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spk07: Thank you for standing by and welcome to the Honeywell Third Quarter 2023 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's call is being recorded. I would now like to hand the call over to Sean Mecham, Vice President of Investor Relations. Please go ahead.
spk05: Good morning and welcome to Honeywell's Third Quarter 2023 earnings conference call. On the call with me today are Chief Executive Officer Vimal Kapoor and Senior Vice President and Chief Financial Officer Greg Lewis. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information that may be of interest or material to our investors on this website. Our discussion today includes forward-looking statements that are based on our best view of the world and of our businesses as we see them today and are subject to risks and uncertainties, including the ones described in our SEC file links. This morning, we will review our financial results for the Third Quarter, share our guidance for the Fourth Quarter and full year 2023, and provide some preliminary thoughts on 2024. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to our CEO, Vimal Kapoor.
spk08: Thank you, Sean, and good morning, everyone. Let's begin on slide two. First off, we are saddened by recent events in the Middle East. We are deeply upset by the loss of innocent lives. Our number one priority continues to be safety and security of our employees and partners in the region and responding to their immediate needs. Coming to the Third Quarter, it was another strong quarter one for Honeywell in which we delivered all of our financial commitments. We delivered adjusted earnings per share of $2.27, two cents above the high end of our guidance range. That was up 1% year over year or up 7%, excluding a 14 cent non-cash pension headwind. Discipline execution of our rigorous operating principles in the face of ongoing macroeconomic challenges continues to serve us and our stakeholders well. Third Quarter sales were up 2% year over year, driven by double digit growth in our commercial aviation, defense and space, and process solutions. Our aerospace business continues to be a bright spot in our portfolio, driving meaningful commercial success. Our already robust backlog grew to a new record of $31.4 billion in Third Quarter, up 8% year over year and 3% sequentially due to strength in aero and other long cycle businesses. Orders grew double digit in the quarter due to tremendous demand generation in aero, where orders were up 30% year over year. Honeywell building technology and safety and productivity solution ended with quarter with flat year over year orders with book to bail off around one. An indication that we are seeing a short cycle end markets beginning to stabilize. Intelligrated was another positive indicator in the Third Quarter as we converted on a robust pipeline to drive double digit year over year orders growth and over 50% sequential orders growth. PMT was down mid single digits on unfavorable comparisons to last year's peak in advanced materials orders. Our segment margin expanded 80 basis point year over year, achieving the high end of our guidance range led by HPT up 110 basis point. We continue to see business mix improvement due to strong growth in our higher margin aerospace business as well as ongoing gains from productivity. Free cash flow was $1.6 billion in Third Quarter with over 100% cash conversion and 17% free cash flow margin in line with our expectations. Greg will walk you through the free cash flow drivers in more detail in few minutes. We remain committed to our capital deployment strategy and we put our robust balance sheet to work in the Third Quarter by deploying $2 billion to dividend, M&A, growth capex and share repurchases. We bought back 5.3 million shares in the quarter, reducing our weighted average share count to 667 million is step up due to highly attractive valuation and our ongoing confidence in Honeywell's performance. We remain on track with our commitment to deploy capital to higher return categories and generate compelling value for Honeywell's shareholders. As always, we continue to execute on our proven value creation framework, effectively managing through ongoing external difficulties and delivering on our commitment. Looking forward, our consistent adherence to our rigorous operating principles underpinned by our accelerator operating system, continued strength in our long cycle end markets and our technologically differentiated portfolio of solution should provide investors with comfort that we will remain highly resilient, perform in all economic cycles and drive shareholder value for years to come. Next, let's turn to slide three to review some of our exciting recent wins. Before I hand it off to Greg, let me briefly highlight some recent announcement that demonstrate our innovation across our portfolio. In Aero, we recently won a key new customer in the air transport space that will increase our APU and avionics installed based on roughly 200 new aircraft over the next five years. This win helps demonstrate the strength in our aerospace portfolio, regardless of the market conditions. In Energi Space, we announced a partnership with SK ENS to deploy our UOP carbon capture technology at a natural gas power plant in Korea. Our technology will help enable the capture of greater than 95% of the carbon dioxide produced in the plant. We remain excited about the win rates across our sustainable technology solution business as we help pave the way for the world's great energy transition. Finally, our force for building software was recently implemented in one Bangkok, the city's largest integrated district. This partnership with Frasers and TCC Technologies will foster an expanding adoption of our software offerings across business sectors as we support the achievement of sustainability goals. Our core focus as a company continues to be on aerospace, sustainability and automation. Our recent wins are closely aligned to these initiatives and are proof that we continue to drive innovation across our portfolio. We not only see profitable market outcomes, but also position Honeywell to address the world's toughest challenges. Now, let me turn it over to Greg on slide four to discuss our third quarter results in more detail, as well as provide our views on guidance.
