in the mechanical and the avionics area. What I'd like to leave you with in this area is a couple of points. You're going to see in the next, I think it's the next or two charts, you're going to see our projected growth for 2017. In this area, we've had a 2% CAGR over the 2013 to 2016 time period.
Two is we're really, I would say, we have an envious position relative to the platforms that are coming to market and a massive installed base, we've been focused on the installed base to a much greater extent than we have been. When Bob talks about mandates and aftermarket growth in certain services, that's what he's talking about. He's talking about the portfolio of business that is out there. One of the areas that we're excited about also is as we've become better operationally, we are having additional aftermarket come into our business. Then, of course, the last point here is that we have some very exciting products that have not come to market yet. If you think about programs like the 737 MAX, 777X, some of the business aviation aircraft that we've been developing products for.
Those products and services that are in our development cycle right now, our engineering house is full. We can take more if there's more business coming, at the end of the day, we're developing new products that I think are going to provide a lot of value to the platforms and to the operators of those aircraft. From a look forward for 2017 perspective, I'd like to leave you with, there's five things that are big needle movers relative to growth for Honeywell Aerospace. The first one is the growth that Terrence is going to talk about relative to turbos. The second one is the engine that you saw out here in the lobby, which is the HTF7000 engines. We've had unparalleled success relative to that, which means build the engine once and apply it many times, okay?
We have significant ramp-ups that are required based on the success of capturing the business with the HTF7K. The third one is connectivity. We've been talking about since we have an exclusive position with Inmarsat in the last couple of years, the fact that we're exclusive provider for the equipage that's going to go on all the aircraft that is going to be connected to the satellite. We're building and delivering product now. The fourth area is associated with, if you think about all of the services and so on that we've been providing for some time via the acquisitions in Mike Edmonds' area, that's an area of significant amount of growth. The fifth area is the A350, the equipment that we provide on the A350. We have enormous amount of value that goes onto that aircraft.
Think in terms of tons, mechanical systems, and we provide avionics. We provide literally two tons of equipment in the mechanical area, including auxiliary power units on the A350 with the ramp-up. Those are really the five big areas that contribute to the growth projection that we're forecasting here, unlike the previous, let's say, four or five years. All right. Segment margin and operating margin expansion. I think here's the messages that I would like to leave you with. One is that we plan on continuing to maintain on the trajectory that we have been relative to margin expansion. Two is it's reasonable probability that we will exceed our 2018 or meet our 2018 plan this year. Three is having the HOS Gold enterprises in place enabled by the transparency that we have within Aerospace. When I say that, 100% of Honeywell Aerospace was on SAP.
Now it's 99% with the acquisitions. What it's done is it's provide, I would say, a great degree of transparency relative to pricing, total cost, product cost, support costs, all the way through the income statement. I think it has allowed us, enabled the organization at the moving with the scale that we have, with speed from a small business speed standpoint at the HOS Gold enterprise, to really start to optimize and invest in some other areas relative to new product introductions to attain that short cycle business. Our commitment is to continue to expand margins, I think I've been asked this question each year, when do we think it's going to end? I don't see it. I think that clearly we've established a goal to hit 25% and continue on in that area.
All right, taking a look a little bit from a market standpoint, if you look at programs that are out there that have had very significant success, there's a couple of aircraft in the business aviation, like the G650, Gulfstream products, narrow single aisle aircraft rates have gone up 20% or so. The A350 ramps are going to go up very, very substantially. If you look at what's happening relative to our areas, relative to auxiliary power unit and engine and mechanical components, had very nice growth in that area. Maintaining a strong win rate relative to what's happening in either on the OEM side or in the aftermarket. If we think about buyer-furnished equipment, we've had a very nice win rate relative to, let's say, on the single aisle competitions in the A380s relative to the selections, and also in some of the avionics areas.
Of course, the retention of the service agreements. This has been important for us in order to have customers value sticking the aftermarket services and being able to count on that type of business. In the defensive space area, there's really, I think, three points that I would like to leave you here with. The first one is it's a more comfortable environment and more stable environment and a slight growth relative to U.S. DOD. The second one is having the right position on the right aircraft, including the right fighters, trainers, and inertials. If you think about certain product areas of growth, it comes into those. It's the M-346, the fighter aircraft, and inertials. The third point is it's relatively stable growth or small amount of growth with U.S. DOD. Third point is explosive growth Double-digit growth internationally.
The work that we've been doing with Shane's team over the last couple of years has come to fruition relative to our international growth. All right. Now let me just talk about conventional growth, and then I'm going to turn it over to Bob. From a mechanical leadership perspective, we have 12,000 business aviation engines that are out there. 75% of those engines are under long-term support agreements. Over the next three years, we're going to need to deliver another 900 of those HTF7 engines alone. That's not speculative based on winning a platform. That's based on orders that we have. 900 more HTF7Ks, and of course, then there's the retention for the aftermarket. The nice thing about this is that the engines that are out there, that have been out there for seven and eight years, have been highly reliable.
They're coming back in for the aftermarket area. On the right-hand side, auxiliary power units, I would make a couple points, which is we've had very, very nice success relative to our win rates on the fleet renewals, like the 737, the MAX, the 777X, et cetera. I think the more exciting part is, of course, on the narrow bodies with the Airbus platforms, each one of those is a buyer-furnished equipment selection process. Had very good success in this area. The last point is that in the aftermarket, what has happened is our performance from a turnaround time of the components, including the auxiliary power units and engines, has been, operationally, we've been improving. What's happening is that APUs that have been serviced by others, by other third parties, we're starting to recapture some of that aftermarket based on our operational excellence.
That's always exciting to take some business that may have crept away some time previously to have back. In the Aerospace area, so on the integrated cockpit, I'd leave you with three points. One is we have 6,000 integrated cockpits that are out there. It's 10 times the next largest competitor. The second point is that we'll deliver more cockpits, more integrated cockpits in 2016 and 2017 than anybody else. The third point is that we are now in the process, we have fielded three upgrades.
If you think about delivering a cockpit 10 years ago and providing a substantial high-valued upgrade, like to our Primus Epic system, we are now in the midst of developing the fourth upgrade from an engineering development standpoint, which we'll end up be fielding, and it will be one of the upgrades that Bob. When Bob talks about upgrades, think in terms of those type of value. Competitors have not fielded any upgrades. From a navigation standpoint, this is really nice growth. It's driven by the fact of two things. One is it's very high precision navigation, so it goes into many of our competitors' products, which is good. Two is, if there are certain areas where there is some local conflict, and so on, then precision navigation is very important.
On the safety and radio area here, we're very, very excited about the products that we've brought to market, like the RDR-4000. The radar system and how that ties into our connected aircraft story, and the fact that, for instance, Southwest Airlines selected for 400 aircraft, the cockpit, and the safety system in that area. From a High Growth Region standpoint, the playbook that Anant and that Shane outlined has been, I would say, our Bible relative to fixing that, or following that. I think that the exciting part for us is that when we started this a number of years ago, I think within Aerospace, we like to template things. We like to think about standardization, and it's very, very common.
What we've learned is, no, the recipe in Turkey is going to be different than what it is in China, and there's a degree of differentiation based on the model for that particular, what drives the economies within that area. We've been very, very excited about the opportunities that avail themselves, the growth that we've had in this area, and really, more importantly, I would say, the opportunities that are ahead of us in this area. With that, I'm going to turn it over to Bob, who is going to spend some time talking about decoupled growth. What I'd like you to think about in this kind of headset is, think about the fact that all of us have probably had a TV in our home for the last 30 years.
