Honeywell International Inc.

Good day ladies and gentlemen and welcome to Honeywell's fourth quarter earnings and 2019 Outlook Conference Call. At this time all participants have been placed in a listen only mode and the floor will be open for your questions following the presentation. If you would like to ask a question at that time please press star 1 on your touch tone phone. If at any point your question has been answered you may remove yourself from the queue by pressing star 2. Lastly, if you should require operator assistance please press star 0. As a reminder this conference call is being recorded. I would now like to introduce you to your host for today's conference, Mark Macaluso. Please go ahead Vice President of Investor Relations.

Thank you Marguerite. Good morning and welcome to Honeywell's fourth quarter 2018 earnings and 2019 Outlook Call. With me here today are Chairman and CEO Darius Zdomchick and Senior Vice President and Chief Financial Officer Greg Lewis. This call and webcast including any non-GAAP reconciliations are available on our website at .honeywell.com forward slash investor. Note that elements of this presentation contain forward looking statements that are based on our best view of the world and of our businesses as we see them today. Those elements can change and we ask that you interpret them in that light. We identify the principal risks and uncertainties that affect our performance in our annual report on Form 10K and other SEC filings. For this call references to adjusted earnings per share, adjusted free cash flow, and free cash flow conversion and effective tax rate exclude the impact from separation costs related to the two spinoffs of our homes and transportation systems businesses as well as pension -to-market adjustment and U.S. tax legislation except for otherwise noted in 2018. With regards to 2019, references to adjusted free cash flow guidance and associated conversion on this call exclude impacts from separation cost payments related to the spinoff. This morning we will review our financial results for the fourth quarter and full year 2018, share our guidance for the first quarter of 2019, and discuss our full year outlook. As always we will leave time for your questions on the end. With that I will turn the call over to Chairman and CEO Darius Adamczyk.

Thank you Mark and good morning everyone. Let's begin on slide two. We're extremely pleased with our results in 2018. We made progress both from a portfolio and financial perspective, continued smart investments in our businesses and our people, and took steps to position the company for the next 20 years. This quarter we successfully completed our second spinoff of the year of Residio Technologies launching our New York Stock Exchange in October. We also continued to advance our software strategy while growing our core businesses in attractive end markets. Most importantly, consistent with what we've done all year, Honeywell delivered on its commitment to our share owners. We met or exceeded our financial commitments on all metrics, delivering adjusted earnings per share of $1.91 in the fourth quarter, driven by 6% organic sales growth and 80 basis points of segment margin expansion. We continue to see strength in our long cycle businesses, most notably in commercial aerospace, defense and warehouse automation, where our integrated business is a global leader. Furthermore, we are aggressively planning and mitigating the impacts of the tariffs dispute in all of our businesses as evidenced by the strong margin expansion we generated this quarter. Based on what we know of today, we do not expect any material impact or results in 2019 related to tariffs. For the full year, we achieved 100% free cash flow conversion and 105% conversion in the fourth quarter. We generated over $6 billion of free cash flow for the year, excluding spin cost payments of 22%, even after spinning nearly 20% of the company in the fourth quarter. This was principally driven by profitable growth, higher net income, and continued efforts to free up working capital, all the while funding smart growth investments through $800 million of CAPEX. Our free cash flow's percent of sales is the highest it's been in at least 15 years, and we expect it will continue to grow from here. Importantly, our U.S. pension is funded at over 105%, and we do not expect any cash contributions in the near term. The financial health of this company heading into 2019 is as strong as it's ever been, and we still have ample resources to deploy. Lastly, we continue the steady cadence of capital deployment with an additional $1.7 billion of Honeywell share repurchases in the quarter, bringing the full year total to approximately $4 billion. As a result, and now expect the fully diluted share count to be down at least 3% in 2019 based on our plan to reduce share count by at least 1% from 2018. As we continue to return cash to our share owners through $2.3 billion in dividends, following another double-digit dividend increase in 2018. This was a particularly good year for Honeywell. We have a simpler, more focused portfolio after the spins, and continue to execute on our initiatives as we look to the future. We see strength across several end markets and have significant balance sheet capacity to deploy. And while we're not planning for recession 2019, we are taking steps now to ensure we delve on our commitments in an uncertain economic environment. Let's turn to slide 3 to review some of the progress from last year. As I mentioned, we took significant steps through 2018 to transform the business. One of my key priorities from the outset was to accelerate organic growth. As you've seen by results, we're making good progress on this front. We're encouraged by the fact that nearly 60% of the portfolio grew, sales 5% or more organically for the full year of 2018, with several businesses growing above 10%. With the spin-offs complete, we now operate a more focused portfolio with a smaller number of attractive end markets. Portfolio optimization is central and will continue to be part of Honeywell's operating system. We plan to continue effectively deploying capital by funding high-return capex and returning capital to shareholders through dividends and share repurchases. We have had nine consecutive double-digit dividend increases since 2010 and still have a strong and flexible balance sheet and the ability to deploy over $14 billion of cash to M&A, capex, dividends and share repurchases. The combination of strong sales growth, favorable end market exposure and significant balance sheet capacity positions as well as we head into 2019. We are now on slide 4. As I mentioned, continuous transformation is part of Honeywell's operating system. On this slide, we highlight three key transformation initiatives to establish Honeywell as a premier technology company for the future. Earlier this year, we established Honeywell Connected Enterprise or HCE, which is a strengthened and centralized organization that will serve as a software innovation engine for all of Honeywell. HCE operates with speed and agility of a startup, working close to our businesses and our customers across the entire portfolio to build the world's best software solutions rapidly and efficiently on a single platform. Our transformation to a premier technology company will require us to look beyond just spin-offs. Our Chief Supply Chain Officer, Torsten Pils, is leading Honeywell's efforts to improve our supply chain and optimize our global footprint. You see a lot of opportunity here to drive margin expansion and operational efficiency and you'll learn much more about this from Torsten at our annual investor conference in May. We are making similar enhancements on our capabilities internally with Honeywell's digital initiative. This requires people, process, data and technology elements to come together, which will allow for more effective and efficient decision making throughout Honeywell. This effort includes a continuation of our progress to centralize ERP systems. Thus far, we have eliminated 35 unique systems in 2018, going from 106 to 71, and we're on path to just 10 ERP applications by the end of 2020. The result will be consistent processes and centralized data governance with a common IT foundation. As you can see, we have achieved a lot this year and continue to redefine the limits on what Honeywell can achieve to be the best positioned multi-industrial company for the future. Let's turn to slide 5 to briefly review progress against our key priorities. I laid out my key priorities for the company in 2017. Since then, we've continued to foster a cultural ven-honeywell of doing what we say, or as we call it, the say-do ratio. As you stack the results against our long-term commitment, you can see we're clearly making progress and in some instances achieving milestones sooner than we thought, such as with our organic sales growth and free cash flow conversion. We're accomplishing these objectives while making smart investments for the future through CAPEX, restructuring and research and development. Our software businesses grew in the mid-teens range last year on a path to the 20% long-term compound annual growth rate we anticipate. We've taken steps to unify and strengthen our software strategy through our Honeywell-connected enterprise and continue to invest in software development, sales and marketing capabilities and build out of the sentience platform. In 2018, Honeywell Ventures made five investments, including in software robotics, a developer of automation solutions and software robotic gripping systems that can grasp and manipulate items of the same dexterity of the human hand, and in IOTM, a managed secure network infrastructure platform for the industrial Internet of Things that primarily serves building technologies and industrial customers. We also completed two bolt-on acquisitions totaling roughly $500 million. Artlof Engineers is a privately-held licensure and industry-leading developer of specialized technologies that drive high returns in natural gas processing and sulfur recovery. This complements our existing UOP offering, which allows us to better meet customer needs for high-recovery, non-gas liquid extraction plans globally. TransNorm, now part of Safety and Productivity Solutions, is a global leader in high-performance conveyor solutions that are used in divers and markets such as parcel delivery, e-commerce fulfillment and airports. The acquisitions strengthen Honeywell's warehouse automation portfolio and positions the company to support the growing European e-commerce market while broadening Honeywell's connected distribution center and aftermarket offerings. I'll stop there and turn the call over to Greg, who will discuss our fourth quarter results and 2019 outlook in more detail. Thanks, Darius, and