spk15: Thank you Vimal and good morning everyone. As Vimal outlined, we delivered another strong quarter in a dynamic macro environment. Third quarter sales grew 2% organically led by double digit organic sales growth in commercial aviation, defense and space and process solutions. Commercial success in aerospace, which drove 18% year over year growth in the third quarter was once again a bright spot for Honeywell. Our short cycle businesses continue to show signs of stabilizing sequentially. Encouraging fundamentals persist across most of PMT's end market, which led to another quarter of 3% year over year growth, despite more challenging comps as we entered the second half. As expected, our long cycle warehouse automation business remains around trough levels, which led to overall bond decline of 1% for the quarter. However, excluding SPS volumes were up 6% across the portfolio. Our backlog remains at a record level, ending the third quarter at $31.4 billion up 8% year over year driven by double digit orders growth across our long cycle businesses. Sequential improvements in supply chain constraints led to past two backlog reductions in our short cycle businesses, while demand continues to outpace output in aero, a bullish signal of the underlying robustness of that business. And improving cost position and favorable business mix due to significant growth in our high margin aerospace business among others, enabled us to expand segment margins by 80 basis points year over year to .6% and achieve the high end of our guidance. On cash, we generated $1.6 billion of free cash flow, down 18% year over year due to the timing of cash tax payments and higher networking capital, a strong aerospace sales performance drove up our receivables balances year over year so we improved collections on our past two balances. Throughout this quarter, we accelerated our share buyback program more than doubling the amount of shares repurchased compared to the second quarter. We feel great about the future of Honeywell and believe in our next leg of transformation and we'll continue to opportunistically buy Honeywell shares at attractive valuations. Now let's spend a few minutes on the third quarter performance by business. Aerospace sales for the third quarter were up 18% organically with double digit growth in both commercial aviation and defense in space, the strongest growth quarter for aero in over a decade. Commercial aviation growth was led by strength in the air transport aftermarket where increased flight activity globally continues to drive demand. Commercial original equipment also grew in the quarter on increased deliveries to both business and general aviation and air transport customers. Defense in space sales inflected in three Q growing 18% organically and orders grew over 30% year over year for the second consecutive quarter as we see the impact of increased global focus on national security come through. While the aerospace supply chain remains constrained, we are continuing to see modest sequential improvements which enabled us to increase our output and convert our record backlog into sales growth. For example, this was the third consecutive quarter with a 20% year over year increase in original equipment and spare shipment. While these gains in output are encouraging and leading to sales acceleration, demand continues to outpace supply. This is evidenced by our aerospace book to bill of around 1.3 in the third quarter. Segment margins and arrows were flat year over year as increased volume leverage and commercial excellence offset cost inflation and mixed pressure in our original equipment as expected. Performance materials and technology sales grew 3% organically in the third quarter led by HPS, which saw double digit growth for the fourth consecutive quarter. Process solutions sales grew 11% organically driven by continued strength in our projects business and life cycle solutions and services. In UOP sales grew 6% organically led by gas processing solutions and petrochemical catalyst shipments. We continue to see robust demand in our sustainable technology solutions business within UOP as orders grew triple digits for the third consecutive quarter and sales grew at strong double digit rates. In advanced materials sales decreased 8% organically driven primarily due to the continued expected macro driven softness in our electronics, chemicals and life science businesses and challenging year over year comps. Sequentially segment margins expanded 40 basis points while on a year on year basis, segment margins contracted 50 basis points to .1% as a result of lower volume in advanced materials. Safety and productivity solutions sales decreased 25% organically in the quarter. Primarily driven by lower volumes in warehouse and workflow solutions and productivity solutions and services. The projects portion of our integrated business is around trough levels in the current low investment warehouse automation environment, but our pipeline remains robust and successful execution of our sales strategies resulted in double digit year over year growth and over 50% sequential growth in orders in the third quarter. Additionally, the aftermarket services portion of the business continues to deliver solid double digit sales growth. And productivity solutions and services, we're working through the effects of distributor destocking, but believe we are nearing the end of that cycle. Sensing and safety technologies was also impacted by short cycle softness, but this business continues to remain relatively resilient. Segment margin and SPS contracted 120 basis points to .5% as a result of volume de-leverage, partially offset by our continued operational improvements and commercial excellence. Turning to Honeywell building technologies, sales were flat year over year in the quarter. Our long cycle building solutions business continues to outpace our short cycle building products. Building solutions grew 4% organically led by high single digit growth in building projects driven by strong execution, particularly in energy projects. Orders for building projects were also substantial in the quarter up nearly 20% year over year and resulting in a book to bill ratio of approximately 1.2. On the product side, sales decreased modestly as a result of relatively soft demand for security products. Segment profit remained a bright spot for the business, continuing to grow as a result of productivity actions and commercial excellence. All in, HBT segment margin expanded 110 basis points to 25.2%. Growth across the portfolio continues to be supported by a creative results in Honeywell connected enterprise, providing further evidence of Honeywell's strong software franchise across our businesses. Overall organic growth of approximately 20% in the third quarter was supported by strength in connected industrial, connected buildings, cybersecurity and connected aircraft. Orders growth above 20% in the quarter remains a powerful indicator of the continued robust demand for HCE offerings. In October, we held the