Honeywell International Inc.

Good day, everyone. Ladies and gentlemen, welcome to Honeywell's third quarter earnings conference call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your touchtone 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 your host for today's conference, Mark Binza, Vice President of Investor Relations. Please go ahead.

Thank you, Ebony. Good morning, and welcome to Honeywell's third quarter 2019 earnings conference call. With me here today are Chairman and CEO Darius Adamczyk 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 www.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 risk and uncertainties that may affect our performance in our annual report on Form 10-K 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 impacts from separation costs related to the two spin-offs of our homes and transportation systems businesses in 2018 as well as pension mark-to-market adjustments and U.S. tax legislation, except where otherwise noted. Comparisons are to the prior year period, unless otherwise noted. This morning, we will review our financial results for the third quarter of 2019, share our guidance for the fourth quarter, provide an update to our full year 2019 outlook, and share some preliminary thoughts on 2020 dynamics. As always, we'll leave time for your questions at the end. And with that, I'd like to turn the call over to Chairman and CEO, Dariusz Adamczyk.

Thank you, Mark, and good morning, everyone. Let's begin on slide two. This has been a very exciting quarter for Honeywell, capped off by another strong financial performance and several important recent leadership changes. I have asked Tim Mahoney, who has been the president and CEO of our aerospace segment for the past 10 years, to serve as our senior vice president of enterprise transformation. In that role, Tim will oversee Honeywell Digital, our global cross-functional digitization initiative that is driving improvements in customer service and efficiency. Tim's outstanding leadership has enabled aerospace to deliver exceptional results. Additionally, within Aero, Tim led the creation of Honeywell's best digital environment. I'm looking forward to leveraging that experience and having his expertise in this crucial role as we continue to evolve as a software industrial company. Taking over for Tim as the leader of aerospace is Mike Mattson, who previously led our aerospace integrated supply chain. Mike has also served as the president of our defense and space business, and has held leadership roles within our air transport and regional business. Mike began his career at Honeywell. This had three decades of leadership experience here. We are fortunate to have someone of Mike's extensive background at the helm of aerospace. These appointments are effective immediately, but Mike and Tim will, of course, work closely together throughout the fourth quarter to ensure a smooth transition. In addition, Jeff Kimball has been named Senior Vice President and Chief Commercial Officer, where he's overseeing our sales and marketing organizations to drive profitable organic growth. Jeff joins us from McKinsey, where he's a partner in the transformation practice. Last, Deborah Flint has joined our Board of Directors as an Independent Director. Deborah is the CEO of Los Angeles World Airports, where she's overseeing the complete modernization of LAX, including championing the use of IoT technologies. Her deep knowledge of and experience with critical infrastructure, connected buildings, and advanced security solutions will be invaluable to the board and our ongoing transformation. We have the right leadership team in place, a deep bench of up-and-coming leaders, an engaged and experienced board of directors that will help us continue to deliver the results you have come to expect from Honeywell. Turning to slide three, let's discuss a few of our recent highlights and wins. Through our Honeywell-connected enterprise, we launched Honeywell Forge Cybersecurity, aimed at helping customers identify and act on cyber-related incidents. We once again had double-digit growth in total connected software sales, as well as continued growth in connected orders during the quarter. We announced that Honeywell was appointed by Kuwait Integrated Petroleum Industries to provide technology and production systems to the El Zor Refinery, which will be the largest integrated refinery and petrochemical plant ever constructed in Kuwait. In addition, Honeywell was ranked 13th on Forbes 2019 World's Most Reputable Companies for Corporate Responsibility. Our position on this list is a testament to all we have done and continue to do to be strong advocates for the environment, our diverse employee base, and our communities. Now, on to slide four, in the third quarter. We continue to drive strong financial results, delivering adjusted earnings per share of $2.08, six cents above the high end of our guidance range. We grew organic sales by 3%, driven by the strength across aerospace, as well as in our process automation and building technologies businesses. Aerospace generated double-digit organic sales growth for the fifth straight quarter, driven by our strong positions on key platforms, robust defense portfolio, and ongoing demand for aftermarket services. Our long-cycle backlog was up approximately 8% year-over-year, driven by defense in space and UOP bookings, as well as the strong warehouse automation orders and HPS projects orders which each increased over 20% in the quarter, positioning us well for the remainder of the year and into 2020. Our organic growth, combined with the benefits of the portfolio enhancements we have made in 2018 and our operational excellence initiatives, drove segment margin expansion of 180 basis points, with segment margin again exceeding 21% this quarter. Excluding the favorable margin impact from the spinoffs, segment margin expanded 80 basis points, which was 40 points above the high end of our guidance. During the quarter, we generated $1.3 billion adjusted free cash flow. We remain focused on our working capital management at every level of the organization and expect to deliver on our cash flow commitment for the full year. As we've done throughout the year, we continue to execute our disciplined capital deployment strategies. During the quarter, we repurchased $1 billion of Honeywell shares, announced a 10% increase in our dividend, our 10th consecutive double-digit increase. We also closed three Honeywell venture investments and completed the acquisition of TrueTrack Flight Systems, a leader in autopilots for the experimental, light sport, and certified aircraft. In the first nine months of 2019, We have deployed $5.5 billion to share repurchases, dividends, and acquisitions. Additionally, during the quarter, we issued $2.7 billion of senior notes to refinance October debt maturities at attractive interest rates, further strengthening our balance sheet. I am very pleased with our performance this year. I'm confident the team will continue to execute and deliver our full-year plan. With that, I'll turn the call over to Greg. We'll discuss our third quarter results in more detail and provide our updated full-year 2019 guidance.