good morning, everyone. Let me begin on slide six. As Darius mentioned, we finished 2018 very strong in every financial metric. Organic sales growth for the fourth quarter was 6%. We have been at or above 5% every quarter this year. This reflects our continued commitment to customer excellence, new product development, as well as our realization of benefits from the investments we've made in our sales organization and new product development process. We generated approximately $2 billion of segment profit in the fourth quarter, driven principally by higher sales volumes with segment margin expansion of 80 basis points. The impact in the spinoffs of lower margin businesses, net of acquisitions contributed 30 basis points, while the core business generated 50 basis points expansion. Pricing and productivity was strong, which enabled us to effectively mitigate the impact of material and labor inflation. We also sought continued benefits from previously funded restructuring. Adjusted EPS was $1.91, up 12% versus prior year, excluding the spins, which exceeded the high end of our guidance range by one penny. The adjusted EPS figure excludes both the impact of an approximate $435 million favorable adjustment to the 4Q17 tax charge and $104 million in spin-related separation costs. At the Outlook call in 2018, we estimated that separation costs for the two transactions would be in the range of $800 million to $1.2 billion. I'm very pleased to report that the total separation costs for both spins came in lower than this estimate at $730 million, which demonstrates our ability to effectively execute complex transactions both ahead of schedule and below budget. We also recorded $300 million in repositioning charges in the quarter to fund future productivity and stranded cost reductions. Share buybacks totaled $4 billion in 2018 and drove a six-cent benefit from lower share count in the quarter. You can find a bridge to the fourth quarter adjusted earnings per share in the appendix of this presentation. Finally, working capital improved 0.6 turns year over year. Our businesses are all focused on improving working capital, and we continue to see progress on our initiatives with room to free up more cash for capital deployment. Now, turn to slide seven and review our segment results. Our aerospace business continues to perform extremely well in a robust demand environment, capping off a strong year of near double-digit organic sales growth. In the fourth quarter, we generated 17% organic growth in defense and space, with double-digit growth in both the US and international businesses, led by global demand for sensors and guidance systems, original equipment shipment volumes, and higher spares volumes on US Department of Defense programs. We also saw growth in our space business driven by new satellite program wins and commercial helicopters driven by repair and overhaul demand. In commercial OE, sales were up 8% organically, with increased HTF engine demand for Gulfstream and Textron Longitude platforms and higher aviation ship set volumes, driven primarily by the certification of the Gulfstream G600. Aftermarket growth was strong in all businesses, including defense, driven by increased demand for avionics upgrades, both software and hardware, navigation products, and safety mandates. Our connected aircraft offerings continue to gain traction, driven by go direct cabin tail capture and robust jet wave demand. Turning to Honeywell Building Technologies, organic sales growth was 1% driven by continued demand for commercial fire products in North America, Europe, and our high-growth regions. Building Solutions projects growth was also strong, particularly for international airports. The HBS projects backlog is up 15%, setting up a strong 2019 as we continue to expand in critical infrastructure markets like airports, cities, and stadiums. These gains were offset by declines in our China air and water business and temporary supply chain challenges within our building management systems business. We expect the air and water business to recover in 2019, driven by new product introductions for the mid-segment and stronger demand as inventory levels normalize after a challenging 2018. In December, the supply chain issues within building management systems began to stabilize, and we expect continued improvement in the first half of 2019. HPT also benefited from one month of single-digit organic sales growth from the former homes and distribution business, driven by strength in both products and ADI global distribution. As a reminder, the results for HPT exclude homes and distribution after October. In performance materials and technologies, sales were flat on an organic basis. Sales in UOP were up 2%, driven by ongoing strength in licensing and engineering sales, but were offset by an expected decline in gas processing, which was driven by an extremely strong fourth quarter in 2017. Process solution sales were up 1% organically, driven primarily by a strong demand in our software maintenance and migration services and field devices. This was offset by declines in large project activity and in smart energy and thermal solutions, both shorter cycle businesses, due to supply chain challenges. Notably, we continue to see solid trends within the automation businesses of Process Solutions, with total orders up double digits and short cycle backlog up over 30%, suggesting that oil price volatility in the fourth quarter may have temporarily delayed customer investment decisions. Advanced materials sales were down 3% on an organic basis, as continued strong demand and adoption of our Solstice line of low global warming refrigerants, which was up 5%, was offset by declines in specialty products, particularly in our electronic materials business, which is in the semiconductor space, as you know, and tough comps associated to the fourth quarter of 2017. PMT segment margins expanded 200 basis points in the fourth quarter, as expected, driven by the timing of catalyst shipments within UOP, commercial excellence, and the benefits from previously funded repositioning. Now turning to the safety and productivity solutions business, that continued to perform at a high level, with organic sales up 15%, driven by broad-based strength across all lines of business. Double digit organic growth and IntelliGRADE continued, as orders for major systems and robust backlog conversion fueled by e-commerce drove strong results. We also saw double digit growth in our sensing business and continued strength in our productivity products business, driven by demand for Android-based mobility offerings and handheld printing devices. In total, organic growth in our productivity solutions segment was up 23%. Moving to safety, the safety business sales grew 5% organically, led by ongoing demand for gas products and strong growth in retail footwear associated with the holiday season. Finally, we continued to see strength in our businesses across high-growth regions. In China, SPS grew double digits with robust growth across industrial safety, productivity products, and SIOT. Excluding the ongoing softness in air and water, HBT also grew double digits in China. For all of Honeywell, China was up 9% organically for the full year. In India, our capabilities and strength provided exceptional growth in the fourth quarter, greater than 25% over prior year. This was driven by our building and process solutions businesses. We continue to see positive macroeconomic trends in the Middle East, which supported growth across all businesses, with three segments growing double digits organically compared to the prior quarter. Now with 2018 in the rearview mirror, let's move to slide 8 and discuss our 2019 outlook. We have a reliable playbook at Honeywell and it's not changing for 2019. Our focus on smart growth investments, breakthrough initiatives, and new product development, coupled with productivity rigor and the benefits of funded repositioning, has positioned us well for continued outperformance. For 2019, we anticipate an organic sales growth range of 2-5%, the low end of which reflects the possibility of some economic slowing, but not a recession in 2019. Segment margin expansion is expected to be 110 to 140 basis points, or 30 to 60 basis points excluding the impact of the spinoffs. This will drive earnings per share growth of 6 to 10%, excluding dilution from the spins in 2018. We expect to generate adjusted free cash flow conversion near 100%, consistent with 2018, driven by high quality income growth and continued working capital improvements across the portfolio. We are confident in our businesses in the year ahead, supported by positive long cycle orders and backlog trends exiting 2018. We have put forth a strong plan with multiple cost levers to pull in the event the recent volatility in the macro environment persists. As Darius mentioned in his opening, we don't expect a significant impact in 2019 related to tariffs. We have