latest installment of Honeywell connect where we conducted 29 technology demonstrations to a group of 200 customers. We launched three new products, featured several product enhancements and showcase advanced intelligence solutions using AI and generative AI technology. One highlight from the event was the introduction of a suite of cybersecurity solutions, including Honeywell Ford's Cybersecurity Plus, Cyber Insight and Cyberwatch, supported by the acquisition of Skate Defense in August, leading to new sales opportunities in as early as the fourth quarter. Overall, this was a great result for Honeywell. Our operational execution enabled us to grow third quarter earnings per share to $2.27, up 1% year over year on an adjusted basis. Segment profit drove 15 cents of improvement in earnings per share, the main driver of our EPS growth. Excluding the 14 cent pension headwind, EPS was $2.41, up 7% year over year. A bridge for adjusted EPS from 3Q22 to 3Q23 can be found in the appendix of this presentation with all the details. Finally, as Vimal mentioned earlier, we continue to leverage our healthy balance sheet, deploying $2 billion in the quarter, bringing the year to date total to $5.7 billion as we execute on our capital deployment strategy. So overall, Honeywell's operating playbook continues to deliver strong results and our best in class Honeywell value creation framework will enable us to drive compelling growth and earnings and cash for quarters to come. Now let's turn to slide five to discuss our fourth quarter and full year guidance. At this stage in the year and given the incrementally more challenging macro backdrop with geopolitics and interest rate dynamics, we're narrowing our full year guidance ranges for sales and EPS while increasing the midpoints of our segment margin expectations. Our demand profile remains healthy with record backlog and favorable orders performance. While we continue to monitor the timing of short cycle recovery, we are confident in our ability to deliver on our commitments. For the fourth quarter, we anticipate sales to be between 9.6 and $9.9 billion, up three to 7% organically driven by continued strength in commercial aviation, defense and space, process solutions and UOP. We anticipate organic sales growth in Aero, PMT and HBT in the fourth quarter. For the full year, we're raising the low end of our previous sales guidance by $100 million and lowering the high end by 200 million for a new range of 36.8 to $37.1 billion, representing four to 5% organic growth for the year. This reflects continued solid execution in our long cycle business, while we awaited demand acceleration in some of our short cycle businesses. Turning the segment margin, we anticipate the fourth quarter to be between 22.9 and 23.2%, flat to up 30 basis points year over year and up sequentially as we continue to benefit from improving business mix and our productivity actions. For the full year, we are also raising the low end of our segment margin guidance by 10 basis points for a new range of 22.5 to 22.6%, representing 80 to 90 basis points of year over year expansion. This improvement is driven by HBT, SPS and PMT, which are all expected to expand margin. Now let me walk you through the expectations for each segment in a little bit more detail. Looking ahead for aerospace, we're very pleased with the continued improvements in the aerospace supply chain that are allowing us to capitalize on our record backlog. In 4Q, we anticipate another quarter of strong sales growth both year over year and sequentially in commercial aviation and defense in space. In commercial aviation, we expect most of the sequential growth to come through increased original equipment volumes, though commercial aftermarket will also deliver healthy year over year growth with demand driven by continued improvement in air transport flight hours. In defense in space, we are coming off back to back quarters of 30% plus orders growth, which has bolstered our already sizable backlog. And we see another quarter of double digit growth to end the year. With our growth momentum from the third quarter tearing over into 4Q, we now expect aerospace sales to be up mid teams for the year. With much of the incremental sales in this upgrade coming from increased original equipment shipments, as we capture a greater install base, we expect arrow margins to be flat to modestly down for the year. In performance materials and technologies, our strong execution and the encouraging outlook in our end markets will continue to drive favorable growth. For the fourth quarter, we expect our typical solid finish to the year, leading to year over year and sequential sales growth. Growth will be led by process solutions on strength and projects and aftermarket services. In UOP, our growth outlook is supported by robust demand for petrochemical and refining catalysts. The sustainability technology solutions business will continue to grow as we capitalize on legislation back demand. For advanced materials, we expect continued demand for fluorine products, a rebound in life sciences end markets, and an improvement in our electronics and chemicals business supportive of sequential growth. For the full year, we continue to expect high single digit sales growth in PMT. Due to typical catalyst seasonality, we still expect meaningful sequential and year over year margin expansion in the fourth quarter, resulting in modest segment margin expansion for the year for PMT. In safety and productivity solutions, our outlook continues to be impacted by the current low levels of investment in new warehouse capacity and distributor destocking. However, the impact on our financials is declining, creating stabilization and signs of potential return to growth in the coming quarters. For the fourth quarter, we expect these effects to lead to sales that are roughly flat sequentially, down organically, but to a lesser degree than earlier in the year. Orders will grow sequentially and year over year in the fourth quarter as we build on momentum from this quarter. While new warehouse investment remains challenged, customers continue to upgrade their existing infrastructure, which will lead to another quarter of double digit growth for the aftermarket services portion of our integrated business. For the full year, we now expect sales to be down approximately 20% as the SPS portfolio bounces along the bottom of the cycle. However, the productivity actions and operational improvements we have made this year will still enable us to expand margins solidly for the year. In building technologies, we were prudent with our posture at the start of the year as we face unprecedented central bank tightening cycle and uncertain demand environment. While the operating backdrop remains difficult, we are encouraged by the sequential orders progression we saw each month throughout three Q, including double digit products orders growth in the month of September. For the fourth quarter, we expect modest sequential sales improvement from our two Q and three Q