Thank you, Darius, and good morning, everyone. Let's begin on slide five. We posted another strong performance in the third quarter, building on the great first half in 2019. Aerospace had another double-digit organic growth quarter. Sales were strong across process solutions, UOP's licensing and refining catalyst businesses, and building products. Honeywell Connected Enterprise drove double-digit growth in connected software. SPS contracted during the quarter, but the turnaround in productivity products is progressing, and the large order bookings we anticipated and telegraded have begun to materialize, as evidenced by the over 20% growth in orders during the quarter. The impact of the spinoffs of Garrett and Resideo in 2018, both lower-margin businesses at the time of the spin, contributed 100 basis points of segment margin expansion this quarter. We will lap the favorable impact of these actions in the fourth quarter. The remaining 80 basis points of this quarter's expansion was the result of our business performance in aerospace, building technologies, and performance materials and technologies, partially offset by the year-over-year margin decline in safety and productivity solutions that we had signaled previously. Adjusted earnings per share were $2.08, up 9% excluding the spin-off impact. Adjusted earnings per share excludes a $114 million tax adjustment associated with withholding taxes in connection with the fourth quarter of 2017 U.S. tax legislation charge. With that benefit, reported earnings per share in the quarter was $2.23. I'll talk in more detail about EPS on the next slide. Adjusted free cash flow in the quarter was $1.3 billion with conversion of 85%. Our total adjusted free cash flow for the first nine months was $4 billion, up from $3.9 billion, excluding the spins, in the first nine months of 2018. Cash conversion for the year has been impacted by the timing in our projects businesses, primarily in Intelligrated and PMT. Overall, a very good performance for the third quarter and above both our margin expansion and our EPS guidance regions. I'm now moving to slide six. and the adjusted earnings per share bridge from the third quarter of 2018. Consistent with last quarter, the majority of our earnings growth, excluding the spins, came through segment profit improvement, 14 cents. That was driven by organic sales growth, continued productivity improvements realized through our operational excellence initiatives, and savings from previously funded repositioning projects. Our share repurchase program, with which we have deployed $3.7 billion year-to-date, has resulted in a 3% reduction in share count from last year and provided $0.07 of earnings improvement. Our adjusted effective tax rate was 22%, consistent with last third quarter and the outlook we previously provided. Below the line items were a $0.03 headwind this quarter compared to last year, primarily due to lower pension income as a result of the pension de-risking actions we took in 2018 and the higher funding of new repositioning projects. We funded a substantial amount of high-return projects, more than $70 million in the quarter, which will support our continued productivity focus, transformation, and supply chain initiatives, and will also help drive segment margin expansion and earnings growth in a range of macroeconomic environments. Overall, third quarter adjusted EPS was $0.06 above the high end of the guidance we provided in the second quarter. Our better-than-anticipated performance was primarily from stronger segment profit in Arrow, SPS, as well as acceleration of stranded cost removal. The below the line expenses were about three cents lower than we had expected, partially due to benefits from foreign exchange. So in total, EPS grew 9% this quarter, another great result, adding to our already strong start to the year. Now let's turn to slide seven and discuss the segment performance. Starting with aerospace, sales were up 10% on an organic basis, continuing an outstanding year for the business. Commercial aftermarket grew 6% organically, with strong demand across both air transport and the business aviation. Defense in space grew 17% organically, led by global demand for guidance and navigation systems, as well as increased aftermarket volumes on key U.S. Department of Defense programs. Backlog for defense in space is up nearly 20%, and more than two-thirds of orders with delivery through 2020 are booked, giving us confidence that business is poised for continued growth next year. In commercial OE, sales were up 7% organically, driven by growth in air transport shipments and continued strength across business jet platforms. We saw increased deliveries across major OE business aviation platforms and high demand for components in air transport. As we've discussed previously, we remain aligned to Boeing's stated production schedule for the 737 MAX and will continue to monitor the situation closely But at this point, we have not seen and do not anticipate a significant impact to Honeywell in 2019. Commercial aftermarket sales growth was driven by demand across both air transport and business aviation, led by growth in retrofit, modifications, and upgrades. In addition, demand for Honeywell Forge for aircraft drove double-digit jetwave organic sales growth. Aerospace segment margins expanded 350 basis points, driven by commercial excellence, productivity net of inflation, and margin accretion from the spin of transportation systems. The spin contributed approximately 100 basis points to Aerospace's total margin expansion. As a reminder, this is the last quarter we'll have the benefit of spin accretion in Aero. We expect Aerospace's strong organic sales growth and segment margin expansion to continue into the fourth quarter. In Honeywell Building Technologies, sales were up 3% organically. primarily driven by ongoing strength in commercial fire products in the U.S., double-digit growth across our suite of building management products, which was aided by improved supply chain execution, and strong demand for our Tritium connected software platform. Notably, in Europe, the quarter finished stronger than expected after seeing a soft market in the first two months, particularly in Germany. Building solutions was flat in the quarter, with projects growth across both the Americas region and the airport vertical which were offset by declines in the energy business. HBT segment margins expanded 390 basis points in the third quarter, driven by the