worked very hard to mitigate that across the year for 2019, including addressing the potential impact of the still unannounced list 4, which contemplates 25% tariffs on all remaining items reported from China. We will continue to monitor this throughout the year and react accordingly as we did in 2018. Some other items to take note of related to our 2019 plan. We are on track to slightly ahead of our plan to eliminate all stranded costs in 2019 related to the spinoffs, with a literal over half the costs removed to date. We see the impact of these costs primarily in the net corporate cost line and in the segment margin in Honeywell Building Technologies. Also based on the plan reduction in pension income driven by discount rates and assumed asset returns, as well as lower repositioning and other charges driven by the spin indemnity, our total net below the line charges are expected to be approximately $80 million in 2019. We will see continued benefits from planned and executed share repurchases. Our 2019 plan assumes a weighted average share count reduction of about 3% year on year or 730 million shares. This is based on the 2% share count reduction we executed from 2018 repurchases and at least 1% additional reduction in 2019. You'll find additional details on our 2019 plan inputs in the appendix. Based on what we can see today, we expect to be at the upper end of our sales guidance range for organic growth. However, given the many uncertainties in the macro signals, we're planning cautiously in 2019 overall, as it's difficult to predict short cycle revenues, particularly in the second half of the year. And remember that is still approximately 60% of our business. Let's turn to page 9. We provided an initial assessment of our end markets and anticipated organic growth rates in each for 2019. The green arrows are an indication that we expect market conditions to improve, while the gray flat arrows indicate that we expect market conditions to remain relatively similar to last year. Starting with aerospace, we expect organic sales to be up strong mid single digits for the year. We continue to see a robust demand environment in both commercial aerospace and defense. In air transport, we expect continued growth in narrow body production rates. We forecast new business jet deliveries to increase 8 to 10% in 2019, supported by several new aircraft models entering into service, a decline in young used aircraft inventories, and stable used jet prices. Our long term strategy of securing good positions on the right platforms and building our installed base will service well in 2019, particularly with new business jet platforms where we are well positioned from an OE standpoint. Mid single digit flight hours growth will continue to drive aftermarket demand and we tailwind from the ADS-B compliance mandate deadline, along with increased demand for connected aircraft solutions across all products. The industry dynamics and defense will be positive in the US and internationally driven by budget growth, but we are planning conservatively for 2019 given the tough year over year comparisons following 2018's banner year where we grew 15% organically in the business. With the favorable margin rate uplift from the former transportation system spin, you should expect segment margins of approximately 24% for the aerobusiness going forward. Now on to HBT. As a reminder, following the spin of our home service portfolio, HBT's primary exposure is to non-residential construction. Here we anticipate low single digit organic sales growth after a challenging 2018, driven by better execution in our operations, better selling strategies and sales coverage, and new product introductions. We expect commercial fire will continue to be strong with the expansion of sales coverage and share gain and commercial security to improve with the expansion of our channel partner network. The declines we experience in our China-based air and water business should subside through a combination of stronger market demand and new product introductions for the mid-segment and mass mid-segment. Globally, we see building management solutions growth in both hardware and software, driven by high growth regions expansion and our investments in software. Honeywell building solutions growth will be driven by government investments in smart cities, social infrastructure, and airport modernization and capacity enhancement, particularly in high growth regions. We also expect continued adoption of connected building solutions on a global basis. You should expect to see margins in the range of about .5% in HBT after the spin-off of homes. For PMT, sales are expected to be up low single digits plus on an organic basis, and oil and gas petrochemical market growth should remain steady at about 4%, driven by demand for packaging and plastics. However, given the volatility in oil prices in the second half of 2018, investments in global megaprojects slowed, and we see the oil price volatility potentially putting some pressure on upstream spending plans in 2019. Nevertheless, we anticipate similar market dynamics overall for 2018 and the basis for our plan is that oil prices remain in the low to mid-60s per barrel. The refining market should continue to be strong as global demand for cleaner transportation fuels remains. The U.S. natural gas market, which is primarily served by our UOP Russell business, is expected to improve from 2018. UOP is expected to deliver a strong year driven by its strong backlog, licensing, and services growth, and improve market demand and gas processing after a tough 2018. Process solutions will continue to grow across its short cycle businesses, as we saw in 2018. This is supported by short cycle backlog, which was up over 30% at the year end. Finally, within advanced materials, we expect continued growth from Solstice and our Florian Products business, and better execution in specialty products. Lastly, in SPS, sales are expected to be up in the mid-single digit range. We expect the strong e-commerce and warehouse distribution macro trends to continue as our customers seek and implement differentiated warehouse solutions to deal with rising demand. Our orders and integrated in 2018 were up over 30% for the year. In the safety business, we anticipate growth will be driven by new product introductions within gas detection, growth in our core product lines and high-risk personal protective equipment, and new product launches in general safety. In productivity, we expect strong growth driven by backlog conversion in IntelliGRADED and our sensing business, new mobility product introductions, and expanded software offerings. We are also seeing growth in our lifecycle service offerings in IntelliGRADED, which includes maintenance, technical support, and optimization services. That is combined with the aftermarket capabilities we acquired with TransNorm. Now let's move on to slide 10. Here you can see the bridge of our 2018 adjusted earnings per share to 2019. The SPIN impact, which we define as the after-tax segment profit contribution from the SPINs in 2018, nine months of transportation systems, and 10 months of homes. Net of the estimated impact of the SPIN indemnity, assuming that it was in place all year for 2018, will be a 62-cent headwind to earnings in 2019. As you can see, the majority of our earnings improvement, 30 to 60 cents per share, will again come from operational gains in our businesses driven by profitable growth, continued productivity improvements, and incremental benefits from previously funded restructuring. You can see the remaining impacts from the share count, -the-line items, and tax rate I have already touched on will contribute approximately 11 cents per share. Now let's move to slide 11 to discuss our first quarter guidance. For the first quarter, we expect to generate 3 to 5 percent organic sales growth, driven principally by healthy growth in our long-cycle businesses, with a more cautious tone towards short-cycle, given the market volatility exiting 2018. With that said, we do anticipate that the commercial aftermarket, our sensing business and productivity products, and commercial fire products will continue to be strong on the short-cycle side. We expect segment margins will expand 30 to 60 basis points, x the spins, consistent with our long-term framework, and 110 to 140 basis points on a reported basis, aided by 80 basis points of margin accretion from the absence of the two spins. Our expected adjusted earnings per share range of $1.80 to $1.85 represents growth of 6 to 9 percent x spins. We have 25 cents of earnings dilution from the spins in the first quarter of 2018. Our guide is based on an effective tax rate of 22 percent and a weighted average share count of 737 million shares for the quarter. We feel this will be a very strong start to another successful year for Honeywell in 2019. With that, I'd like to turn the call back to Darius, who will wrap up on slide 12.