levels, with growth continuing to be led by our long cycle building solutions business. The supply chain is improving each quarter, and we expect to make further progress on converting our past two backlog into sales. We're also encouraged by the resiliency we are seeing in verticals such as airports, government, and education, and expect institutional demand to provide support amid commercial softness. We project HPT sales to be up low single digits for the year with commercial and operational excellence, enabling HPT to be our largest margin expander in 2023. Now moving on to our other key guidance metrics, we anticipate net below the line impact to be between negative 105 million to negative $155 million in the fourth quarter, and between negative 525 and negative $575 million for the full year. This guidance includes a range of repositioning between 45 and $85 million in the fourth quarter, and between 260 and $300 million for the full year as we continue to invest in high return projects to support our future growth and productivity. We expect the adjusted effective tax rate to be around 19% in the fourth quarter and around 21% for the full year, unchanged from our previous guidance. We anticipate average share count to be around 664 million shares in the fourth quarter and around 669 million shares for the full year as we continue to reduce our share count through opportunistic buybacks. As a result of these inputs, we anticipate adjusted earnings per share to be between $2.53 and $2.63 for the fourth quarter, flat to up 4% year over year. Excluding pension headwinds, fourth quarter EPS growth would be up 6% to 10%. For the full year, we're nearing both ends of our EPS guidance ranges by 5 cents for a new range of $9.10 to $9.20, up 4 to 5% year over year, holding the midpoint of our prior guide. Excluding pension headwinds, EPS growth would be up 10 to 11% for the year. On cash, we continue to expect to meet our original free cash flow guidance of 3.9 to $4.3 billion in 2023, or $5.1 to $5.5 billion, excluding the net impact of settlements, driven by stronger collections and inventory management. Higher cash tax outlays in the third quarter will be offset by more favorable cash outlook in the fourth quarter, giving us confidence in our full year guidance. So to summarize, we're nearing our full year guidance ranges for sales and EPS while raising the midpoint of our segment margin expectations based on our confidence and the ability to successfully deliver results in a fluid operating environment. Before turning back to Vimal, let's turn to the next page and discuss our preliminary thoughts for 2024. While next year's environment is shaping up to be just as volatile as the last few years, our proven track record of navigating an uncertain macro backdrop should give investors confidence in our ability to execute on our commitments. We have a unique set of operating principles that enable us to move quickly and decisively to drive growth, protect margins, ensure liquidity, and position ourselves well to deliver in any environment. Our end market exposures remain favorable into 2024, particularly in aerospace and energy. We expect continued commercial aviation fleet growth and replenishment, increased domestic and international defense investment amid geopolitical uncertainty, heightened focus on automation due to labor scarcity, increased energy demands and intensifying decarbonization goals, accelerating the need for technologies enabling the energy transition and increased infrastructure spending. All of these compelling vertical tailwinds as well as ongoing customer demand to help enable digitalization, give us confidence that all four of our reconstituted businesses will deliver growth next year. The timing of an eventual recovery in short cycle is less certain and will be a swing variable to our sales outcome. We have a strong setup that will drive growth in sales, margin, and earnings in 2024 within our long-term financial framework. We expect organic growth to be led by our long cycle businesses due to record level demand and backlog in 2023. Additionally, our focus on new product innovation is yielding benefits. We believe extending our success in delivering new solutions to our existing vast install base as well as the commercial efforts driving greater penetration of our current set of technologies to new markets will help enable robust organic growth. That coupled with our ongoing leadership in high growth regions and the strength of our software franchise gives us confidence in the top line. We also expect supply chain to continue to improve gradually in arrows throughout next year. For overall Honeywell, 2024 margins will benefit from improving business mix, continued benefits from price costs and productivity actions including our precision focus on reducing raw material costs as well as implementing AI into our development and production. We will continue our investments in R&D and growth oriented capital expenditures and remain keenly focused on creating uniquely innovative, differentiated recession proof technologies to address the world's toughest automation, digitalization and sustainability challenges. While we expect our spend on repositioning to be relatively stable year over year in 24, we also anticipate modestly higher interest expense and lower pension income next year both driven by the acceleration and yields across the bond markets. We have seen since this summer. That will lead to slightly higher net below the line expense. We will provide more information about the year over year magnitude of these changes at year end when we snap the line on pension but we anticipate there'll be more in line with normal historical changes not last year's outsized impacts. As a reminder, pension income is a non-cash item given our overfunded pension status and will ensure no incremental contributions are needed. This is a great position to be in for our employees, both former and current and our shareholders. We expect our cash to grow in line or above earnings next year with improvement assisted by the absence of the one-time settlement from de-risking our balance sheet earlier this year, which had an outsized effect on our cash performance. We're also embarking on a multi-year online of the last two years of working capital buildup. We will continue benefiting from improved demand planning and optimized production and materials management using our enhanced -to-end process and digitalization capabilities through Accelerator. We see several compelling growth capital opportunities and expect to fund high return projects through disciplined capex spending in the coming years. Our balance sheet strength will continue to give us meaningful capacity for M&A and we expect an ongoing favorable deal environment going into 2024, which supports our intention to accelerate capital deployment. Now I'm gonna pass the call over to Vimal to say a few words about the announcement we made earlier this month on our portfolio and strategic priorities. Over to you, Vimal.