favorable impact from the spin-off of homes business. As a reminder, this was the last quarter we'll have the full benefit of the homes spin accretion, given that the spin occurred at the end of October 2018. Segment margins, excluding the impact from the spin accretion, were up 10 basis points this quarter and have continued to show improvement quarter to quarter, since the beginning of 2019. Overall, it was another good quarter from the HBT team. Before moving on, I'd like to remind everyone that the Building Technologies Leadership Team is hosting an investor showcase event November 20th through the 21st at our headquarters in Atlanta, Georgia. Vimal and his team are going to provide a deep dive into each of the businesses and highlight his strategy and the technology offerings we bring to the market. I encourage you to listen to the webcast online. In performance materials and technologies, sales were up 3% on an organic basis. Process solution sales were up 7% organically, driven by strength across the entire automation portfolio. We saw growth in maintenance and migration services, gas sediment products, and automation projects and software. Orders and backlog across PMT were both up high single digits with particular strength in the projects businesses, notably seeing some movement in global megaprojects. specifically in Russia and China, giving us confidence in the momentum of this business. In UOP, sales were flat organically, with growth in refining catalysts and licensing offset by declines in gas processing due to fewer domestic cryo unit sales, given a softer midstream gas processing market in the U.S. We again saw strong double-digit orders and backlog growth in UOP, with strength in equipment and petrochemical catalysts positioning us well for growth going forward. Organic sales in advanced materials were down 2%, driven by lower volumes and pricing in fluorine products due to the impact of illegal HFC imports into Europe and weaker end market demand in specialty products. We're actively working in partnership with private industry, EU regulators, and EU member countries to address the harmful illegal HFC imports. While these efforts are underway, we will continue to see pressure on HFC pricing and volumes. Overall, PMT segment margins expanded by 60 basis points in the quarter, driven by direct material productivity, commercial excellence, and organic growth. Finally, in safety and productivity solutions, sales were down 8% on an organic basis due to distributor destocking and fewer large project rollouts and productivity products, and the impact of major systems project timing in Intelligrated. Segment margins contracted 320 basis points for the quarter, driven by lower sales volumes, which, while down year over year, was 110 basis points better sequentially than the second quarter. The management team has taken appropriate cost actions to address the volume deleveraging, mitigating some of the softness this year. They will continue to realign the cost structure in the fourth quarter as we work through the revenue challenges. In productivity products, we continue to make progress in the commercial turnaround. Channel inventory levels are burning down as expected and are on a trajectory to reach normalized levels by the end of 2019. In our Intelligrated Warehouse Automation businesses, as we've previously mentioned, a large portion is project-based, which results in uneven growth patterns. Recent market data from SEMA's September semi-annual release highlighted this order contraction in the first half across the material handling market. They're experiencing high double digit 29% order contraction with 2% shipment growth. Our sales were down double digits this quarter as a result of the difficult comps and the timing of major systems shifting to the right. The pipeline of major systems orders we highlighted previously have started to convert with orders up more than 20% year over year in the third quarter. The bulk of the sales stemming from these orders will start to show up in 2020. Intelligrate's aftermarket service business continues to benefit from our large and growing installed base, again having a strong double-digit growth from ongoing demand for lifecycle support and services. Moving to safety, organic sales for the quarter were flat as continued demand for our gas detection products was offset by decreased volumes of general safety and personal protective equipment. So overall for the portfolio, a strong performance for the third quarter. With that, let's turn to slide eight to discuss our fourth quarter outlook and the updated full year 2019 guidance. We've delivered strong results in the first nine months of 2019 with higher segment profit and earnings per share in the third quarter than initially anticipated, and we're seeing continued strength in several key markets. However, we remain somewhat cautious in our outlook given the continued uncertainty in the macro environment, and the full year continues to be solidly on track. We expect organic growth in the fourth quarter in the range of 2% to 4%, which will be driven by continued strength in aerospace and defense, coupled with ongoing demand in building products and process automation, supported by a healthy backlog in UOP and continued growth in connected software through Honeywell Connected Enterprise. We expect continued segment profit and segment margin growth with year-over-year improvement of 20 to 50 basis points, excluding the impact of the 2018 spins. resulting in segment margins in the range of 20.7 to 21% in the fourth quarter. Let's look at the segment outlook in a little bit more detail. In aerospace, we continue to see strong demand in both business aviation and in U.S. defense, supported by robust orders growth and firm backlogs for orders with delivery into 2020. We will see tougher comps in business aviation OE and defense, given the double-digit organic sales growth in the fourth quarter of 18, so we expect the growth to moderate slightly. In building technologies, we expect continued strength in commercial fire products, driven by demand of the Americas, continued strength in software, and increased project growth in high-growth regions. In performance materials and technologies, we expect to see continued growth in products and services and process automation, and we expect healthy demand in UOP from the strong backlog, particularly in the equipment business. The headwinds in the advanced materials business from illegal imports