Our experience of using that device has changed radically as cable has come to market, right? You're still using the same device, but you're probably using Netflix, Movies On Demand, et cetera. The experience is very, very different based on a technological breakthrough, which has taken place this year relative to the Inmarsat GX constellation. Bob?
Great. Thanks, Tim. Let me start with the title of this chart. The title of this chart is Transforming Our Business, which is kind of a big claim, a lot of bold words associated with that. Over the next few minutes, I'm going to try and convince you that that's actually a compelling part of our growth story going forward. We're talking about decoupled growth. What do we mean by that? As Tim was mentioning, the way a lot of you go model our forecast is whether you're in build rates or forecast flight hours.
That's what you go out and go look at, and you say, "Does that make sense given the platforms they are and the positions that they have?" What we wanted to do is actually break away from that Aerospace industry standard of just a few percentage of growth, which is single-digit type growth that we have within the industry. We may do a little bit better than our peers in that regard, but we want to break away from that. How do you actually go do that? The way we actually have developed this over the past five years, this has been a strategy that we've been working on, but are now ready to talk about because it's actually shown up. It's showing up in our financials, and it's giving us a lot of tailwind going forward.
It has four pillars, and the four pillars are those listed on this chart. It's connectivity, it's software, it's services, and also what we're doing in terms of upgrades. The nice thing about this, not only does it give us that type of 10% CAGR rate, but it is also highly accretive in a margin sense to our overall portfolio. Let's break each one of those down. First of all, in connectivity, the title is also very important here. The connected aircraft era has arrived. It didn't arrive last week. It didn't arrive several years ago. We're not talking about dial-up modem speeds. That's not what we're talking about. We're talking about connectivity like you experience in your home. We don't want to talk about kilobits, we want to talk about megabits, and that's what the chart on the right side actually talks about.
We are the exclusive hardware provider of Ka-band systems for all of aviation. That is our position in the marketplace, as well as an airtime retailer. What that means is that we're able to provide a big data pipe that comes into an aircraft that is 1,000 times faster and 20 times less costly than the competition. That's an incredible capability that we uniquely can provide, and that's what gives us a lot of excitement about this connectivity actually coming into this space at this time. Who has ever thought and gone to a hotel room and said, "You know, this Wi-Fi is just a little too fast. I'd like to slow it down a little bit." You never say that. That's why we always get this kind of excitement about this particular area, and that's why the adoption rate is so high.
You can see down in the lower right about the adoption we're getting from reference customers, Lufthansa. We're getting it from Bombardier on their overall Challenger business aviation aircraft. That's what William Shatner was talking about on the plane there. He was talking about actually seeing that service on his iPad like he saw it at home, and that's why that excitement is there, and that's why we're going to deliver over 5,000 aircraft equipped with Ka-band systems by 2018. That's not too far away from now. We're producing those systems today. That's not where it ends for us. Let's talk about what that overall value stream looks like on this chart. We want to play in this entire value stream.
The reason why we want to play in this value stream is that there's a lot of value to be had at each one of these levels. Let me break it down for you with the diagram on the right. On the right side of the chart, you can see we've actually highlighted some of our acquisitions that we brought in over the past several years. Again, building off this overall five-year strategy that we've had in place. In the upper right, we have COM DEV. COM DEV makes switches for communication satellites. We actually get a better understanding of what satellites are going to come out, at what kind of networks, and also be able to provide that service to them. Around 95% of commercial satellites give us a great amount of insight into what connectivity looks like for now and in the future.
Going down to the tip of the aircraft, you can see EMS Technologies. EMS Technologies was what helped us in terms of antennas and what we do in terms of modems, and allowed us to have a position that was strong enough that we were able to go to Inmarsat and get this exclusive deal on Ka-band. Moving to the middle of the aircraft, you can see Satcom1. Satcom1 is a router provider. Routers you have in your home actually route data throughout the aircraft. We can actually optimize that routing to provide better value to our customers so they get the best speeds for the right type of data. Moving down to the Aviaso line, we're talking about data analytics with that acquisition. How do we take all this data and offer them as data services associated with that overall offering for the airlines?
When you take all of those acquisitions and you combine that with our organic capabilities around Aerospace, mechanical, and services, this is where it really gets very exciting for us. What gets exciting about it for us, we are going to start making money in a different way than traditional Aerospace Tier 1 suppliers. Instead of making money because we actually just sold a product and delivered it that will get installed on an aircraft, we are going to make money on airtime, like Verizon does.
Instead of making just money on how we actually give software as part of a box, we actually are going to make it in terms of a software load, much like you would in terms of a subscription service like Netflix or a big gaming company, where we get one big load and suddenly you have a worldwide adoption of that one particular game at that time. All of these things playing along that value chain gives us a lot of excitement about what we can do in terms of rapid adoption of upgrades, what we can do in time to cash, and all of this, as you can probably imagine, being software, is really high-margin capability. If connectivity is the foundation, what do we actually have as the factory to deliver this capability? That really comes down to software.
We have a great capability and a great install base in terms of software. We are very, very good. Krishna indicated we have 11,000 engineers in software. 5,000 of those, over 5,000, are actually within Honeywell Aerospace. That is because we make embedded software. We make things like flight controls. We make integrated cockpits. We make things like flight management systems, which are highly complex pieces of software that we have a great position on. As a matter of fact, if you have flown anywhere internationally from the U.S., you have flown on a Honeywell flight management system, which provides the overall guidance to the aircraft, because we are on every wide-body aircraft with our FMS. We have a great, strong standing capability within software.
The reason why this is exciting for us and what is new is that we are telling all of our engineers and our product managers, "Let us not talk about just the box, selling software that goes inside of a box. Let us talk about how we sell software in all of these areas." Let me give you the example on the right, on weather. Weather is just one example of many that I could have picked, but this one is particularly good. If you actually think about how you can deal with weather and monetize weather information, a lot of value to be had here. You can actually talk about within FMS, but generally what you do is you take off with an FMS with a certain wind profile that you are expecting. What if I can actually go change that wind profile real-time on demand because you actually have connectivity?
You get a lot of value to the customer who can now optimize their flight plan and save a lot of fuel. That's a great benefit to them. We're doing that today. What if you can actually then change the radar system and change the software load such that you can actually identify hail and lightning better? You can prevent hull damage to that aircraft. We've done that, and when we did that, we actually took the Southwest Airlines fleet for the 737 MAX away from our competitor. If you actually talk about overall what you want to see from the weather profile around, most weather radars only see 300 nautical miles. That's about 30 minutes of flying time. I need to see farther to actually make significant changes to my profile.
That weather app is something we co-developed with Airbus and is now available. All of those things are what we've done today, but we can also talk about what we want to do in the future in terms of connecting radars, making a network of systems. Once we have the big pipe, we're exclusively able to actually route that data and give you a connected radar profile based on your entire fleet composition.
Likewise, since we have a mechanical system, unlike all of our peers, we can actually use our software capability to actually get digital exhaust off of that mechanical system and either inform it that here's what the weather conditions are and change its operations, or actually tell what we need to go do from a maintenance action sooner and better. This is the kind of examples that we have around our company that we're working on that's contributing to this 160 different product launches by 2018. Very exciting delivery process for us. It doesn't end there because we also are going to wrap services around all that software offering. That's a very exciting part of this. If you want to get an analog here, think about Uber. Uber didn't develop the taxi system.
