Honeywell International Inc.

Good day, ladies and gentlemen, and welcome to Honeywell's fourth 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 Benza, Vice President of Investor Relations.

Thank you, Abby. Good morning, and welcome to Honeywell's fourth quarter 2019 earnings and 2020 outlook 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 risks 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 spinoffs of our homes and transportation systems businesses in 2018, as well as pension mark-to-market adjustments and U.S. tax legislation except were otherwise noted. Comparisons are to the prior year period, unless otherwise noted. This morning, we will review our financial results for the fourth quarter and full year 2019, discuss our full year 2020 outlook, and share our guidance for the first quarter of 2020. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to Chairman and CEO, Darius Adantra.

Thank you, Mark, and good morning, everyone. Let's begin on slide two. We are very pleased with our results in 2019. We finished a great year of another strong quarter. In the fourth quarter, we delivered $2.06 adjusted earnings per share above the high end of the guidance range, 130 basis points of margin expansion, and maybe most importantly, $2.3 billion of adjusted free cash flow resulting in a fourth quarter conversion of 154%. With this conclusion to the year, we met or exceeded our financial commitments on all metrics in 2019, managing through a volatile environment and delivering adjusted earnings per share of $8.16, six cents above the high end of our initial 2019 guidance. Despite the challenging broad macro environment in 2019, we grew organic sales 5%, driven by strength across much of our portfolio throughout the year. Growth was driven by commercial aerospace, defense, asset solutions, and building products. We also had strong orders for HPS mega projects, UOP equipment and defense, and over 100% increase in telegrader orders during the fourth quarter. These robust orders contribute to a 10% year-over-year increase in long cycle backlog. Additionally, in 2019, Honeywell Connected Enterprise drove double-digit software growth. We expanded segment margin 150 basis points or 70 basis points, excluding the impact of the 2018 spinoffs, both 10 basis points above the high end of our 2019 guidance. Our growth, combined with productivity rigor and commercial excellence, drove margin expansion in aerospace, building technologies, and performance materials and technologies. We generated $6.3 billion of adjusted free cash flow for the year, exceeding the high end of our initial guidance by approximately $300 million and resulting in 105% free cash flow conversion or 114% free cash flow conversion, excluding pension income. We continue to make smart investments in our businesses, people, and communities. We deployed $7.8 billion of capital in 2019 across share repurchases, higher dividends, high-return CapEx, and two acquisitions, including Rebellion Photonics, a provider of innovative, intelligent, visual gas monitoring solutions, which we closed in the fourth quarter. This also included over 10 investments by Honeywell Ventures for over $50 million deployed in 2019, bringing our total venture investments to date to over $75 million. We continue to have our robust pipeline of M&A opportunities with significant balance sheet capacity deployed. We launched a new brand campaign to highlight some of the most exciting innovations and we're ranked number 13 on the Forbes magazine list of the world's most reputable companies for corporate responsibility. Lastly, we continue to make progress in our breakthrough and transformation initiatives, which I'll cover next in more detail. Let's turn to slide three. We continue to make significant progress on three key initiatives in support of our transformation to a software industrial company. In 2019, we commercialized Honeywell Forge enterprise performance management software, which helps companies in a variety of industries gather, gain insights from, and ultimately autonomously control their operations to drive efficiency and safety. Honeywell Forge helped drive double-digit connected software growth this year. Additionally, HCE is leading that transition to more recurring revenue models across the company, has delivered key wins and stronger customer relationships throughout 2019, and will continue to drive growth across Honeywell, including a 20% connected software growth component and overall growth rate over five years. We also made great strides in our integrated supply chain transformation. We established supply-based management strategies for 11 categories across the enterprise, enabled our businesses to take actions to substantially reduce their distribution and manufacturing footprint, drove improvements in sourcing productivity, and in the fourth quarter, we began seeing broad improvements in our inventory. We are on track to achieve our long-term targets, including half a billion of run rate benefits and a $1 billion reduction in inventory. On Honeywell Digital, which is foundational to running Honeywell with data-driven decision-making, We have matured our data management practices, digitized key processes through the deployment of new technology platforms, rationalized over 500 software applications, cleansed 5.2 million critical master data records, eliminated 20 ERP systems, and reduced websites by 58%. When complete, we expect our digital transformation to deliver half a billion dollars of run rate benefits across sales, productivity, and working capital improvements. We are very pleased the progress we made with each of our transformation initiatives in 2019, and we'll continue to build on this momentum in 2020 as we transform into a software industrial. In summer, we had a terrific 2019, both in our short-term operating performance and longer-term transformation agenda. And we're setting ourselves up for a strong 2020 and beyond. Now let me turn it over to Greg on slide four to discuss our fourth quarter results, and provide our 2020 outlook.