of HFCs will persist into the fourth quarter. Finally, in SPS, we continue to expect distributor destocking and productivity products to remain a headwind for the remainder of 2019 from both a sales and segment margin perspective. We expect another very strong quarter for Intelligrated Orders, but sales will again be unfavorably impacted by the tougher comps and the timing of those major systems rollouts. The net below-the-line impact, which is the difference between segment profit and income before tax, is expected to be approximately $155 million in the fourth quarter as we continue to fund repositioning pipeline. We expect the adjusted effective tax rate to be between 20% and 21% in the fourth quarter, and the average share count to be approximately 723 million shares. So now let's move on to slide nine, and we can talk about our updated full-year guidance. On this slide, you can see the progression of our guidance throughout the year. We delivered strong results each quarter, continued to expand margins, and driven adjusted earnings per share growth of approximately 10% year over year, despite some deceleration in organic growth as the macro environment has become increasingly less stable in the second half. Based on our year-to-date results, we are again raising the low end of our adjusted earnings per share guidance by 15 cents. We're narrowing our reported sales range to $36.7 to $36.9 billion, with organic sales growth expected to be in the range of 4% to 5%, reflecting a tougher second half, but above the midpoint of our original sales guidance this year. We're raising the low end of our segment market guidance by 20 basis points to a new range of 20.9 to 21.0, reflecting the progress we continue to make in driving profitable growth. We're also reaffirming our adjusted free cash flow guidance to be in the range of $5.7 to $6 billion as we remain focused on improving working capital and driving cash throughout all Honeywell businesses. Our higher full-year adjusted earnings per share guidance of 810 to 815 represents earnings growth of approximately 10%, excluding the impact of the spins. This is an increase of 8 cents at the midpoint from our most recent full-year guidance. passing through the third quarter beat of $0.08 as compared to the midpoint of our third quarter guidance range. This latest update and additional $0.15 low-end raise takes us to a $0.30 raise in EPS from the low end of our original guidance range of $7.80 to $8.10 at the beginning of the year, demonstrating the strong progression throughout 2019. We continue to be confident in our ability to execute, even in difficult environments. And these updates reflect that. We have planned for and executed mitigations against externalities such as tariffs. We've taken appropriate and targeted cost actions to reduce costs in areas where we believe the most exposure to macro instability and market weaknesses lie. As a result, the momentum we built throughout the third quarter and a strong finish in Q4 will carry through for an excellent performance this year. With that, Let's turn to slide 10 and discuss some of what we're seeing as we head into 2020. As we head into next year, we're seeing indicators of strength in many of our key end markets, but economic instability remains. It's clear the growth outlook for the overall economy will not be as robust as it has been in 2018 and 2019. We do see continued demand growth in key industries, though, where we have strong positions. Commercial aftermarket activity will be driven by increases in flight hours, though at a slower pace. Solid airlines demand, ramping of platforms that recently entered into service, and continued stable defense budgets. These drivers across end markets position Aero well for good growth in 2020, albeit at more moderate levels. Our continued focus on productivity, commercial excellence, and our transformation initiatives gives us confidence to sustain our margin improvement path, though likely at a slower pace than 2019 in Arrow. Non-residential construction growth with slight moderation should enable continued demand for building technologies, products, and services, and the progress Vimal and team are making in operational excellence and new product introductions should provide the opportunity for accelerated margin expansion continuing the positive trend that we've seen in HPT through 2019. In PMT, we expect process automation to continue to grow, and we've had continued strong orders and backlog growth for UOP, which positions us well going into next year. Macro data is suggesting that the softer market in the U.S. midstream oil and gas continues, which will affect the gas processing business. The negative impact in advanced materials from illegal imports of HFCs into Europe while being proactively addressed, will likely continue into 2020. We do expect that a growing set of actions that the European Union is beginning to deploy relative to enforcements, fines, and seizures should result in the slowdown and ultimately the elimination of the illegal import of refrigerants into the region. In SPS, productivity products is progressing on its turnaround, and we expect to return to growth and margin expansion during 2020. The second half build of backlog with major systems projects awards for Intelligrated's warehouse automation solutions will provide a tailwind to accelerate growth into next year. And across end markets, we expect Honeywell Connected Enterprise to continue to drive double-digit connected software growth as we see strong initial demand for our Honeywell Forge offerings and will continue to launch updates for Forge throughout 2020. In summary, we're well positioned in key verticals and end markets, with ongoing operational excellence initiatives across all businesses to drive productivity and margin expansion. We have a robust playbook with multiple levers to protect profit in the event of a market slowdown, and significant balance sheet flexibility to generate strong returns through share repurchases and M&A. Our three transformation initiatives, the Connected Enterprise, Integrated Supply Chain, and Honeywell Digital, will continue to provide catalysts for profitable growth. So while 2020 is shaping up to be a challenging year, we're confident in our ability to continue to deliver. As we did last year, we will provide more detailed guidance once we close out the full year of 2019. With that, I'd like to turn the call back over to Darius, who will wrap up on slide 11.