What they did is they took connectivity and software, put them together, and put drivers and actually people that needed a ride together. That's the same idea that we're doing. We're taking connectivity and software to actually bring services to our customers. For example, with the GoDirect Fuel Efficiency application, we're able to actually say, how much fuel should you be carrying? What's the weather conditions you're going to be experiencing? What's the pricing you should be able to actually get from this way and optimize your overall fuel buying? What can we do in terms of your flight planning so we can optimize what's going on around the world so that you have the optimal flight plan for you? Finally, what do you do around taxiing around a surface of an aircraft, around the surface? Generally, you're looking out the window.
Finally, Tim touched on this a little bit around upgrades and mandates, and since we're going to use the television analogy, I'll use that one as well because when you go buy a house and you had to be stuck with a TV for 20-40 years like you have with an aircraft, you'd go nuts, and you'd never go put up with that, but you wouldn't go buy a new house because you needed a new TV. That's what we do.
We actually come in and say, you have old electronics, you have old systems, therefore, we can put in new displays in that system. When we put in those new displays, we'll also put in new software capability to that. We have 30+ new upgrades that are going to come in just this year for 15,000 different aircraft. You can see the CAGR there, That's also being contributed to with the mandates that we have, the four mandates that you see there, which have to do with how you fly in the airspace with air traffic management, as well as other things around safety. We have great positions in those, Those are going to drive this overall growth.
I want to hit as one final point in this decoupled section, talk about a little bit about two enablers that actually help us move this decoupled strategy forward. One is Honeywell User Experience. If you really want to get this type of decoupled growth and move at the speed of customer need, as opposed to moving at the Aerospace industry rate, you're going to have to make a delightful experience for all the people that you interact with. That's what's exciting about what we're doing in terms of human-centered design for our products. What you see on the left is a multipurpose control display unit. It's used as an input device on an aircraft. You can see it's like an old typewriter with a green screen. What we've replaced that with is on the right, which is a touchscreen controller.
It looks much more like a tablet that you have. The beauty of that is not only the interaction that you get, but also all the applications, all the software that you can go do. I can put software upgrades again and again and again on this one as I develop new apps and new capabilities here that I couldn't do on the hardware-centric focus that I have on the left. This is actually real dollars. We've always had this conversation within Aerospace that if your HUE strategy, your Honeywell User Experience strategy is working, It is driving incremental growth. $50 million of incremental growth in 2015 $100 million of incremental growth in 2016. Very powerful for us.
Finally, around HOS Gold, to get decoupled growth, to move at the speed of customer need, we are going to have to have an agile framework. You've heard it said a couple times today that we want that big company scale along with the efficiencies that you get from actually working like a small company. When we break this down into smaller enterprises, we have the ability then for them to identify small bolt-on strategies in terms of M&A. That's what we had with Aviaso and Satcom1 and others. That's driving part of that overall growth that we're seeing today. We also have them with breakthrough strategies, and you can see here that 75% of them are actually targeted around connectivity and software.
Finally, you can see that those breakthrough strategies are going to contribute to over $1 billion of sales just from having this type of approach to our overall business. This is why I'm very excited about what we're doing. This is why I think we have transformed our business through connectivity, software, services, and what we're doing around upgrades. That's why we're very confident about not only what we're going to do in 2016, but over the next four years. Thanks very much, and I'm going to turn it over to Terrence Hahn, who's going to talk about Transportation Systems. Terrence?
Thanks everyone. Want to just share with you, I know it's late in the afternoon, I took the liberty of writing up your notes already. They're out in front of you, but really put them in a simple form around three key areas. One, how we're winning big, and doing that with Honeywell Advantage, a term you've hearing a lot of lately, but we're in the golden age of turbos as well. I'll share with you how that's providing a significant tailwind for us. In addition to that, how TS really is using HOS Gold in a model for the company on HOS Gold, and we're using that additionally to drive new breakthrough growth.
I'm going to talk to you today not just about turbocharging, but the new opportunities of skills and capabilities we have in my business, connected to Aerospace and across all of Honeywell to grow faster. What you see here is the key outline that I'm going to go through, proof points on the right-hand side, and I'll just jump into each one of these in more detail. First one is we are winning. Pie chart on the left shows 40% win rate, okay? With all the existing and new competition that has come into this space because the market's growing, we continue to win at very high rates and rates that are accretive to our share. In addition to that, we're winning where it matters, in the high growth areas. For us, quite honestly, one of our emerging markets is clearly China, as Shane had shared.
Another one of my emerging markets is actually the U.S., That's driven by the CAFE regulations, I'll share with you a little bit more about how the growth rates are moving forward. This gives us, again, the opportunity to continue to grow and outpace our competition, that win rate, but also our execution capability, which is really unmatched in the number of launches we do per year. Nearly 100 every year. I'm showing the customers here on the right-hand side. If there's somebody who you think we're not doing business with, we probably are, I just ran out of space. Okay. We're touching essentially everybody in the industry, passenger vehicle, commercial vehicle, again, across each region. How do we do it? Well, one of the things I really love about my job is I've got two titles.
I get to be President and CEO of Honeywell Transportation Systems, I also get to be the leader of the Low Altitude Aviation Department, right? It's fantastic. This connectivity, this connection with Aerospace really is a differentiator for us. I just share with you on the left-hand side, if you look at what a new entrant or an existing player might have on an absolute dollar base in terms of R&D spend, then you look at our Transportation Systems business, where, again, we're the largest in the space, we invest in technology very heavily. Now look on top of that. If you now look at folks who've got jet engine capability, think about a turbo as that jet engine on your car, the mechanical systems group in Aerospace is spending significantly more.
What we get from that as an entire company, what I get from that from TS, is these key lists of leading performance technologies. Think of high temperature materials, aerodynamics, bearings and tribology, seals. All of this competence that comes from Aerospace, we're able to put into our turbo systems. This is a business that sells on technology. We are getting technology industry margins as well. What it also does is in our business, we can convert this into things that the automotive customer wants, that's performance, driving performance, fuel economy, and torque, power for productivity. Some of the examples here, two of whom are WardsAuto top 10 vehicles that turbocharge. When customers choose Honeywell, they've got a higher chance of their vehicles being successful. I'll share with you today, you may know this, my hometown currently is in Geneva.
The Geneva Auto Show is on. They announced the car of the year just yesterday. It happens to be a Opel Vauxhall Astra, the 1.6 liter diesel and the 1.6 liter gas version of that vehicle has a Honeywell turbocharger. That's same as last year's, when the Peugeot 308 model, 1.2 liter one, also with a Honeywell turbocharger. High performing vehicles have high performing engines and turbochargers that come from Honeywell. For us, it's absolutely proof points relative to our ability to have Aerospace technology be a big differentiator in our business. In addition to that, I won't go country by country, but I'll let you make this your mental screensaver relative to our ability to deploy globally. Okay.
These seven regions, while automobiles are assembled everywhere around the globe, these seven regions are where the powertrains and engines are produced, and obviously the turbocharged ones as well. We are very well positioned in each with our design, engineering, manufacturing, and applications capability. What you also see is, I wanted to give you some proof points when we were here in 2013, showed you about what the growth rates were going to be, so I put the 2012 numbers here. This continued growth in each region is occurring, and the fact that we've set up shop already, again, have very strong local teams, local supply base, local engineering, but manage our technology portfolio globally, puts us in a very preferred position. There's no one in our industry who could show you this position.
Those key items, again, technology and footprint help us win, but we are also in a spot in the industry, again, some call it the golden age of turbos, that allows us to be growing much faster than end vehicle sales. It is not driven around the economics of fuel, the price of gasoline or diesel. It is driven around regulation relative to fuel economy and emissions. Independent of the price of fuel, those regulations are in place and they continue to get more strict and severe as we're seeing around the globe. What it's doing is driving auto manufacturers to go to downsized engines, same performance, but again, lower displacement size, better fuel economy.