Thanks, Greg. We accomplished a lot in 2018 and expect great things in 2019 as well. We delivered on all our commitments, successfully completed spin-offs ahead of schedule and under budget, while still overdriving on the organic growth, margin expansion, earnings per share, and free cash flow targets that we will establish at the end of 2017. There is significant room for continued margin expansion on the path to our long-term target of 23 percent. This is aided by over $450 million of repositioning funded in 2018 and in prior years, which will drive improvements to our cost structure, supply chain, and gross margin in 2019 and beyond. Our balance sheet capacity is strong and this will provide another lever to drive up performance in any macro environment. There are continued business transformations through several new initiatives, including a unified software business in Honeywell Connected Enterprise, an increased focus on our supply chain. We are excited about 2019 and expect another great year. With that, Mark, let's move on to Q&A.

Thanks, Darius. Darius and Greg are now available to answer your questions. If possible, please keep your questions to one comment and a quick follow-up so we can address all questions. Marguerite, if you could, please open up the line for Q&A.

Thank you. If you would like to ask a question on today's call, please signal now by pressing star one on your telephone keypad. That's star one to ask a question. We can now take our first question from Peter Armandt from Baird. Please go ahead.

Yeah, thanks. Good morning, Darius and Greg.

Morning.

Nice way to finish up 2018. Darius, I guess on aerospace, just really the momentum continues to be really impressive with organic growth of 10% in each of the past two quarters. Maybe you could talk about, I guess, the sustainability of the confidence around the business volume for you. I know you mentioned 8% to 10% for this year. And on the 2019 aerospace guidance of -single-digit plus, is the Defense Tough Comp really the only headwind you're seeing in 2019? Maybe just some color there. Thanks.

Yeah, I mean, so first of all, we're very confident about our Aero outlook for 2019. Our bookings have been strong. January's been strong. Yeah, the comps do get tougher. And there's some short cycle. And I think as people saw in our outlook for Q1 and what I anticipate will be Q2, we have rebid our confidence that -single-digit is hopefully the bottom. But the fact is we don't know the second half of the year. And that's why the numbers are what they are. And potential government shutdowns and budgetary challenges and trade licenses potentially becoming an issue. We hope that doesn't happen. That just reflects sort of external risk. But overall, there's absolutely nothing that I'm concerned about in terms of the bookings, the growth rates, the kind of growth we're seeing in that business. And it's pervasive across all three segments, whether it's transport, BGA, or defense in space. So I'm very pleased. And it's not a place where I'm going to be losing a lot of sleep in 2019.

Appreciate the color. Thanks, Olivia, one.

Thanks. Thanks, Peter.

We can now take our next question from Sheila Kiyoku from Jeffreys. Please go ahead. Thank you and good morning.

Good morning,

Sheila.