Thanks, Greg. Overall, we are pleased with and encouraged by the performance from our businesses in the first three quarters of 2019. We continue to execute on our commitments to shareholders, are generating strong organic growth in many end markets, and have many ways to further expand margins and grow earnings. We continue to invest in our business's growth initiatives and deploy capital to generate high returns. Our track record of execution continues, and we're making progress in our business transformation initiatives, including Honeywell Connected Enterprise, Honeywell Digital, and supply chain transformation. We still have a lot of work to do with these initiatives, but I am pleased with the early progress and the significant opportunities they provide for Honeywell. With that, Mark, let's move to Q&A.

Thank you, Darius. Darius and Greg are now available to answer your questions. Ebony, please open the line for Q&A.

Thank you. The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. We ask that when you pose your question, please pick up your handset. Thank you, everyone. Our first question is coming from Sheila Kayaglu with Jefferies. Please go ahead.

Hi. Good morning, everyone, and thank you for the time. Darius, maybe for you on aerospace, can you talk about this business a little bit, how you're thinking about it as part of Honeywell longer term? Does it get bigger or maybe even smaller? I ask this because the management changed clearly, but I look at five quarters of double-digit organic growth and operating margins close to 27%, and I ask myself, is this as good as it gets? So maybe if you could just touch upon that for a second.

Well, yeah, I think it's pretty good. I mean, anytime you get double-digit growth in the economy, it's terrific, but we don't think that that kind of growth is far from over. You know, maybe certainly we're in a very favorable economic conditions, but as we kind of look into 2020, you know, we continue to be bullish on this business. You know, the management change really has nothing to do with the market conditions. I mean, I think, frankly... Tim has a core skill set that's very unique to what we're trying to accomplish in Honeywell Digital. We're trying to template what was done in aerospace because they're substantially more advanced than the rest of Honeywell. Tim expressed a desire, and I fully agreed and encouraged him to take on a new role to wrap up kind of his career. And Mike Mattson has been a terrific leader for decades in Honeywell. So I think that this is kind of a natural transition. I wouldn't read into the management changes has anything to do with aerospace market conditions. When I point to figures such as 60% of our orders already backlogged through 2020, I think flight hours are going to continue. Our aftermarket business is strong. There's a lot of BGA platforms that are ongoing production rates are strong. Hopefully, we'll see the 737 MAX return to higher productions rates and back to service. I don't see any kind of a doom and gloom scenario for the aerospace segment for the foreseeable future. As a matter of fact, I'm quite bullish on it.

Thank you very much. No, I didn't imply that about Tim. I think Mike and Tim were probably good partners. And then just upon the defense business, do you see that slowing down into 2020? You've mentioned before that you're trying to sell out for all of 2020. Kind of how you think about the growth profile of 40% of Aero? Yeah.

I mean, yeah, I think the tough, you know, the comps are going to get obviously tougher because you've had double-digit growth for, you know, for five consecutive quarters. But, you know, I don't think that there's, I'm anticipating any kind of a crash or negative growth. We're still expecting to grow next year. That's the expectations. Those are our early plans. We're going to provide you more detail in early 2020. But overall, the business continues to have levers for growth and also for continued margin expansion because I think something that gets discussed Dramatically understated is our focus on productivity, which you saw in our margin profile this quarter, which is continuing restructuring, driving Honeywell Digital, ISC transformation, the power of one on the commercial and fixed cost side. And you see that coming through in our numbers. So no matter what the market conditions are, that's part of the Honeywell Playbook.

Thank you.

You're welcome.

We will take our next question from Scott Davis with Milius Research. Please go ahead.

Good morning, guys. Good morning, Scott. One of the things, if you guys just don't mind going around the world a little bit and give us a little granularity on what you're seeing, and specifically China, I guess, and then Western Europe, maybe even Brazil, Mexico, et cetera. Sure.

Sure. I mean, I think overall, despite some of the negativity in the news, we actually saw pretty good growth, both from a revenue and orders perspective. You know, by far, China had the best quarter of the year, I think mid-single digit in terms of revenue growth, strong double-digit orders growth, bookings up double digits, so actually had a very, very good quarter in China. Our long-cycle businesses perform extraordinarily well. And it was a good quarter. Despite what we read in Europe, Honeywell had a very strong quarter in Europe as well. I mean, up mid-single digits, strong growth across the board. Probably the only exception was Italy. We had a little bit of a tougher. But overall, Europe was strong. Latham actually had a pretty good quarter as well. They were up, think about kind of mid-single digit growth. And again, some of the challenge economies there. It was a pleasant surprise based on how we're doing. Russia actually did well. Middle East did well. A little bit of the soft spot was India, which was a bit unusual for us in Q3. But we're still expecting in India double-digit growth for the year. So I'm not particularly alarmed by the one data point. And then U.S. obviously continues to be strong. So overall, both as I look at revenues and More importantly, orders, which is what positions us for 2020, was actually a pretty strong story and one that was very encouraging.

Good to hear. And just a completely different follow-up would just be, what does the customer adoption of Forge look like in the context of, you know, is it kind of trialing and saying we'll give this a try for a year? Is it more longer-term contracts? Is there... something in the middle? Is there some sort of standardized agreement that's starting to emerge as you get deeper into this?