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To get performance. This slide on the right is, last year I asked everyone to take the slide out, put a magnet, put it on your refrigerator, but we've updated it and it's going to go on top of it now. What it shows is, we told you last year, we're going to see 10 percentage points in turbo penetration over a five-year period. That was from 33%-43%, 2015-2019. Now we're looking at 47% by 2020. This all comes out of our annual five-year forecast, and we continue to see this growing. That's going from today, one out of every three cars having a turbocharged engine to nearly one out of two or 50% of all vehicles turbocharged by the end of 2020. Again, significant ramp and pathway forward going out for existing years. Let's break this down by fuel type.
If you look at turbo diesels, we continue to see this moving, and moving very effectively on a flat basis. I know there were some events that you've all read about one particular OEM that occurred in September. I'll just share with you one proof point is that diesel turbo penetration in Europe has gone up every month since September. There may have been share shifts relative to who's selling those vehicles. As Honeywell, we're well positioned. None of them too important because we're supplying everybody in the industry. As share shifts occur, for us, this has been really a neutral event. More importantly is what's in the middle. This is what the auto manufacturers look at. We're supplying the top end of this chart where you see more of the greens, turbo diesel, turbo gasoline, and turbo hybrids.
Really it comes down to what's best for fuel efficiency, emissions, which is primarily CO2. Also the economics. That's the economics for the OEM and the consumer. Again, being positioned at the top end of this chart, we're also connected to where the highest amount of growth is coming from. This is significant for us, and we put this in contrast to looking at other alternates. Obviously, non-turbocharged gasoline is going to phase out relative to the emissions. Battery electric, while you may see on a relative high growth rate numbers, it's still a very small %, and hybrids still beat battery electric. The economics are there. Every electric vehicle that is sold today, the manufacturer is putting money on the dashboard when it goes to a customer. The economics aren't there yet because the battery technology isn't.
When I share that with you, what's driving the technology? Today, turbo technology is far in advance of where the regulations are at. As the regulations improve, we've got technology in-house, plus what we're developing to further drive performance. I really contrast that to battery technology today, where battery technology is at its limit. It's really the gating event that's driving electric vehicles. A little bit more as we look down the diesel value chain. Honeywell is well positioned here in insights. Dave's entire portfolio from the front end in PMT, as you've heard from UOP and HPS, gives us insight, as well as being an efficiency company, both in ACS and obviously our turbo business.
If you look at the barrels of oil that are coming out of the ground, approximately 35% of that on average goes into diesel. That diesel primarily goes into transportation fuels. As a refiner, you can balance that. You can move between 24% and 42%. Some refineries move as high as 65%, depending on the local market. The amount of diesel that you can get out of a barrel of oil is significant. The other fact will always be there. In a growing industrial economy, while GDP is growing, there's greater opportunity for efficiency. Diesel is going to continue to still be a major player. It's a major player in applications also because of some other key attributes.
Those attributes are fuel economy, which we've talked about, much improved on a miles per gallon basis here, showing on an average 25%. Torque, again, significant, much more both in fun to drive and performance, but also hauling and towing capacity. You may not be aware, cost of ownership. Diesel vehicle is 15% less to operate on an annualized basis. In addition to that, it's got a higher resale value. The economics are there for the producer, the economics are there for the consumer. If you look at emissions, again, the lowest on CO2, but both on particulate matter and NOx under the current regulations and with technology, we've been able to get to parity both of these attributes, NOx and particulate matter. As you look at, current regulations are around static tests.
Many of you may be aware, we kind of hinted to last year, RDE or Real Driving Emissions regulations. It's just been approved in Europe. That will require now a more sophisticated cycle, but we're very confident with the technology we have and other elements of the engine process. We're going to be able to meet those targets not only on fuel economy, CO2, but emissions, both particulate matter and NOx. With that, let's take a look at our business of Transportation Systems and what a gold business looks like. A gold business in Honeywell is one that's growing faster than its market, and that's what the five gold business enterprises that we have within Transportation Systems are doing. We're doing that because of some key unique differentiators we have within Transportation Systems.
I'd really like to draw your attention to something that's going on in the transformation of HOS Gold within Honeywell. Transportation Systems now has, from a new product introduction standpoint, our VPD or Velocity Product Development, we're at, again, greater than 90% of all of our offerings are at that level. That allows us to accelerate growth, again, much faster than the industry. On value retention, our HOS Gold from the order and cash perspective, HOS Silver in our plants, again, also greater than 90% for all of our business. What is that doing? The proof points are real. We're in an industry that's serving a very demanding customer set. The economics continue to be tight, and here we are expanding margins, growing on the top line, beating our competition relative to volume growth, and contributing significantly, again, to the margin expansion within Aerospace and within Honeywell.
In addition to that, as a business, we are now an exporter of capability to the rest of Honeywell. Many calls coming in every week around the company saying, "Hey, what's a process that we have within TS? Can we adopt it more rapidly elsewhere around the company?" This model that Dave has developed of saying, "Hey, I'm going to have every business, every gold business enterprise, focus on how they can grow faster than their markets using the VPD process for new product introduction, using HOS Silver for running their plants and operations supply chain business is absolutely working and TS is a great proof point for that. It doesn't stop there. If any of you saying, "Hey, this is a one trick pony. This is great. You're in the turbocharger business, but what are you going to do with that?
How are you going to lever Honeywell capability?" Let me share with you, we're very, very excited, as you can see, about our mechanical turbocharger business, in a very significant space. If I could draw your attention to maybe one line on this slide, it's the total addressable market. What we're also looking at doing, knowing that we're going to be not just in gas and diesel, but also in the hybrid space. Hybrid is this now going to be a smaller and even smaller downsized internal combustion engine with a mechanical turbo. It's also going to have, because of the hybrid electrical and most likely a 48-volt framework, it's going to have the opportunity for us to put e-boosters and e-chargers on the vehicle. This will improve performance over that Real Driving Emissions cycle that will be coming out.
In addition to that, it will also provide more acceleration, or more boost during acceleration periods in a vehicle and the opportunity to be actually recovering energy at periods where it's available and putting it back into the battery system. We see this being very additive, could be in the neighborhood of over a period of 30%-50% more scope, in addition to a mechanical turbocharger. We have capability in doing this. It comes from Aerospace. There's a big connection between electrical and mechanical systems, high-speed motors, high-temperature and high-speed controllers. We have all those competencies. Others have had to go out and pay premiums to buy it. We have it in-house, and we're able to use it quite effectively. Another place we're using in-house capability is building software solutions.
For us, taking capability, that multivariate processing analysis that makes the HPS business so successful, we're taking that now and putting it in systems to be able to optimize engines. The cybersecurity that's used in large buildings or in refineries or in airplanes, we're taking that capability and putting it in place for the automotive industry. Many, many examples of places where Honeywell has a core competence. Now we're going to bring that capability to automotive. What it does is shows you is there's significant more space, more growth opportunity, more headroom. We're going to be going after and planting seeds in all these areas, in addition to the opportunities that we have in the short term to dramatically grow our revenue and margins in the mechanical turbocharger business. With that, hope you've seen the proof points here.
Hope they're hanging in your kitchen on the refrigerator later tonight. The key element here is we are winning, and we're winning accretive to our share. We're doing that through having the best technology and the best footprint anybody in our industry could ever have. It is the golden age of turbos. This is a business that's growing to a half from nearly a third today of all vehicles and a market that at maturity will be $20 billion. We're well positioned to seek a lot of that growth. From a business standpoint and using Honeywell HOS Gold, we've got best practices that we've deployed in our business and are sharing across Honeywell and breakthrough growth ideas that are going to make even our existing market that much bigger. With that, Tim, turn it over to you.