The question for business is you either have a deceleration in organic growth or flattening of sales growth. Just where are you factoring in some conservatism with a slowdown? And how are you capturing that low end of the sales growth guidance of 2%?

Yeah, I think it's not so much that we're capturing any conservatism in any of the businesses. I think what we have in our guidance going forward is the fact that more than 50% of our business is short-cycle. And what's different about this year than I think many years in the past is we have many more unknowns, whether it's Brexit, whether it's trade negotiations, specific China, US, whether it's the Fed hikes in terms of what happens, whether it's government shutdowns, there are just a lot of geopolitical unknowns more than usual. And for us to express a level of confidence around all these unknowns, around a little bit wider range than we anticipated, I think would probably indicate a level of knowledge that we currently don't have. Now having said that, and as you can see in our Q1 outlook, we're actually front-end loaded. And if anything, we're going to be at the upper half of our revenue growth range in the first half of the year. So actually, provided all things go as we think they will, to the positive side, I think that hopefully we'll be raising the bottom of that range as we move further through the year. But I don't see really any growth issues with any of our businesses, and we expect all of them to grow in 2019.

Thank you for the call.

We can now take our next question from John Inch from Gordon Huskies. Please go ahead.

Thank you. Good morning, everybody. Morning, guys. So how did your European businesses do and what's actually baked, I guess, on a growth rate, any color there, and what's baked into your guidance for 2019 for Europe?

Yeah, John, Europe continued to be strong. In the fourth quarter, our European businesses were up 6%, which capped off a 4% organic growth for the year. So I still think we're seeing good, strong growth there. And it's pretty broad-based, to be honest. SPS is probably the strongest of the bunch, but each of the businesses is growing in the mid-single digits or higher in Europe at this stage. As we look forward, we expect that's probably going to be still low to mid-single digits. But as Darius mentioned, clearly there are concerns out there. Brexit in particular will have some sort of an answer in the next 60 days as to what occurs with that. And we've got a meaningful-sized business in the UK. So definitely back to the concern aspects of macro signals, Europe is an area where we're waiting to see what's going to happen with Brexit in particular and what impacts that may have on us.

But, Greg, that performance, the 6%, that's pretty good relative to what other companies have been putting up in Europe and given sort of the slowing in Germany and stuff. Is there a mixed issue that's benefiting Honeywell or new products, or what do you think is attributable to why you're doing better on Honeywell? Well, again, I would tell you that each

of the businesses is performing well. So it's not like one is... I mean, SPS being the strongest of the bunch, but each of them is up mid-single digits for the year. So it's strength across our entire portfolio.

And then as a follow-up, last year you guys put up the 3% to 5% core growth target, and Darius, you flagged accelerating core growth as your number one priority. Now, I understand the economic sensitivities around the 2% to 5% this year, but I'm just trying to think big picture. What are you and how are you actually going to tackle driving Honeywell toward more of a mid-single digit type of accelerating core growth over time? Is that meaning to go after, like in Darius, that pie, the 40% that's not growing at 5% plus? Or do you kickstart building technologies, which has been sort of a problem for a little while, or more emanating? Maybe just walk us through a little bit of your own thoughts and maybe Horizon 2.

Yeah, well, yeah, John, it's not any one thing. It's probably all of those. I mean, it starts with portfolio, and we think that based upon what we've done here, we've got a more growth-oriented and less cyclical portfolio that's certainly part of it. Secondly, which is our tremendous focus on velocity product development, and we're launching a whole new process called Z21, which basically is going to reduce our innovation cycle times in half, deploying more capital to R&D, because my strong belief is that part of any growth story has got to be a strong innovation engine, and that's something that we're trying to create. Continued focus on high-growth regions. I mean, we're winning in places like China and India. And even though the back half of the year, China was a little bit slower, we grew nearly double-digit in China this year. So that continues to be a success story. Our focus on commercial excellence with our sales force is working, where we're getting better productivity out of our sales force, better performance. It's never only one thing. We're working all those levers, and as you can see in the growth rate that we've demonstrated, this is granted the markets are pretty good, but certainly without the self-help that we've administered over the last couple of years, there's no way we would be in that range, both in 2018 and what we're projecting for 2019.

Just last, India has been a real success story. I think you flagged it again. Would you consider putting more resources or doing M&A in India in particular? I realize it's much smaller than China, but it does seem to have gained a lot of traction for Honeywell. I'm just wondering what you're thinking about

it. Yeah, no, we've had a lot of focus on India. I mean, to give you a perspective for India, our growth in India in Q4 was 27%.

Yeah.

So, that's tremendous. We have a big footprint there, not just from a business perspective. We have our engineering centers there of over 10,000 people. So, we feel very comfortable of our presence there. The opportunity is now to go after the mass mid-market segment, and that's actually one of our core initiatives for 2019 and beyond is just not to play in the top tier, the mid-tier, but actually having a greater level of participation in the mid-market segment. So, India is definitely one of the economies which we think is going to be a great story for us in 2019 and beyond.

Thanks very

much.

Thanks, John.

We can now take our next question from Gautam Khanna from Cohen & Company. Please go ahead.

Thanks. Good morning and great results.

Thank you. Good morning.

Two questions. First, just big picture, M&A pipeline, what can you say about it? Is it as healthy as it's ever been or anything large that you guys are looking at? Just any commentary on the nature of the pipeline right now?

Yeah. I would say large, probably not, because we think that we're still very much focused on bolt-ons and not the mega deal. So, I would say that is and will continue to be our focus. We got a deal done in Q4, which was good. TransNorm was a deal of size, the kind of size we like. It was about half a billion capital, we want to do that. But to be honest, my commentary, the pipeline continues to be good and we were working on a deal that recently fell through, just because although there's been a little bit of a correction in the market, as we saw particularly in December, that didn't really change the expectations of a lot of the sellers. So, we continue to struggle with valuations and the expectations, which there's a very pronounced shift up. And it's got to work in our financial model. So, we continue to be very active. The pipeline is good, but I also want to tell you that we're realistic because we're cautious buyers and we don't like to overpay. So, we have to be certain about what we're buying and make sure that it generates the for sure owners.

Appreciate it. And the second question was just if there are any supplier constraints you're seeing on the aerospace side. I remember last year you had some aftermarket constraints. Are you seeing any pinch points emerge?