spk08: Thanks, Greg. Two weeks ago, we announced a portfolio reorganization that aligns our business with distinct, compelling mega trends that are shaping the future of our industries and our planet. These are automation, the future of aviation and energy transition and all are underpinned by our robust capability in digitalization. This realignment will enable us to have a simpler, clearer strategic focus and clearly define Honeywell's value proposition for our customers, investors and employees. We are an automation, aerospace and sustainability focused technology company. We believe this change will empower our business leaders to better prioritize R&D efforts, capital expenditures, M&A pipeline, -to-market strategies and more. It will also create a more focused framework for M&A, allowing us to pursue bolt-on acquisitions and select this position that aligns to our teams and enhance our portfolio. Overall, we have demonstrated the ability to operate under dynamic circumstances, including a global pandemic, large-scale supply chain disruption, heightened inflation, international trade disputes, unprecedented central bank tightening and geopolitical tensions. Underpinned by the strength of our differentiated accelerator operating system, we are confident that we can deliver strong financial performance in 2024. We will provide more specific inputs in our annual outlook call once we close out the year. Now let's turn onto the slide seven and I will close with some long-term comments. Let's take a minute to zoom out from the quarterly result. As a reminder, my priorities as CEO are first simplify the portfolio to better align with the key mega trend that I mentioned earlier. Next, I will drive accelerated organic growth by strengthening our innovation playbook, growing our sustainability and digitalization offering and maintaining our leadership position in high-growth region. On top of those organic growth efforts, I will manage the portfolio by enhancing our M&A capability, including staying disciplined and executing on bolt-on M&A aligned to these three mega trends. I also plan to advance the accelerator operating system to create more value through business model optimization. We continue to make progress on our long-term growth algorithm that we discussed during our main investor day. Our 2023 guidance represents another year of strong financial performance, consistent with our framework, following meaningful progress since 2017 through some very turbulent times. We'll continue to carefully track our progression towards achieving our targets and remain confident in our ability to accelerate growth, expand gross margin to about 40%, achieve 25% plus segment margin and generate free cash flow margins of mid-teens plus. I'm thrilled to lead Honeywell into the next phase of our transformation. And I'm optimistic about the tremendous opportunities we are uncovering to capture value, drive incremental sales growth, expand margins and generate more cash. And we'll continue to update you as these efforts increasingly transfer into enhanced financial performance. Now let's start with the slide eight for closing thoughts before we move into the Q&A. We delivered on all commitments in third quarter. We have and will continue to demonstrate resiliency while managing through a dynamic macroeconomic and geopolitical backdrop. Overall, demand generation remains strong, particularly in the long cycle businesses with orders up double digit year over year and record backlog levels will continue to support strong results. While we navigate an external environment that remains challenging for the short cycle. Our portfolio is aligned to powerful mega trends including automation, the future of aviation and energy transition all underpinned by digitalization. Our technologically differentiated portfolio of solution and our world-class Honeywell accelerator operating system will enable us to capitalize on these trends and drive the profitable growth we outlined in our long-term financial framework. We're expecting a strong finish to 2023 and well positioned for further growth in 2024. We look forward updating you on the progress as we execute on our commitment. With that Sean, let's move to Q&A. As a reminder,
spk05: Vinmal and Greg are now available to answer your questions. We ask you please be mindful of others in the queue by only asking one question. Operator, please open the line for Q&A.
spk07: As a reminder to ask a question, you will need to press star one one on your telephone. To remove yourself from the question queue press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Julian Mitchell of Barclays.
spk01: Hi, good morning. Maybe. Good morning Julian. Good morning. Maybe just wanted to start off with a question on the fourth quarter margin outlook. So I think you're looking at about 40 bips of margin uplift sequentially, 30% operating leverage sequentially. It looks like PMT perhaps is the segment where you're expecting a very big margin uplift. So just wondered if you could go into a little bit more detail around that. You know the margins have been down year on year, all year there. So just maybe help us understand what's really changing a lot in the fourth quarter to get that moving. And then just as a very quick follow up, HBT cross currents this year you've got a low base as we think about 24, but the interest rate environment is negative. So just confidence in HBT's growth ability looking out. Thank you.