Yeah, I think, Scott, that that varies based on the franchise. I mean, you know, for some of the connecteds are further ahead than others. You know, for example, in Q3, we had connected buildings and the cybersecurity leading in terms of strong double-digit growth. Some of them are a little further behind. We have more mature offerings, I would say, in cyber, in the aircraft segment, the building segment. Some of them are still in the development stage. So some of them are, you know, that's typically how you start an engagement with a customer. You kind of do a proof of concept. The customer is happy that proof of concept moves on to their assignment. So we are some that are in a broader rollout stage and some that are in a proof of concept stage. As an example of our success, we've had a major player in the Middle East do a proof of concept for us, which was highly successful. And that same player is now rolling out our Forge solutions to the entire oil and gas infrastructure, which will be worth millions of annual dollars per year. So I think it just depends which one we're talking about. But, you know, I think overall with Forge, we're still in early innings, and we're just launching the various Forge offerings. Well, good luck to you.

Thank you, guys. Thank you.

Moving next, we'll go to Steve Tuzel with JP Morgan. Please go ahead.

Hey, guys. Good morning.

Morning, Steve.

Can you just first walk through anything in the model for fourth quarter with regards to the segments that you'd want to highlight? I mean, you know, SPS is obviously one that I think would be helpful to get a little bit more kind of pointed guidance around, whether it's organic growth or you know, or profits and any of the other businesses that, you know, we may see variability outside of just kind of normal seasonality and comps.

Yeah. So I think you're going to see something, you know, pretty consistent with what we've just done in the third quarter. You know, obviously there's variability ranges around all of them. But, you know, as I described, I think Arrow is going to continue to lead the pack from a growth perspective. And I think we're going to see, you know, mid-single-digit kind of growth, you know, low to mid-single-digit kind of growth in PMT and HPT. And I would expect to see SPS, you know, down single digits again in the fourth quarter. And, you know, on an orders perspective, as we talked about in the prepared comments, you know, we had a great integrated quarter, 20% plus. you know, growth in orders. And we've been talking about those major systems projects coming in. We expect more of that in the fourth quarter. And that, you know, that ought to help us, you know, get set for next year. And then, you know, with the, you know, from a margin expansion perspective, you know, I think you're going to see the obviously the removal of the spin comparison is going to change the overall reported numbers. But I would expect to see you know, margin ranges that are going to look fairly similar from, you know, third into the fourth quarter, broadly speaking. It's the same, it's the same playbook. There's, I don't expect a, I don't expect like a big divergence, you know, from one quarter to the next in any particular business.

Is, is 15% margin still a credible number at SPNS? And you know, if you don't see progress there over the next kind of 12 months, you know, what kind of actions can you take?

Yeah, I think 15% is still a credible margin rate to build back from, you know, as we enter into 2020. And again, if you look at productivity products, as an example, it's essentially kind of flattened out. So we're, you know, we're showing organic declines, but the absolute value of the revenues has uh really kind of flattened out over the last few quarters and so and as we talked about in the channel um that that inventory level is going to come down to a normalized level in 4q so as that begins to re-accelerate uh and as uh and as we continue to get um additional growth in the uh in the aftermarket side and integrated i absolutely expect to see margins continue to uh to bounce back and and expand into 2020. yeah i just i wonder

Yeah, just add a couple of things to that. One is I think, you know, although maybe at a high level, obviously we'd like to print better results on SPS, but in terms of productivity products, you know, we're executing what we should be executing. The inventory levels are dropping, and we know exactly what they are, and they drop double-digit kind of things in Q3. You know, we see our sales out data improving. We see better commercial activity on our tier one wins. So it's still not resulting in the financial results we'd hope to see, but the progress from queue over queue is good. We've also enhanced some of the talent in that business, and we've had some new people join. So I would say that productivity products, we're very much on track. Intelligrator, which is maybe the other part of the story, I think as we discussed at the end of Q2, we got exactly the orders we expected to get, 24% growth in Intelligrator year over year. They came in late. They came in late in September, which are obviously when they come that late, and it's still a projects kind of business. It takes at least a couple of months to convert orders, at least to begin to convert orders into revenues. So probably won't see more of that until we get to you know, next 2020. But the other expectation I want to highlight is we're expecting another robust booking quarter in Intelligrated in Q4 this year. So I think we're – I'm not worried at all about what's going on in Intelligrated. I think the market has been challenged through the first half of the year. When you look at data points from SEMA and some of our industry competitors, I think we're – very much in line or even better than some of them.

One last quick one for you just on aerospace. Can you just talk about what the combination of any kind of potential headwinds from upgrades from this year combined with kind of the Honeywell-specific growth initiatives, whether it's connected or anything like that, Is that a neutral to next year, year over year? Is that still a positive, a slight negative? Can you just discuss the kind of dynamics between those two moving parts?

Yeah, I'm sure. I think the short story is kind of neutral. I think what we get into next year is probably a little bit tougher comps, giving the double-digit growth rate. So I think that that's realistic. If some puts and minuses, I mean, it's the 737 Macs. We anticipate it will be back in service next year, so that we'll get a little bit more OE. Probably some of the older aircraft will not be flying, so we'll probably have a little bit more of the aftermarket stream. I think business aviation will continue to be robust. We're very bullish on defense in space. We're seeing good growth in space and the helicopter markets again. I think probably the toughest things on a year-over-year basis will be the comps. The comps will be tougher. But I'm not sure there's any kind of major one-timers that I think would prevail. In terms of the RMUs and so on, we're continuing to invest in our NPD engine on that that's been very successful for us. And obviously, Forge will grow. So those are kind of the major puts and takes.