Yeah, no. The answer to that is yes. And I would say that there are some pinch points on the supply chain emerging, not just in aerospace. Those are there and prevalent, particularly in areas like casting, etc. But we see similar challenges in smart energy and even in some elements of electronic supply chain. So, the pinch points on the supply chain are real. They're there. We're working through those and hope to resolve those. Frankly speaking, our results could have been even better had some of those pinch points not been there.

Thanks a lot, guys.

Sure.

We can now take our next question from Julian Mitchell from Barclays. Please go ahead.

Hi. Good morning. Good morning. Maybe just the first question around SPS. You grew around 10% plus organically in 2018. Your slide nine shows about -single-digit growth this year amidst the sort of accelerating market arrow. So, is that guidance based on anything you're seeing in the short cycle businesses within SPS or it's simply about tough comps and the usual macro aspects that you'd mentioned earlier?

Thanks, Julian. I think it's a little bit of both. I mean, obviously, we continue to be very excited about Intelligrated and the double-digit growth rates that we achieved this year. With a very strong backlog, expect that to continue to be strong. We did our retail business, though not large, grew over 20% in 2018. So that's probably going to dampen a bit with some of those comps. We still feel very positive about productivity products and sensing and IoT with the new product introductions that they have. But those and the industrial safety businesses, they are short cycle. And when those things change, they can change quickly. So I think that's where we're trying to be a bit cautious because we've seen it happen before in terms of the speed at which the short cycle can turn on us. And so it's not a matter of having seen it so far and being concerned about anything with our business specifically, but I would just call it a bit more caution with the environment.

Thanks. And then my...

Yeah, just to add to Julian, like Greg said, I mean, the majority of that business is actually short cycle. Intelligrated is about the only business that isn't short cycle. So based on what we're seeing now and today and our guide for Q1, there's no warning signs for us here. You know, where we position is just uncertainty, particularly around the second half of the year.

Thanks. And then my second question around PMT, any more color you'd like to provide on how you see the cadence of the large project activity within HPS in terms of the scale of any delays and also UOP, how you're gauging the volatility there at the moment?

Yeah, no, I like the greater stability. What we saw in Q4 a little bit was a bit of a pause on the order rates just around the volatility of oil, but given the right direction movement, we're much more bullish. But despite that, I just want to quote you a couple of numbers from Q4 on why I'm bullish on PMT for this year. First of all, our HPS order rates were up double digit. Second of all, our UOP backlog is up 8%. So I'm very optimistic around PMT performance for 2019. Probably the one segment that was pretty soft was in our advanced materials business, the electronics chemicals, which electronics has been a bit weaker. Some of the other companies in that segment announcing, and we saw that in our electronics chemicals business. So that's probably the only sort of minus that we saw in Q4. But overall, both the backlog, the order rates were good. And to be honest, especially in HPS, our global mega projects, front log and quote, are really strong, we didn't even book a lot of those orders in Q4. And our orders growth was up double digit in a quarter. So I feel pretty good about PMT for 2019.

Great, thank you. Thanks, Julie. Thank you.

We can now take our next question from Steve Tusa from JP Morgan. Please go ahead.

Hey, guys, thanks for fitting me in. Our pleasure. Just wanted to ask about the... We're not sensitive or anything like that. You mentioned kind of the next phase of the transformation and some of the footprint stuff that you're looking into. Is that something that you'll be able to kind of quantify more and speak to at this year's investor day? Or is that going to remain, I don't know what you put at the bottom of the slide, like you're consulting with people or something like that about what the number is going to be? When will we kind of hear more about that and how big could that opportunity be?

We're not putting you in the middle anymore on the call. You wind up grumpy, Steve. No, the... Yeah, so the short answer is yes on investor day. We're going to... It's obviously going to be a segment of that presentation. We'll give you a lot more detail. But I just want to be very clear that the next phase of the transformation is not just the IEC transformation. That's a very big part of it. But we kind of talked a little bit about this deck, about kind of the three legs of the two, which are IEC transformation, Honeywell Digital, and Honeywell Connected Enterprises. That's sort of the next phase of the evolution of Honeywell. And one of those three is the business, and the next two are going to be ongoing for at least the next three to five years. So this is going to give us a lot more tailwinds in terms of margins, cash generation, more efficiency, working capital, simplifications, better planning, lower capital intensity, a lot of benefits. So we're going to provide a lot more color on that

at

our investor day.

Are you going to give something tangible, or will it be kind of like directional arrows? Sometimes this stuff can... It sounds great, but ultimately it doesn't filter down to the bottom line for other companies. Just curious if you're going to give something tangible, numbers-wise.

So Steve, oftentimes we get asked about how long of a runway do we have for margin expansion. And to me, this is continuing to fill the portfolio of things that keeps that runway alive and well. And so that's kind of the way I'm thinking about all of these things are going to continue to contribute to our ability to drive that margin expansion well beyond 2019.

As we kind of get deeper and deeper into the 20s, which we're very comfortable that we're going to do, and you look at our framework that we present in 2017, I talked about 30 to 50 basis point expansion, as you see from our performance as well as our guide and the top end of the range, it's even greater than that number. These are the kinds of things that enable us to kind of keep growing that margin machine is self-help and these internal initiatives. The good news is we've got plenty of opportunity because we've got a lot of work to do on the supply chain and on the digital. So I view all of that as not bad news, but really a tremendous opportunity to continue to drive margins.

And then one last one. I know you guys don't want to give specific segment guidance, but maybe can you just talk about who may be above or below the averages when it comes to margin expansion for 2019? Just so people are kind of calibrated. Sometimes these segments can move around a little bit and people tend to kind of pick what they want to look at as positives or negatives. I think it's good to kind of baseline. People don't need exact numbers, but just some directional color around what will be above or below that kind of margin expansion or whether they'll all be kind of in the middle there. That would be helpful.

Yeah, I would expect Arrow and HBT to probably lead the pack in terms of the rate of expansion in 2019, but each of the segments will have a very respectable margin expansion profile. But clearly with the rate of growth that we're seeing in Arrow and leveraging the fixed costs that we have there, that's probably got a pretty sizable opportunity. And again, HBT with a return to growth and some new products, we see that as also having a fair amount of opportunity. But each of the businesses I think will expand margins in a meaningful way in 2019.