spk15: Hey Julian, so I'll take the first one and I'll pitch it to Vimal for number two. So overall we've had a great year in margin expansion for Honeywell. And again we're looking to finish the year at the high end of our guidance range as you've seen. So I think we've continued to demonstrate our ability to drive margin expansion in any environment. As we look into Q4, as you said, we see a nice sequential improvement from Q3 to Q4 and some healthy margin expansion there as well. You know in PMT we talk about it often. The margin tends to be somewhat lumpy from any one quarter to the next. A big part of that of course is where catalyst shipments wind up during the course of the year and in which end market. And so as we go into Q4 for PMT, we have a pretty healthy UOP mix for sure. And we're seeing also some recovery from some of the challenges that we've had earlier in the year with operations in AM. So that's really the underlying theme for Q4. But we think the teams have done a great job and PMT is on track also to have a very nice year overall with high single digit, top line growth and some modest margin expansion. So we're pretty pleased with where we are going with that and maybe them all hand it to you on the HPT one. So Julian
spk08: on HPT I would say I'll spend a minute to kind of first go back to what our business model is before I kind of answer your question. I think there are three parts of our HPT business model. First it is 60% product, 40% solution and within 40% solution more than half is aftermarket. So by very mix it's a short cycle oriented business. The second point is the products we have, they are critical to the buildings and that's why they are higher margin. And that explains our constant margin improvement in the segment. And finally our exposure in buildings is combination of real estate but also infrastructure. And all that put together explains our results of 2022 where we grow double digits and this year we'll grow low single digits. To your question of 2024, we remain confident HPT will grow for our guidance. Our backlog is growing in our solution business. And of course the swing factor remains here the short cycle position. Great, thank you.
spk07: Our next question comes from the line of Steve Tusa of JP Morgan. Hey guys, good morning.
spk00: Hey,
spk02: good morning
spk07: Steve.
spk02: So some cross currents here at SP&S, I mean it's now down to like 10% of your profits. Things seem to be bottoming there but did the timing of those shipments can that business grow next year or should we kind of prepared for another down year there? Maybe if you could just like base out the expectations there for SP&S.
spk08: Sure Steve, so you're right, SPS is coming out of the bullpig effect of COVID and clearly that reflects in our Q3 numbers. But as you mentioned in our earlier conversation, the SPS orders in Q3, we had a book to bill of one and we see similar trends continuing in Q4 which means we are in a recovery cycle in this business moving forward starting Q4 and we'll see that in 2024. Margin expansion will certainly help there because the volumes growth will help in margin expansion. We have rebase in our cost base aligned to the new revenue scale. So overall we should see recovery from this point onwards.
spk02: Okay, so that's a growth business with some nice leverage next year is what you're saying.
spk15: I think Steve, the overall top line growth could be flattish next year, but as Vimal said with particularly as the short cycle accelerates, there's a lot of leverage in those short cycle businesses in particular. So we absolutely will do that, expect to see that come through and again on the integrated side, with the aftermarket growing far greater than the project business, we should see some nice mix in that direction. And then we'll see that happen in the aftermarket business as well. So the timing of that acceleration, as you've said overall still, is something that we're waiting to see happen, but we've flattened out, bottomed out the orders rate. So it should be coming anytime now and when it does, a lot of leverage comes along with it.
spk07: Thank you. Our next question comes from Scott Davis, Amelius Research.
spk03: Hey, good morning guys. Vimal, Greg and John. Good morning Scott. Hey, the world is kind of changing and volatile. China seems like it's taken another step down, but can you guys walk us around the world and what you're seeing from a geographic mix perspective and just a little bit of color on how things maybe change through the quarter or into 4Q from that front as well. And that'll be my question. I'll pass it on after that. Thanks.
spk08: Okay, thanks Scott. I would say you're absolutely right, Scott. There is a lot of variation how things are working in the world at this point. Let me start with China. We are gonna have high single digit growth in China this year. It's primarily supported by growth in Europe, but also in some other businesses too. We see China to be a similar trend, mid single digit to high single digit in 2024. We have enough backlog and strength in aero to support that. In other parts of the world, I would say, we see a lot of strength in Asia, in particular India and ASEAN countries. And Middle East also given a strong position in energy, positions us pretty well. And then Europe and US probably, we all see the impact of high interest rate and challenging environment. So probably we are experiencing the same here. So good balance of positive and negative. But one thing I like to add there is, as we see our backlog, which grew by 8%, we also see good orders position forecasted for quarter four. It's gonna position us pretty well for 2024 ahead in spite of the challenging condition, because we do expect our long cycle businesses are gonna have to drive in our, the forecasted range of revenue growth for 2024.
spk03: Thank you guys.
spk07: Thank you. Our next question comes from the line of Nigel Koh of Wolf Research. Nigel Koh, your line is open, please proceed.
spk12: Yes, sorry about that. I had my mute button on, sorry about that. Thanks for the question. So Greg, I don't wanna put words in your mouth, but I think I heard, do you see in 2024 as a sort of within the long term framework of four to seven, 50 base points of OM. Is that sort of what you meant based on what you see today? I understand a lot of macro-students out there. And if I could just clarify, the free cash flow growing in line with earnings, whatever that may be, should we add back the one time as this year as the base and then grow from there? Because obviously, $1.2 billion is a big number. And any thoughts on the pension headwind would be helpful as well.