Thanks very much, Terrence. Thanks, Bob. Just in summary, I'd like to convey that we're very, very bullish and buoyant about our growth projection. You just heard some of that. Two is that we have a high degree of confidence relative to our operating performance. Three is we're very excited relative to this all coming together and all being executed and achieved through the HOS Gold enterprises and the framework that's been developed by Andreas and Dave and Krishna in the previous couple last couple of years. With that, I will ask Tom Szlosek to come up, our CFO, and provide the next briefing. Thanks very much.
Thank you, Tim. Good afternoon. Thank you for your attention today. I hope you have been able to get a sense for the confidence we have in our growth prospects, as well as the substance behind the growth forecast that we've put up there. As a CFO, I know I like to see that there's some proof behind the pudding, and I think our guys did a nice job of putting that together. I'm going to spend a few minutes summarizing the financials, and then we'll move on to Q&A. First, 2015, I know each of us has gone through this a few times. The slow growth environment for industrials in 2015 was well-chronicled. We're probably still in it. Our 2015 core organic growth of 1% didn't exactly result in a lot of oohs and aahs from all of you.
I will say that we did have some impacts from the slow growth, particularly when we talk about oil and gas, although it's a small fraction of our portfolio, and Darius took you through how we managed through that. On the top line, it certainly had an impact. If I take that out of my growth, that was probably about 3% core organic growth in 2015, just to kind of give you a sense of the momentum in the portfolio. 220 basis points expansion on segment margins. That's 180 basis points if you exclude the fourth quarter 2014 Aero OEM incentive. Of that 180 basis points that's left, we've been very clear with you throughout the year to tell you that 60 of that was really due to strategic decisions we made. We divested Friction Materials. We hedged our 2015 income, but not our sales.
Sales was impacted by foreign exchange, but our income was protected at about $1.24. Also the pricing model that we have in Resins and Chemicals. That leaves about 120 basis points of true margin expansion in 2015. Just as a frame of reference, our five-year plan calls for 45-75 basis points of expansion. The guidance we provided you at the beginning of the year called for 100-130 basis points of expansion. At the high end, certainly doubling our longer-term projections and sound performance there. In terms of EPS guidance, you can see at the outset, our guidance there was 7%-11%, we came in at 10%. We extended our streak of consecutive years of double-digit earnings growth.
Free cash flow, 11% was in line with our earnings growth, at the same time investing in those high ROI CapEx projects that Darius talked about. Our performance for 2015 was at the top of our peer group, and this is the same peer group we show year in and year out every quarter that we have an earnings release with you. On core organic sales growth, again, that 1% that we've talked about, we did well on relative to the peer group. I've conveniently placed us at the top of all the 1 percenters, but nonetheless, we're in range. In terms of the segment margin, obviously, we were the best in the group, and our earnings per share also stood out, as you can see there.
You'll note that while some of our peers were struggling to get to even 1% EPS growth, we drove nearly 10%, and really proud of that. That was without a real substantial impact from share repurchases. We instead channeled most of our capital deployment to future investment opportunities, which I'll touch on in a minute. That top-tier performance is not new for us. We've been doing it for years. This is a five-year look. Here on the left, you can see our five-year EPS CAGR of 15%, which none of the peers that I've listed here even comes close to. I'll again point out, and when I show this chart, I always want to make sure you understand that the line for 15% and the bar for 15% are two different things. One is the net income CAGR. That's the line. The EPS CAGR is the bar.
Both of them are 15%, meaning that our share count has been flat over that timeframe. That's consistent with our stated framework of keeping share count flat over the long haul. On the right is our total share owner return for the same timeframe, also at the top of the peer group. We run our company for our long-term share owners, which is reflected in our returns. Of course, our share owners, all of you out there, are smart enough to know that past performance is no indication of future performance, and you're always kicking the tires as you should. We receive many questions on sales growth as an example. Why are you slower than your peers? As I showed you, we're actually in line with our peer group. When you look forward, Tim talked about, as an example, the breakout growth that we've got for Aero.
All of our portfolios include examples. If you think of the Solstice refrigerant, you think of Aerospace connectivity, the offerings Alex talked about, HGRs, all of which you've heard about today. In terms of margins, people have told us for years that we're laggards on margins, and we expanded significantly in 2015, as I indicated. In fact, each SBG has something much higher in mind in terms of margin expansion we've talked about. 25% for Aero, 25% for PMT, 20% for ACS. This will come first and foremost from the top line. Those connectivity and software types of offerings that we've talked about, those are high margin. Those will drive the growth, also HOS. Applying HOS to our supply chain, as we've showed, there's still a lot of room to go there. We'll be doing the acquisition integration.
Of course, Alex talked as an example about some of the business integrations he's doing in ACS. All that helps to drive that margin expansion. I would say, I point this out to people, the evidence is in our restructuring funding. In order to continue to drive that productivity, we need to have the funding for removing the cost. We have $350 million of unspent restructuring projects. We've already approved them in our P&L, and we're in the process of executing them. As we execute them, the costs come out, we eliminate, and we drive that productivity. In terms of free cash flow, the conversion continues to receive attention. We're targeting 100% free cash flow conversion, and we've got a path to get there by the end of 2017. Our working capital is improving.
We're near the top of our peer group in terms of working capital performance, and yet we're unhappy with that and are driving that. CapEx will also, as we've shown, and I've got a chart coming up on this, will drive to more moderated levels. We're in the midst of some accelerated spending, as we've talked through. In terms of capital deployment, we also get a lot of questions on capital deployment. Mostly that we're not doing enough on M&A, and mostly we're not doing enough on share buyback. That was a difficult argument to sustain in 2015. Let me just take you through our capital deployment framework. We put $10 billion of share owners' capital to work in 2015. $1 billion was in the high ROI CapEx that we've talked about, $6 billion in M&A. The deals spanned across all of our business groups.
We used a lot of our non-U.S. balance sheet cash, and there's plenty ahead. As you've already seen in 2016, we've already done three new deals. We've closed in the two months so far for about $600 million of additional capital. Dividends, $1.7 billion in dividends. Dave talked about this earlier. We're trying to grow our dividend faster than our rate of earnings growth. That meant that in 2015, we were up 15% on our dividend, same thing with 2014. $2 billion in share repurchases, two times our normal level. We're committed to maintain our share count flat, as I said, but we're opportunistically in the marketplace, which can result in advanced funding of future dilution that we've talked about, that I mentioned earlier. I have a chart on that to explain a little bit more.
At the current pace, I now expect average share count for 2016 to actually be about 2% lower than it was over the course of 2015. Speaking of the areas we're deploying the capital, this is our M&A framework. This remains intact. Nothing has changed here. The requirements that we have are both qualitative, and we talk a lot about having great positions in good industries. The chart kind of goes through what we consider to be a good industry. Basically, it's where technology matters, where you can get good returns on your investments, and where you have similarly minded competition. In terms of great positions, we want to have an HOS Gold leadership position in those industries that we're serving. That means having the best growth rates. That means having the highest margin rates.
Most of you are familiar with the quantitative criteria that we've laid out in terms of ROI, IRR, and accretion in year two of the deal. We don't put sales synergies into our models, that means that we have to drive significant amounts to get the returns that you see there. We've got to drive significant cost synergies. To drive significant cost synergies, there's got to be a good overlap. There's got to be common suppliers, got to be common technology. We end up, generally speaking, investing in areas that we're familiar with. In terms of how we manage this, our management operating system, we have a regular cadence of reviews with Dave. Each of the gold enterprises maintains their own pipeline of deals. We look at it once a month. I'd say the same thing for our cadence around our integration reviews. Integration is critical.