Okay, great.

Thanks a lot.

Thanks Steve. We can now take our next question from Jeff Sprague from Vertical Research. Please go ahead.

Thank you. Good morning everyone. Morning Jeff. Morning. Hey, good morning. Just a couple things on maybe some of the longer cycle outlooks and the like. First on IntelliGRADED, obviously you have great visibility now on 19 on this backlog, but do you have visibility on things like front log bidding, et cetera? Do you expect it to be a fairly active order year again in 2019 for IntelliGRADED?

Yeah, the short answer is absolutely. Not only because of the continued strength of activity in North America, which continues to be robust, but now with the TransNorm and our enhanced capability in Europe, both from the beachhead that we've established by acquiring TransNorm, but also because if you recall, we put a lot of investments back in the 17 and 18 timeframe for R&D capability to have a metrics-based offering. That's complete now, so we're very capable bidding on warehouses, et cetera. We continue to expect another very robust year in our IntelliGRADED business.

Then I was also just wondering back to this mega projects question in HPS, you noted your orders were strong even without some of those kind of hitting the order book. We think a lot of those projects kind of being underwritten at maybe $50 or $60 oil price. So is it just you think there's just kind of a human reflex here that the volatility in Q4 caused people to just tap the pause button or do you see some legitimate risk to these things kind of sliding out further?

Yeah,

I think it's just natural reaction when you see that kind of volatility like we saw in Q4 that causes people to pause, but we're actually seeing a very positive movement here in Q1, so I think that some of those decisions will get made and we feel confident that when they do get made, we're going to have some positive outcomes for us. I was encouraged by our bookings in Q4 because despite not having booked some of those GMP jobs, we still had a very robust order score.

Yeah, all right. Great. Thank you very much.

Thank you. Thanks, Jeff.

We can now take our next question from Scott Davis from Mellius Research. Please go ahead.

Hi, good morning, guys. Hey, morning. Hi, Mr. So much of the future story of Honeywell seems to relate to software in some way, shape or form. I'm a little intrigued by HCE in general. Can you help us understand how centralized is the software development effort and whenever I hear about centralized software development, I always think about pre-dex makes me want to cry or worse, but how do you still see the customer and the businesses themselves and still have this type of a centralized effort and ensure that you're actually getting a return on the investment?

Yeah, so let me just maybe explain that. When we say centralized, that means sort of the platform, the IT stack that we call Sentinel. That's what centralized that all of our connected enterprises use. But then the actual analytics, the solutions that are provided, those are very much vertically oriented. And the way we approach this is essentially each of those businesses and customer focused business, so whether it's connected aircraft, connected plant, connected buildings, we develop MV0, MV1, which we call single pane of glass, which has a lot of value driver solutions for end customers. And we typically partner with a few key anchored customers to help us iterate and drive and optimize these solutions. So we're very close to the end customers. In fact, we develop a lot of these solutions with the end customers, but we also don't want to drive customization, but rather standardization. So don't think about this as something that sits at corporate at kind of a central level, is insular and doesn't work with end customers. That's not the case. What we want to do is have end customer agency while driving leverage to the IT stack called Sentinel. That's really the core of it. And maybe if I could just

add to that, with the leadership from Q, she's applying that customer go to market approach across all of those connected enterprises such that each one of them individually isn't having to develop those muscles and skill sets independent. And while these businesses are still embedded inside of the four SBGs, those four SBG presidents wouldn't possibly be able to give it the amount of time and attention that Q will be able to do as the president of HCE. So centralized really means focus, much more so than corporate. Yeah,

that's

a very good

point. Because the way this was organized before, it still has sort of core reporting into the SBG presidents in Q, but we gave just a lot more authority and control to Q just because when you're running a 10 or 12 billion dollar business and you have something that's a fraction of that, it requires a lot of time, attention, strategy changes, agility. It's tough to manage that.

Right. Now that makes sense. That's helpful. And you guys have done a nice job. So it's not, it just requires I think a little bit of explanation. But just a follow on question really just on Intelligrated and some of the assets you bought around it. Are you close to being at the point where you can go to market together with some of these products globally? Or how long will it take? I mean, particularly given how regionalized some of the warehouse offerings are. Yeah,

the short answer, Scott, is no. We are ready. As a matter of fact, we are calling globally. And as excited as we are about the North American market, we anticipate securing some jobs both in Asia this year and in the future as well as Europe. And we're ready. We've invested from an R&D perspective that transfer and acquisition is going to further help. But you should expect us to get some more momentum here on a global level in 2019. And a lot of those solutions are finished.

Okay. Good. Good luck. Thanks, guys.

Thanks,

Scott.

We now take our next question from Andrew Obin from Bank of America. Mary Lynch, please go ahead.

Hey, guys. Good morning.

Morning,

Andrew. Just a question on defense just because it was so strong. Can you give us more visibility into how sustainable some of the developments that you had in 4Q into the first half? I would imagine F35 ramp is sustainable. You mentioned space and defense. I think you mentioned aftermarket. If you could just walk us through visibility for the next six months. Thank you.

Well, I would tell you, so as you mentioned, our defense business has been growing mid-teens all four quarters of 2018. And as we look out for the next six months, the backlog growth there is also very strong. It's strong double digits, over 20% in defense and space. So for the next six months, as you mentioned, I think our visibility is very good to continued strength in that area.

And just maybe on China, could you just describe more color on specific markets and just your top-down view on China's economy and how do you think it will progress through the year just because you have such a big business there and you've been very knowledgeable?

Yeah, as I mentioned, our China business has been up nearly double digits, just shy of that for the year. So another solid growth here. A bit of a slowing in, I would say, in Q4. But there's some very clear reasons that we understood that slowing. So let me kind of take it segment by segment. If we think about SPS, it was terrific. It was up double digit growth in China, no slowing. Actually, if anything, things are accelerating. In PMT, we had some tough comps. We understood that and expected that. We had some big both orders and revenue growth. So we expected that. Nothing unusual. You doubled the business in UOP in

the last two years.