Great. Thanks a lot.

Thank you.

Our next question. We'll come from Jeff Spray with Vertical Research Partners. Please go ahead.

Yes, thank you. Good morning, everybody. Good morning, Jeff. Hey, just a couple things from me. First, could you just elaborate a little bit on what's going on with the net below-the-line items, what's driving the change from your prior outlook to the current outlook, restructuring and other things?

I mean, it's primarily the, you know, the three-cent favorability issue Again, roughly $30 million in the third quarter. A lot of that has to do with foreign currency, and there's still a number of other things below the line. So basically, the $50 million delta is $30 million of our actual 3Q and a $20 million roundabout lower number in the fourth quarter. Again, there's no huge needle mover in there, and there's going to be a range around that number, too. I mean, we say about $155, but that'll move around. you know, a little bit as well.

And there's some other stuff moving around, like other income and pension and the like. What's the actual restructuring outlook for Q4?

Yeah, we've got a sizable capacity. If you remember, I think we booked something like $300 million of restructuring in 2018 in the fourth quarter. And we've got, you know, capacity loaded in there for something similar. We're working our pipeline. And, you know, as we always do, we continue to curate that restructuring pipeline, and we'll take advantage of, you know, the projects that we have as we exit the year.

Yeah, I think maybe, Jeff, just something else to add. You know, we kind of give you a point number on all the line impact, and I think that's, you know, approximate. I think we're probably going to revisit that for next year because it really isn't a point number. There is some movement in it. It can happen from quarter to quarter, and I think just to be that precise and give you that precise number, it's probably a little bit inaccurate. I mean, we try to get as close as we can to our estimates, but we have some moving pieces in there that Greg just described. So I think, you know, I don't think there was anything major that moved. There's no major assumption changes, but a couple of little things, you know, moved $20, $30 million, which given the size of our company isn't much, and you'll get a different outcome. So I wouldn't read too much into it.

Understood. And then just on... projects, the long cycle order dynamics sound quite encouraging. Could you elaborate a little bit on the cash flow impact of that? It does sound like maybe the cash cycle on some of this is stretching out a little bit. What kind of opportunity do you see perhaps to unlock some more cash from working capital or other elements in the next year?

Yeah, I would say that you used the right word. It's the cash cycle. I wouldn't call it a problem. I mean, we had... obviously a very strong projects-related results as we were in last year and then coming into the early part of this year. And that's cycled down a bit with the orders pattern that we had seen previously. And now as that cycles back up, you're going to restart the advanced cycle on a lot of those large projects. And so we expect to start seeing that coming back through. And then we continue to do a lot of work around inventory as well. Our inventory, while it hasn't been a huge year-over-year cash flow problem for us, it's still growing. And we're trying to take that down every year as we try to become more and more efficient. So we're still working our initiatives around trying to drive inventory down as well. And we hope and expect that that's going to be supportive as we continue to move into the fourth quarter and into next year from a free cash perspective.

Yeah, as Greg pointed out, I think the biggest mover for us here in the Q3 was sort of this movement around the advances slash unbuild in much of our projects business. That's really the biggest needle mover. And we got a lot of our orders late. We weren't able to collect the cash And, you know, from a last year perspective, a lot of those orders came in earlier in the year, so we had the benefit of the advances. That's not the case this year, and that was a big swing. Maybe not as big of a factor, but our reinvestment ratio was the highest in Q3 versus the whole year. So that's probably the other factor, although not the major one for the cash outcome.

Great. Thank you.

Thank you.

We'll take our next question from Dean Dre with RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone.

Good morning, Dean. Good morning.

Hey, on PMT and process in particular, it was impressive to hear about these projects in Russia and China. We've heard from your competitors in process about pushouts of projects in particular. And are you seeing pushouts, anything at the margin that you'd call out?

We were actually very pleased with our global major projects this quarter. I mean, we were up strong double digit actually in that segment. So that was one of the really nice stories for us for the quarter, probably even better than we expected. So really, really nice progress. And Q4 looks quite robust as well. So hopefully we'll be able to secure those as well. But I think that was one of the more positive stories for us in the quarter. And good orders growth in Russia, China, some of the, you know, economies that have been, you know, that are presumably challenged, but, you know, frankly, we're not seeing that.

Got it. And this might be a bit of a rhetorical question, but based upon the upside in defense and space this quarter, you know, the 17% growth in core revenues and commentary about 2020, are you, Do you see Honeywell disadvantaged at all in some of the defense industry consolidation that we're seeing?

No, I don't. We're not generally a final system provider. We are a component tier one provider to those. I don't think that that calculus changes with the consolidation that's happening. We continue to be a good supplier to a lot of those integrators and suppliers. system providers, but I don't see that dynamic changing.

That's helpful. Thank you.

Thank you. Thank you.

Moving next to Julian Mitchell with Barsley. Please go ahead.

Hi. Good morning. Hi. Good morning. Maybe just a first question around... If you look at how demand trended in recent months, you'd called out Intelligrated picking up late in Q3, also some of the HBT activity in Europe. I wondered if there was anything else that you would highlight that got better or worse over the past sort of two or three months as you moved through it, and also maybe how your own repositioning and CapEx spending plans may have changed when you're thinking about 2020, if at all.