Elster is a great example. It's critical first that we staff it with our top talent, but that we keep the TBA or the deal model clearly in front of the teams, we're checking that every month to ensure that what we invested in is actually materializing. In terms of the approach that we have for our spend, I'd say there's no requirements and no limits, what I mean by that is we don't set budgets for people. We don't say, "You got to do $1 billion in M&A this year." The only thing that really governs us in that sense is the returns criteria. Some years you'll see us, like in 2014, we did $200 million of M&A. 2015, it was $6 billion. It's when we get to a point where we have that confidence in being able to achieve the synergies.
Second area is CapEx, where we're investing in deploying capital. We talked a lot about, if you see on the right-hand side of the chart, the peak levels of CapEx that we're at now, about $1.1 billion per year. That will moderate down, as you see over the next couple of years to that $800 million-$900 million. The peak is for these high IRR growth projects, Darius mentioned a few of those for PMT. If you look at the fluorine products and the UOP catalyst as examples We had organic growth in those businesses of 10% in 2015. We're always talking about seeing the impact of those investments, that clearly is showing up.
New opportunities could emerge for additional CapEx, right now, we think the level of spending is currently projected to normalize by the end of 2017, after which our conversion, which you see on the left-hand side of the page, should normalize to around 100%. A little more on dividends and share repurchases. We had 11% CAGR in our dividend rate since 2014. That includes 15% that I mentioned. The 11% was since 2004. That includes 15% in both 2014 and 2015. As I said, it's our intention to continue growing that dividend faster than our earnings grow. This will improve our payout ratio, this will likely also help with our dividend yield. Share repurchases, part of our norm, at a minimum to keep the share count flat. Our long-term strategy requires, as I said, about $1 billion of share repurchases.
In 2015, we did nearly $2 billion, so twice the normal rate. We saw good opportunities, and we executed on them. So far in 2016, we've already had over $1 billion in share repurchases. We're definitely in the market when we see those opportunities. As I said, our share count for 2016 is currently expected to be about 2% lower. In terms of capital deployment capacity, we get a lot of questions, and you guys might remember back two years when we talked about $10 billion. Just to remind you, that $10 billion was just an illustration. At the time, we were trying to say we have a great balance sheet, and if we deployed the balance sheet, we could generate $1 of earnings per share.
We said at the time, if you did that with M&A, you'd need to acquire about $5 billion-$8 billion in revenues. If you do the math and apply margin rates and you apply multiples, you'd say that'd be about $10 billion of M&A at the time. The message of this page is our capacity is a lot greater. This is maintaining our existing credit rating, and this is not using any equity. You can see that it starts with the surplus cash that we have on our balance sheet. This $4 billion is not all of our cash, but this is what's beyond what we need to operate. We'll be a strong generator of free cash flow, close to $5 billion a year, as I showed. You net the dividends out, you can see the capacity that creates.
In terms of our debt rating, we adhere strictly to our covenants, and we have good relationships with our lenders, but we still have capacity. That also could provide some additional firepower for us. All in, $25 billion is a good indicator of our resource capability. I'll remind you that our non-U.S. cash position, given that most of our cash is outside the U.S., more of the $25 billion could be used outside the U.S. than inside. We recently completed a U.S. equivalent $4.5 billion bond offering in EUR. It was EUR 4 billion, works out to about $4.5 billion. The proceeds were used to pay down our commercial paper balances. Our commercial paper balances had run up for a couple of reasons.
One was in part to pay for Elster, and the other reason was we had some maturities of longer-term debt that just came due, and we used commercial paper to pay that off. Paid off the commercial paper. Our intention with this euro borrowing is threefold. It's the first time we've borrowed in Europe. One is to offset the exposure that we have on our balance sheet to Europe in general. We continue to grow there. Elster really increased our footprint in Europe. We have foreign exchange exposure on our balance sheet every quarter. If we borrow in EUR, this is a nice way to offset that exposure. Secondly, the number of lenders that we've become familiar with and transacted with as a result of this has been great. We've got a new source of funding.
It creates diversity in our funding sources, and it's a market that we think we can potentially go to again in the future. Thirdly, it locks in some lower cost funding. As you know, the rates in Europe in particular are quite attractive. We ended up borrowing in four different tenors, as you can see on the right-hand of the slide. They average out to about six-year tenor, and the average interest rate was less than 1.25%. The next two pages, I just want to reaffirm our 2016 full-year guidance, as well as the first quarter earnings guidance. On the page that you have in front of you can see our full-year expected reported sales growth of 3%-6%. That's 1%-2% on a core organic basis.
The earnings per share is expected to grow 6%-10%, and you see similar growth in our free cash flow. Each of the SBGs, as you see on the right, is expected to grow low single digits on a core organic basis while expanding margins nicely. You heard from each of the business presidents in terms of their growth platforms that are driving that in 2016 as well as 2017, as well as their views on segment margin expansion. You may wonder why we're maintaining our EPS guidance given the reduction in share count. It's just too early. I'd like to get the first quarter behind us before we start committing to having an impact on our guidance from the lower share count. More to come on that, hopefully. For the first quarter, our EPS guidance remains the same, $1.48-$1.53 per share.
January was largely in line with our expectations. We'll have a better feel for how February came out towards the end of this week. As you can see, what's changed since we issued our initial guidance, a lot of pluses there that you can see. The aftermarket in Aero has been quite strong for us. It's working out well. You've heard a lot about U.S. defense spending and those budgets. We're starting to feel a little bit an impact from that. ACS, the security and fire businesses continue to do very well. As Alex mentioned, we're doing a nice job in China and India and in the high-growth regions. That continues to help us. We are seeing continued lagging in building solutions, mostly in the energy business. It's deals that we've won that have not gone to contract. There's a slowdown on the federal side.
We keep an eye on that and are optimistic that logjam will unplug itself. In terms of PMT, maintaining roughly the same guidance, a little bit of improvement in HPS, and then overall, you see the Honeywell numbers. That's the guidance. Before closing, I want to take the five-year CAGR numbers that I showed you earlier for us and our peers and compare it to the relative share price multiples that you're all familiar with. Of course, I picked out three peers that have the best in terms of PE multiples. I think I've got GE, 3M, and Danaher on here. As you can see, we beat each of these companies over the five years, whether it's on net income, whether it's on EPS, whether it's on total shareholder return.
Yet, when you look at the share price multiple, it really doesn't reflect that outperformance yet. So to us, to this management team here, this signals opportunity. For us and for our shareholders, given the confidence we have in 2016 and 2017, we really do think that from a longer-term perspective, we belong at those multiple levels. I know we're a top pick by a number of you, but we want to be the top pick by all of you. Our portfolio, we think, is in attractive industries. We cover almost all geographies that you can think of. None of them, as Dave continues to point out, is so individually significant or concentrated that a disruption is going to hurt us. Our performance track record, both long-term and on the short-term, it consistently rates in the top quartile, as I've said.
We continue to put in capital to work, $10 billion in 2015, significant balance sheet capacity to do more. We're confident in our performance in 2016 and 2017. Really, that's substantiated, and that confidence is backed up by the stories that you heard from Darius, Alex, Tim, and Terrence. So we're excited. We're excited that those investments are going to lead to that decoupled growth that Tim kind of talked about, that growth that's on top of the normal market growth. I want to thank each of you for your attention. I know we've gone a little bit over. Then I want to bring back Dave, Tim, and Terrence back to the stage, and Bob, for Q&A.
Yeah, Scott.