spk15: Sure, sure. Yeah, so again, it's way too early for guidance, of course. We'll do that specifically in 90 days or so when we announce our full year earnings. So the comments we've been giving is that we see things within that long term framework. That's a reasonably good barometer for how we're seeing things at the moment. But again, 90 days from now, we'll know a lot more. In terms of the free cash flow, you're exactly right. We have $1.2 billion of settlements. That's obviously not gonna happen again next year. So that's a immediate add back to the base. And then from there, we expect to see free cash grow in line or maybe better with earnings. The maybe around that is really a matter of, we expect to start seeing the liquidation of our working capital. But we also have a very robust set of growth projects on capital. And so we're gonna be going through our budgeting process here over the course of the fourth quarter. And we may have some good things to put forth from a capex standpoint next year. So, but we feel really good about the progress that we're making in cash flow. Again, this quarter, very nice cash flow number, 100% conversion, 17% cash margin. So it made some nice progress. One other kind of good anecdotal point, we've started to see Arrow bring their days of supply down in inventory. So while the number in the aggregate's gone up, they're obviously growing the business in the high teams. But we are starting to see the efficiency and inventory show up. So that's really how we're thinking about it at this stage for next year. But we'll know a lot more in 90 days and be a bit more precise. And then on pension, could it be 50 or 100 million or even worse, we'll see rates move around a lot, as you know. And as I mentioned in my comments, we snapped the line at the end of the year, but it's trending to be lower income next year, but obviously nowhere near the kind of shock that we had in the 2023 change.
spk07: Thank you. Our next question comes from the line of Andrew Obin, of Bank of America.
spk06: Yes, good morning.
spk03: Good morning, Andrew.
spk06: Yeah, just a question on advanced materials. I think it was a little bit weaker than we expected. I think you said softness in electronics, chems and life size drove the declines. I think last quarter you highlighted electronics and chemicals. Just wanna understand what the changes are, because I think before you were saying that electronic materials should improve in the second half, just, right, I know it's a high margin business, just what has changed and how does the business look into year end and maybe what kind of momentum you have into next year. Thanks so much.
spk08: Yeah, thanks, Andrew. Look, I would say in AM, the fluorine products, the business of salt states is doing extremely well, continues to grow as its applications keeps growing, its geographic spread keeps growing, so that's very positive. Electronic materials have definitely bottomed out. We have seen signaling of recovery from the CREES fab manufacturer, and part of that is seen in Q4, not as good as we'd like it to see, but we are seeing signals of recovery in the electronic side. And there are parts of chemicals which are weak, which is affected in our overall revenue. And like any other short cycle, we expect it to recover, aligned with the economic conditions there. But I must say that our conviction in the business is very strong. We had outstanding years in 2021 and 2022, and this year should be seen in comps too, the past two years.
spk07: Our next question comes from the line of Sheila Kialu of Jeffreys.
spk09: Hey, good morning, everyone. Thank you. I wanted to ask about- Hey, Sheila and Sheila. Hi, I wanted to ask about aerospace, please, and specifically defense and space, great growth in the quarter of 18%. What are you seeing from a bookings perspective there, the sustainability of demand with everything going on, and how does defense factor into aeromargin mix? Thank you.
spk08: Thanks, Sheila. I think one of our headline of our Q3 is in aero and within aero, the defense and space. Our bookings continue to be strong. Q3 was a strong booking quarter, so was Q2. And that's driven by not only the US domestic bookings, but also international defense markets opening up. And we clearly see reflecting that in our booking rates. The revenue growth is driven by supply chain actions, which are now being seen in defense also. And we expect the continued growth in the defense segment in quarter four and 2024 ahead too. So punchline is that defense is gonna become a contributing factor in the continued aero growth, given the overall geopolitical conditions in the world.
spk05: Great, thank you. Sheila and Sean, on aerospace margins as it relates to defense and space, it's not a material drag on our margins. So that growth there is gonna be not materially different than the overall margin rate. So we find that to be, that growth to be quite nice to segment profit growth.
spk07: Thank you, our next question comes from Jeff Sprague of Vertical Research.
spk14: Hey, thank you, good morning, everyone. Good morning, Jeff. Good morning. Hey, not to get too tied up in arcane pension accounting, but did you guys change something, you know, in pension to mitigate the impact, the interest rate changes? Certainly nice to hear the headwind is that modest, but my rough math would have maybe suggested a bit more. And then maybe just to add another part, then when you touched on advanced materials a little bit in a previous answer, but can you give us a little bit of color on how you see the 410A to 454B transition unfolding, what's happening to 410A prices and availability and where you stand competitively as these OEMs are making the shift? Thank you.
spk15: So maybe I'll hit the pension one first. So no, Jeff, we haven't changed anything in our accounting. We'll do our normal mark to market in the fourth quarter as we've done for many years now. And again, what I mentioned, 50 to $100 million is a range. We'll see how the final numbers pan out with discount rates and returns on assets for the asset basis themselves. So nothing different. And we'll give you a more precise answer after the turn of the year when we snap the line.
spk08: Jeff, on advanced material, I would say pretty fascinating to see how this changeover is happening between SALT-SITs, 410A and 454. We are working with all key OEMs for several years. This is not a new dimension for us. We have been on it for last several years and we see the switchover happening from 410 to 454 in the times ahead. And we have secured our position with the key OEMs. So I would say for us, I would call it like business as usual because this is something which is part of our business and we were ahead of the game here to look ahead and think about its implication on us and we are well covered on that.