Yeah, I mean, in terms of, you know, kind of some of the changes, I think, you know, we had a relatively slow start in Europe for month one and month two of the quarter, and we're a little bit concerned heading into September. But September actually was very, very robust, and economies like Germany, France, the U.K. all did very, very well. So, you know, we had – although we were worried, but – September was very, very robust, much better than sort of what the industrial GDP print would have you believe. So that was certainly better. Kind of as we think about 2020, it's probably, as Greg pointed, it's probably going to be a tougher economic environment in 2020 than it is in 2019. But on the flip side of that, I don't see some fall off the cliff. I don't, you know, as I look at our Backlog, as I look at our growth rates in terms of the long cycle businesses, the level of bookings we have for defense and space, the SPS pickup that we're expecting, reasonable comps for aerospace, although tougher, but maybe not double digit, but still good growth. We're far from planning 2020 right now based on what we see as doom and gloom kind of a year. That's for sure. And, you know, if anything, hopefully there'll be some more positive outcomes. Looks like Brexit may reach a positive conclusion based on the news we're hearing this morning. Hopefully there'll be more of that positive news to go here in a Q4.

Yeah, and as it relates to repositioning, I think we're, as we go into 2020, we're going to have ample capacity to continue, you know, driving our reposition portfolio and pipeline efforts. you know, as we have this year as well. So I expect that to continue to be, you know, a big part of our productivity playbook for 2020 also.

Thanks. And then just following up maybe on SPS specifically in that context, you're now in the third quarter of your organic sales decline in that business. When we're thinking about the longevity of this downturn, should we assume a classic sort of short cycle duration of maybe five quarters of sales decline there and then the recovery post that? And allied to that, maybe just give us an update on how comfortable you feel with the market share in productivity products in particular.

Yeah. Well, I think, you know, as we've stated in the last quarter, I think productivity products is – is the business where we're focused on some improved commercial activity. We saw some good signs of that in Q3. And if you look at the margin profile, incremental margin profile from Q2 to Q3, it was better. The team has adjusted their cost structure to the market reality or their revenue base. But yeah, I mean, I think, you know, we're trending in the right direction. So we do expect productivity products to return to growth in 2020. That's very much our expectation. Based on what I'm seeing today, I don't see anything which would prevent us from doing that. So, you know, I can't tell you whether it's exactly five quarters or three or four, but we expect growth in 2020. It's kind of the short story.

Thank you very much. Thank you.

We will take our next question from John Walsh with Credit Suisse. Please go ahead.

Hi. Good morning.

Morning.

Morning. Just, I guess, a question around price and maybe also a little bit of discussion around the price-cost equation. It looks like at least per the Q, price decelerated a touch in Q3, but obviously the very strong margin performance, I would assume you're pretty green on price-cost. But can you maybe talk a little bit about that dynamic and how that's playing out into next year as we're kind of still seeing some input deflation?

Yeah, I mean, we've continued to have a strong cadence around price across the company. So as we head into, you know, next year, I'm not expecting that we're going to, you know, hit a wall and not be able to continue to get price in the marketplace. And as I said, the cost, as markets are slowing down, we're also doubling down on our procurement activities. uh, team in terms of driving our, uh, our material cost deflation program as well. So, you know, we're going to keep pushing hard on both of those, on both of those levers and, uh, expect that to be a net positive for us as we go into 2020.

Gotcha. And then, um, maybe just on, uh, you know, highlighting the, the balance sheet capacity, I mean, anything to call out there as we look into next year, if, uh, You know, there might be anything to do on the deal front. Obviously, you announced some small things in the release today, but how should we think about the use and the deployment of that next year?

Yeah, I mean, so first of all, we continue to be very active with our M&A pipeline. And, you know, there's a lot of things going on today as we speak, particularly given everything that's happening in the marketplace. And we hope that that will actually have a benefit as we go forward in terms of asset prices possibly increasing. coming down and making some things a bit more attractive. As you saw with our stock purchase program, we continue to do that pretty aggressively. And as we go into next year, I think we'll continue to use that as a lever for us. It's been very successful here. And I think barring any large deals, I think we're going to continue to be targeting to take out at least a percent of our share count on a year-on-year basis. So both of those are are going to be consistently deployed in terms of our expectations. We did, as Darius mentioned, refinance some of our debt. We've got some debt coming due in October, so we refinanced that in the third quarter. So we still retain a very, very strong balance sheet with a lot of access to capital. And with our strong cash flow and our repatriation program, I think we've got a lot of ammunition for us to go ahead and use as we head into next year.

Great. Appreciate the color.

And that does conclude today's question and answer session. At this time, I'd like to turn the conference back over to Mr. Darius Adamchak for any additional or closing remarks.

I want to thank our shareholders for continued support of Honeywell. We have delivered strong results each quarter this year and have continued to make great progress on our initiatives and deliver on our commitments. We are well positioned in attractive end markets with multiple levers for value creation and operational excellence in place. We are focused on continuing to outperform for our shareholders, our customers, and our employees. We're looking forward to sharing our results as well as our 2020 outlook during our fourth quarter earnings call in late January. Thank you for listening.

Thank you, everyone. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.