Patience, guys, good as usual. Dave, sorry to do this to you and ask a question about the beginning of your presentation, but you just made a fairly compelling case for an inflecting growth rate, great margins, great deals you've done like Elster. Why do you need the headaches of a UTX? Why do you need it at all? If Tim and Bob are right, you're beating them, right? Why underwrite their programs when you know your own programs, you may not necessarily know theirs in terms exactly, but why underwrite? Why care? Why do you need it? Why do you want it, I guess, in that context at least?
I think you probably got it right, Scott, when you said I just wanted to hang on longer.
I never said that. That must've been somebody else.
Oh, now he never said that.
You've been milking this cow for a lot of years, Dave. We didn't expect you to go away soon.
I've dealt with people like you a lot the last three weeks. Think about it. No, why did we want? We saw a chance to make a lot of money. Yeah, I guess, I've dealt with headaches all my life. This is just one of those things that we can do. I looked at it as a chance to make a lot of money for our share owners. The UT share owners would have benefited also. It's something we could have managed. We certainly have the management talent and the bench to do it. Why not?
In that context, have you thought about a plan B within where? It seems like really what you want is the Aerospace business. I don't think you want to be an air conditioning guy. You've never wanted to be in that business. Otis is fine, the rest of the stuff isn't all that great. Why not just go after the business that you actually won? Why not try to find a way to get the business you actually won in some sort of buy spin or some sort of plan B where shareholders might be a little bit more enthusiastic about it?
It was an opportunity to pull together a bunch of businesses, create, I thought, a much better core growth portfolio, and able to do by undermanaged assets at a reasonable price. Looking at it that way, rather than saying, "We'll buy this one," well, somebody has to want to do that also. It's kind of a hypothetical. I'm not sure that would've ever been possible. I looked at it as an opportunity. We took a swing, didn't work out, well, move on.
Peter Arment.
Hey, Tim. A question for you on commercial aftermarket. Your forecast is for a 6% CAGR over the next few years. A little bit of that is from the services and the upgrades, but the rest is 4% flight hour growth. One of the takeaways at ISTAT this week was that a lot of deferral of retirements, because of the low oil price, and aircraft are being run harder. Is there upside to that? Are you seeing any evidence of that in your aftermarket streams, as that could be a tailwind to your business? We're actually seeing growth relative to when you look at the conventional aftermarket, there's really three components. Spares. Spares are broken down into LRUs, and detailed parts, and then the R&O, right? What we're seeing is that nice growth in the detailed parts and nice growth in the R&O.
We're seeing now an increase in our order take relative to LRU spares. Peter, that's in the last, I would say, six weeks or so that we're seeing the different trajectory there. It's obviously too early to call that there would be a tailwind there. Obviously, the team, and myself included, stay very close relative to what is the order intake look like, what's the backlog, and what's throughput. I referenced this earlier, that one of the things that I'm most enthusiastic about is that when you think about being able to recapture business that may have been gone for as many as five years, based on your operational performance of repair turnaround time, we're starting to see that already. We started this, we launched this as a breakthrough strategy, I would say about the end of the first quarter last year.
What we've seen is, we've seen some existing customers expand their input, and two is some customers that had gone somewhere else come back.
Steve Winoker. I'm sorry.
Thanks. Not going to ask about UTX anymore. Done. Okay. I am going to ask about software. You have spent a lot of this presentation talking about inflecting growth and software driving that. I think for investors, you also mentioned it's kind of hard to see our reaction in terms of whether or not it's really sticking. I think my perspective on it, and what I want to understand is, when does the business model financials start? When does it start to show up, either in gross margin, maybe higher R&D on the sales and marketing front, other parts of the business model? When do the financials start to maybe really show this in real traction? Is it 2017, along with the rest of the inflection, or how should we think about actually getting a real tangible traction on this?
Well, I'll answer then turn it over to Tim for a specific aerospace comment. You're starting to see some of the benefit of that today. I'd say when it comes to product enablement, we've had a lot of that already. I think you start to see more of it next year and the year after as these services start to grow better than they have. Connectivity is just a great example. That Ka-band capability, the acquisitions that Tim's been able to pull together, the deal with Inmarsat, and the compelling consumer value is one that you'll start to see deployed this year, and I think you really start to see the impact of it next year. I'll let Tim. Steve, two inputs.
One is from a growth standpoint, what you're going to see is this year, you're going to see more net, we say, new product introductions that are software loads. They're smaller content, it's not a big block upgrade, that the customers value, and there's a unmet need, and we're going to provide that. That's incremental, some of what Peter was asking about, some of what is fueling our aftermarket. The second area, which is not necessarily fueling the top line, but it is fueling the economies relative to our DNA, is that we've talked a bit, both ACS and Aero have spent quite a bit of time talking about platform solutions. If you remember, what we've said is, "Listen, the right approach is build a platform once and apply it many times." Well, that applies to software.
As an example, a flight management system, an FMS system, is a perfect example. It costs a very substantial amount to develop FMS systems. It has for a long period of time. Honeywell is the only one in the industry that developed what was called NG FMS. We built it once. It's flying on the seven, has been flying on the 747-8, the G650, and a number of other platforms. It's in production. The marginal cost for the reapplication for that FMS is very minimal.
One of the reasons that I think we are all excited about this software development in a larger way, is the fact that it has influence relative to the top-line growth because we bring products or services to market sooner, and two is that by doing this correctly, particularly where a platform solution exists, then it can really make reapplications much easier in a much smaller marginal cost.
I don't know if I've answered your question completely, but that's why we're really enthusiastic about it.
Joe Ritchie?
Dave and Tom, I know that you're proud of, and you should be, of the double-digit earnings growth track record that you've had. Seems like you're setting up well for 2016. I don't want to jump the gun yet, but it seems like 2017 could be setting up to be a really good year. If the growth trajectory comes through as you guys expect, I just want to understand, when you take a look at where the incremental growth is coming from in 2017, it looks to me like there's a mixed benefit. I just want to understand to see if there's any negative mix issues that we could potentially expect in 2017, and whether I've characterized 2017 appropriately in your eyes.
Well, there's a reason we didn't provide a margin rate for 2017 is we figured we'd let everybody do a little bit of work there. We're not ready to commit to any kind of numbers for 2017. I do believe the sales growth, we can make that happen. In terms of what some of the, say, negative mix possibilities, I generally can't see those. Tom usually makes sure that I see them and points them out to me. I'll turn it over to Tom to do that part.
Well, you can go through the list that we had that added up to the 4%-5%. There are definitely, as Tim calls it, I call them now the decouplers. The connectivity, the software, those kinds of things definitely have attractive margins. There's other elements in that growth as well on the mechanical side, where we're getting onto new platforms, and the margin rates on those can, in part, offset the growth that we have elsewhere. For those reasons, I think we want to wait to see how 2016 plays out before we're committing to the 2017 margins.
I always say, Joe, that if your finance guy is an optimist, you're not going to make your numbers.
Fair enough.
[Chris Glynn]?
Tom, you arguably had a preponderance of green checks under the what changed column for 1Q 2016.
Yep.
Wondering to what extent you're tempted to say, hey, it's maybe game on for the global industrial cycle, or these are just a preponderance of circumstantials.
I think it's early. A good chunk of our business happens in March, and I'd like to see how March plays out and not read too much into what we've seen so far. I share your enthusiasm, Chris.
John Inch?