spk07: Thank you. Our next question comes from the line of Nicole deVleis. I'm from Deutsche Bank.
spk10: Yeah, thanks. Good morning, guys.
spk07: Hey,
spk08: Nicole. Nicole, good morning.
spk10: Can we double-click a little bit on what you guys are seeing with respect to channel inventory reductions within HBC and SPS? Where are we in that inventory de-stocking process? And do you think we will enter 2024 in a pretty clean position with respect to channel inventories?
spk08: Nicole, we have, I would say, the channel inventory is reflected in our orders rate. Our orders rate for both buildings and SPS had a -to-bill of one last quarter and the similar trends are persisting so far in October, which tells me that we are on a path of slight recovery and that's the indirect measure for me on channels that are looking at stocking back again from the cycle. So, and we expect short cycle to slight recover progressively every month moving forward, but not as fast as we'd like it to be at this point.
spk07: Thank you. Our next question comes from the line of Dean Dre of RBC Capital Markets.
spk13: Thank you. Good morning, everyone.
spk08: Hey, Dean, good morning.
spk13: Hey, on HBT, you called out cost inflation headwinds. Could you size that and what kind of pricing actions have you taken? And then on the verticals, airport, government and education, how has government stimulus, has that started to come through and are you benefiting there? Thanks.
spk15: Yeah, hey, Dean, we don't disclose our individual segments, you know, price cost, but if you recall, I mean, we've mentioned that we're gonna retain our price cost positivity and we've done that inside of HBT, you know, throughout the course of the year. So, you know, you see the numbers for total Honeywell, you know, I think we're within our zone that we had guided from a pricing perspective, it's probably gonna be, you know, 4% for the year across the total portfolio. Maybe I'll pass it to Vimal on the other side.
spk08: So, we do get, I would say, benefit of different government stimulus programs. The recent one being around, I would say, chipsack semiconductor activity in US. The proposal activity there is strong and hopefully we'll win enough to see the benefit of that in the times ahead. Or I must also point that we also see heightened infrastructure activity outside US, specifically in high-growth regions. One of the strengths of HBT businesses, very strong footprint in high-growth regions, China, ASEAN, Middle East, India, et cetera. And there the activity on infrastructure built out is pretty strong, which is gonna help us in building out our backlog, specifically long cycle. So that's how we see those dimensions in the business.
spk07: Thank you. Our next question comes from Joe Ritchie of Goldman Sachs.
spk04: Thanks, good morning, everyone. Hey, Joe. Good morning, Joe. My, hey guys, my one question is just on orders. So nice to see the inflection versus what you'd experienced last quarter. I think Aero was the only segment that grew last quarter. I didn't hear the commentary on PMT, so if I missed it, my apologies. But what were orders like in PMT this quarter, or maybe specifically for HBS and UOP?
spk08: Yeah, so here to date, I would say the orders rate in UOP and HBS are pretty strong. And we expect to finish very strongly for both the businesses in 2023 and carry forward a good backlog for 2024. The wins are driven by multiple end markets in HBS. And UOP is certainly benefiting from strong demand of catalysts, but also now strong demand coming from sustainable technologies. Our sustainable technology business is growing at triple digit rate, as we had anticipated. And all that is really adding up for strong performance of UOP for 2023 orders.
spk07: Thank you. Our next question comes from the line of Andrew Taplowitz of Citigroup. Hey,
spk11: good morning, everyone. Good morning, Andrew. So I know you're expecting a nice uptick in PMT margin in Q4, but as you've got it this year, PMT margins tended to be a bit muted for the year. So maybe conviction level that it does jump into Q4. And then I know you're moving HBS over, but pro forma, do you see PMT as one of the better margin performers in 24?
spk15: So in terms of conviction level is high. I mean, I feel pretty strongly about the PMT team's ability to perform here. Again, we're not at a place where we're giving guidance ranges for next year. For any given segments, I expect the PMT business as currently constructed. We expect accretion next year as well, but we're not gonna get into any specific guidance ranges around that at this moment. But our conviction level is high. The team is delivering. They've taken all the right actions in each of the three businesses. And as we said, with a nice mix going into Q4 on catalysts, we expect to be able to deliver the margin accretion in Q4.
spk07: Thank you. I would now like to turn the call back over to Vimal Kapoor for closing remarks.
spk08: Thank you. Our value creation framework is working. While the macro economy remains challenging and the timing of a short cycle acceleration is uncertain, we are deploying our rigorous operating playbook to navigate near term volatility. We are confident in our ability to weather near term challenges and meet our performance targets underpinned by ongoing strength in our two biggest end markets, aerospace and energy, combined with the operating rigor you have expected from Honeywell. Thank you all and our Honeywell colleagues who continue to enable us to outperform in any environment and drive differentiated performance for our customers and shareholders. Thank you all for listening and please stay safe and healthy.
spk07: This concludes today's conference call. Thank you for participating. You may now disconnect.
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