So that's comps are not as small. Yeah, exactly. So nothing out of the world of expectations. For HBT, as you know, we've had some challenges with the air and water segment. And frankly, some of our distributor partners got a little bit ahead of themselves given the robust growth that they saw in 17. And that's been a bit of a challenge for us all year. But we expect that to grow again in 2019. So we think that that's going to be behind us. And then with Aero, we had some collections challenges, which actually limited our shipments because our backlog was actually better than the revenues would indicate. So all in all, we're not building in a tremendous year in China, not kind of the usual Honeywell strong double-digit growth in China where we think it's going to be a little bit slow. But all of that is reflected in our guide. And we expect to grow in China in 2019 for certain. How much that's going to be, well, we'll see. All in all, I think it's pretty good about how the businesses are positioned.

And do you guys have a view on the Chinese economy bottoms in 19?

Well, I think that's a million dollar, it's a bit of a million dollar question, Andrew. I think a lot of that depends and we might know a better answer in the next 30 days, right? I mean, I think we're all watching carefully what happens on the geopolitical sphere and with the broader economy. Because as I said, we're very prepared from a tariff perspective because that's something we can identify and should be able to do something about. What we don't know and where we have some questions, which is what is going to be the overall economic impact, both on the economies of China, the US, etc. I think at this juncture, it's us being a month into the year, that's tough to call. And we'll see what happens.

Terrific. Appreciate it. Thanks so much.

Thank you. Thank you.

Next question comes from Joe Ritchie from Goldman Sachs. Please go ahead.

Thanks. Good morning, guys. And thanks for truly fitting me in. Welcome. So obviously, look, you guys got a lot accomplished in 2018. Congratulations. I think one of the areas that we haven't really focused a lot on is that specialty products business. And so maybe just a broader strategic question there. I think that business is tied to semis, electronics. How do you think about that business longer term? I know you did a lot in 2018. This business seems to be a little bit more cyclical versus the rest of your portfolio. So maybe some thoughts around that to start would be great.

Yeah. I mean, yeah, there's some cyclicality. There's also some stability. I mean, you know, we have our spectra business there, which is doing quite well, our aqua business, which is a cyclical, our electronic materials business, which is more cyclical. So it's a bit of a mixed bag. You know, probably we're given some of the challenges in the electronics segment, you know, probably on the lower end of the curve than we are. But, you know, I think like anything, I mean, we're we like a lot of those businesses, they perform for us. But as always, we're, you know, and I wish we pointed out during our speaker notes today, we're always assessing everything. You know, I think some of the big things that we wanted to do that we didn't think that fit our portfolio within 2018. But everything is always under assessment. You know, we're never done. And we always want to kind of add and also subtract potentially. So, you know, there's no specific update to the SP business. But like I said, we're always assessing and we're going to do what's going to make adjustments as they fit our portfolio.

You know, that's that's fair, Derek. Is it fair to think of that business though, is being mostly you know, semi capex oriented?

It's a mixed bag. I mean, there's really a variety of different businesses. And that's why it's kind of tough to talk about sort of any given one trends, because you have electronic materials, you have

some defense,

spend, you have health care in there, you have consumer goods. So I mean, you have an entire variety of end markets that there's exposure in specialty products. So it's tough to say, you know, what that total blend ends up to. But you have this sort of eclectic mix of various end markets.

Okay, yeah, fair enough. And just one quick one, Greg. You mentioned the stranded cost earlier. I think the number I had was like roughly around like $340, $350 million.

Yep.

The. So, so the timing of this cost, I mean, does it what's remaining into in 2019? First, can you quantify what's left in 2019? Secondly, you know, will we get through those costs through the first half of the year? Are they going to be kind of linear as the year progresses?

Yeah. Yeah. So we've we've taken actions that we'll have eliminated about half of those costs already as we exited 2018.

And

as you as you saw in the fourth quarter with the corporate number being flat to slightly up, you know, that reflects the first quarter of not having, you know, the ability to allocate about 45 or $50 million to those two spin businesses that are now gone. So that's a little bit of why, you know, you saw maybe a heavier number than you might have expected. But we expect that to come down over the course of the year, you know, from from the first to the fourth quarter and we will exit the fourth quarter at a run rate by which all of those costs will be gone. So so that's the you should expect to see a bit of a stair step down. And again, keep in mind that two thirds of it is in is in our net corporate cost. About a third of it was sitting in HBT. So you're not going to see a $300 million number per se. But it's reflective of of a step down as we go through the year.

Got it helpful that thank you. Sure. Thank you.

Next question comes from Christopher again from Open Hammer. Please go ahead.

Hey, thanks. Also a sincere thanks for squeezing me in. I certainly don't expect to go before Steve, but possibly before Joe next time. Anyways, question on non reds. A lot of mixed messages, people talking about low single digits. But yesterday appear talked about very robust commercial projects. So just wondering, you know, what what you're seeing in that space. Is that a very vibrant market or is it just kind of GDP limp?

No, I mean, you know, if you look at our HBS business, which is probably the best indication of kind of that commercial activity, we're seeing up double digit bookings and Q4. So actually very, very strong. You know, that's good. We also want to make sure we capture the service. That's the opportunity. You know, that business is stabilizing. I think Vimal and that team have put the business on the right path. We're seeing good signs and you know, sort of the secret to the growth there is revitalization of the NPD pipeline. And I see a lot of good things in the various segment, whether it's building products, whether it's fire, whether it's our BMS system. So we actually expect a pretty good year. And if you take HBS as a leading indicator, that's also been a pretty good sign in Q4. So, you know, we're a little bit cautious in the outlook, but, you know, given the stability that we have now, and it should be a nice story for us, recovery story for us in 2019. Thank you.

I would now like to turn the call back to Darius.

Thank you. Our end markets continue to be strong and we've got simpler, more focused portfolio following completion of the spins. We continue to execute well as evidenced by our sales, margin and cash performance. We have significant balance sheet capacity to deploy. We have a strong performance culture. Our say will continue to equal our do. And we're focused on continuing to outperform for our customers, our share owners and our employees. I continue to be encouraged by what I see in each of our businesses and our people. I'm excited for what I know will be a strong 2019. Thank you for listening.

That concludes today's conference. Thank you for your participation, ladies and gentlemen. You may now disconnect.