Dave, the messaging and the actions, right, in terms of connectivity and the software and the deals that you're doing, it's sort of apparent what you're trying to do, and it's going to come at a cost. You're pretty well known for holding the line in cost and census and other things. Yet keeping these thousands of software developers and all of the higher layer stuff possibly moves Honeywell to an era of where it's going to cost a lot more to retain these people. How are you going to manage that? How are you thinking about that, both in terms of being poached from other companies or playing in that realm? It's an exciting space, but it's also got some pitfalls.
How are you thinking about that personally, and how do you hold the line on what you've been so good at over the years, keeping these costs down as you're growing the rest of the enterprise?
Well, it helps that we've got about 12,000 of these software engineers already. We have some idea of what to do and how to do it. I think we provide a good work environment, and it's not just about comp. It's also about really impactful work stuff that you can do that is really going to make a difference in life and that you can see what it does for a company or for other people or for a customer. I think we've got a very good value prop when it comes to making sure that we hire and retain really good people. Like I said, we got almost 12,000 of them now, so we're doing something right. We know how to do this. It's just a matter of doing even more of it.
I'd add to that, John, if you look at our R&D spend over the course of the last, whatever, five, six years, including the customer-funded R&D, we've maintained approximately 7% of revenue, and that's with a revenue base that's growing. That's the one area where when we're doing our planning, I don't want to say it's sacrosanct, but it's one that we try and carve out and make sure we're allocating new investment to all the time. I wish I could say that for the finance costs and for the IT costs and for some of the other functional costs, but that's what makes us. Exactly.
He is definitely not a software guy.
Shannon O'Callaghan, right in the front.
Hi. A question for Tim. Can you explain the outgrowth you're expecting in avionics a little bit? I had the impression from you guys that you were maybe a little more interested in the mechanical side of things, given the aftermarket flow and that things, at least parts of the avionics, IMAs, displays, things, were not as important to you anymore. You've got these drivers to actually outgrow all your peers in avionics. Maybe just fill that out a little bit.
Yeah. If I in any way conveyed that I was not, or we were not interested in the avionics area and so on, then that was a misconception. That's not the case.
We are interested in where we provide a lot of value added. I think in certain areas, in the avionics area, things are commoditized. Our approach has been, for instance, in what goes into a display. I'll use a display as an example. Capturing the business of a display, to a great extent, is of limited value. What runs the display and what's the brains in the display, that's where the value added is, and we haven't lost any appetite for capturing that. If you think about value added to the aircraft, Bob touched on that's on one area, like displays could be an example where you look at it and say, the display itself, we're at a point of indifference as to whether we provide that, unless it's a really smart display.
In that case, we'd want to have the FMS system or the brains that are in the system, the integrated cockpit, to drive that display. On the other side, there's areas around where, for instance, a radar system that Bob talked about. We look at that and say, we'd really like to capture the entire business relative to the radar. We've pursued this pretty aggressively with Southwest on the RDR-4000 radar, because that fits into our strategy around providing a service across the entire value stream. There's a strategy that we have relative to weather. Radar fits into it.
We believe that we can create this value to the airlines to save them a lot of money and monetize that for us, relative to providing weather so that they can avoid bad weather, not only from a turbulence standpoint, but a direct cost to the airlines for that. Right? In that case, we see the mechanism is inseparable relative to the hardware and the brains that are in the radar, therefore we pursued that aggressively. You will see us, in some cases, be aggressive relative to something, but to a great extent, I'd like you to think in terms of it is what's inside that machine that's driving that we really want to win. Does that help? Yeah.
Howard Rubel, on the left.
Thank you. Dave or Tom, you've grown the dividend the last couple of years faster than earnings, you probably can do that for a while longer. How do you think about the trade-offs between doing that and the fact that money's cheap and it might make sense to let your businesses buy some more complementary businesses? I'll leave it there.
Far, I'd have to say we haven't been that influenced by the idea that money is cheap, because I think that's an easy way to end up borrowing more to do something silly. I know some of the people who've been advocating repurchases have used that argument with me, I've always said, "Nah, I only want to do it if I think it makes sense, regardless of whether it's 0.5% or 3%. I need to make sure that it just makes sense." We really haven't been that influenced by that. If we see really good businesses, we'll pursue that. If we think repurchases make sense, we'll do that. We did feel that something that made the stock more compelling was the idea of a dividend growth greater than earnings.
That's one of the things we did commit to for the 5 years, because we thought that was one that could help. We really haven't been that influenced by it at all. Tom, I don't know if there's anything you want to.
No, I think that hits. I can't recall a time where we had a choice between M&A and dividend. We've had the capacity to handle them both.
The ability to continue to grow the dividend faster than earnings, is there a point where you'll feel like the payout ratio is appropriate relative to peers, and that in and of itself will help drive the stock?
Yeah, I can't say that we've set a limit on it at this point, nor a number of years. We've just said, "Okay, for this five-year plan, this is what we're going to do, and we'll revisit when the time comes.
Cliff Ransom.
One of the things I have always felt was paying a competitive dividend was important.
This is the kind of question that always comes out kind of, when did you stop beating your wife? I always get a little nervous when companies say, "Well, we've had three unusual years of $1.1 billion in CapEx because we had programs to support." As a shareholder, when you're cash flow rich, why don't I want you to continue to be inventive on where you can spend money, particularly on internal activities where you probably have your best success rate and probably have your highest margins? When I look at a CapEx number that comes down that much, I'm going to ask, why aren't you finding things that were as attractive as the ones you facilitated in the last three years? Is that a fair question?
I think so. It might be one you want to have with a number of your colleagues, because.
Exactly
This is an interesting set of conversations where I know I've been in investor meetings where I've been pressed on why isn't free cash flow conversion above 100%? I'll say, "Because we're doing CapEx investments that are going to yield 30% and 40% IRR. You should want me doing this." They'll press on the free cash flow conversion. I'll say, "Okay, so instead of having 30% and 40% IRR projects with, say, a 90% free cash flow conversion, you would rather have me have 100% free cash flow conversion and invest in 15% IRR acquisitions." Which is generally what it comes to when you, say, talk about cash deployment, which, of course, makes no sense at all. Rather, if you have good projects, you should invest in them. We kind of hit this unique point with PMT, where we had four or five major projects that.
Just came up all at the same time.
Exactly.
You can't predict these things and say, all right, I'm going to do one a year and kind of spread them all out. At the end of the day, you got to get them done. If we had a bunch more of those kind of projects, yeah, we'd do them. Right now we don't. That's why we see us returning back to 100% in 2018.
Good. Last question from Julian Mitchell.
Thanks. Yes, I just wanted to follow up on the growth outlook for the next couple of years, because I guess the High Growth Regions share of total Honeywell sales is set to grow 600, 700 points, I think, the next three years. The last five years, it grew by about 300 points. It looks like the emerging markets are a very big part of that growth the next few years, and I just wondered if that was a sense of more market share gains there, more breakthrough technology advantages for Honeywell, or if it's just a macro difference in growth rates.
Yeah, I'd say all those things are true. Some of the markets are growing much better than others. This is where it helps to play everywhere. We're clearly being successful with our kind of becoming the Chinese competitor or the local competitor approach. Just having a lot more product that's compatible with the local market just makes a difference. You hear me say this a lot, the trick is in the doing. All the stuff that we talk about, becoming the Chinese competitor, HOS Gold, HUE, anybody can say that same stuff. It's a matter of how well do you do it, how well do you actually make it happen. I think we're doing a pretty good job of that.
I'd like to turn it back over to Dave for closing comments.
Well, thank you for joining us here today. Hopefully, you feel the same excitement we do about the future of our company. We've done a great job delivering for you for a lot of years, it's our intent to keep that going, not just this year, next year, the year after that, and the third five-year plan that we'll be issuing at some point. Thank you for joining us today.