Thanks, Darius, and good morning, everyone. For the fourth quarter, we grew organic sales by 2%, driven by 7% organic growth in aerospace, as well as continued growth in our process automation, UOP, and building management products businesses. SPS contracted during the quarter, but the turnaround in productivity products is progressing. Intelligrated sales improved sequentially, but they were down year over year as expected due to tough comps. compared to nearly 50% growth in the fourth quarter of 2018. Importantly, orders were up 100% as the major project orders we anticipated and telegraded materialized to set us up well for 2020. Our organic growth combined with commercial and operational excellence and the benefits from the portfolio enhancements that we made in 2018 drove segment margin expansion of 130 basis points, with segment margin again exceeding 21% this quarter. Excluding the favorable impact of the spinoffs, Segment margins expanded by 90 basis points, which was 40 basis points above the high end of our guidance, driven by our strong commercial excellence and productivity programs. We delivered adjusted earnings per share of $2.06, up 11%, excluding the impact of the spinoff, and above the high end of our guidance. In addition to strong segment profit performance, earnings per share benefited from lower share count due to our buyback program. and a lower adjusted effective tax rate, which more than offset our planned lower pension income. During the quarter, we generated $2.3 billion of adjusted free cash flow with conversion of 154% on the strength of improvements in working capital, primarily from cash collections and inventory reductions. As Darius highlighted, we're beginning to see the effects of our supply chain transformation as demonstrated by inventory improvements in the fourth quarter. This resulted in full-year adjusted free cash flow of $6.3 billion and conversion of 105% above the high end of our guidance range. We continued to execute our capital deployment strategy in the fourth quarter. We deployed $644 million to dividends and $750 million to repurchases of Honeywell shares, bringing the total share repurchases for the year to $4.4 billion, resulting in a 3% share reduction, which is above the commitment of at least 1% share count reduction that we highlighted at the beginning of the year. We also completed the acquisition of Rebellion Photonics and funded two additional Honeywell venture investments. Now let's turn to slide five and talk about the segments. Starting with aerospace, sales up 7% on an organic basis, and orders were up double digits, finishing an outstanding year for the business overall. Defense in space grew 9%, led by increased aftermarket volumes on key U.S. DOD programs and global demand for guidance and navigation systems. backlog for defense and space is up double digits. Additionally, demand for Honeywell Forge drove double-digit jetwave growth in defense. As you'll recall, we launched JetWave for military platforms in 2018, and we continue to be excited about the connected growth opportunities there. In commercial OE, sales were up 4% organically, driven by increased deliveries across major OE business aviation platforms, partially offset by lower air transport sales. Commercial aftermarket grew 6% organically, driven by strong demand in air transport, while business jet aftermarket sales were approximately flat. Aerospace segment margin expanded 270 basis points, driven by productivity, commercial excellence, and strong aftermarket volumes. 2019 was another outstanding year for the aerospace team. In safety and productivity solutions, sales were down 11% on an organic basis, driven by lower sales volumes in productivity products, the impact of major systems project timing and integrated, and lower demand for personal protective equipment. SPS segment margins contracted 330 basis points year over year to approximately 13%, similar to prior quarters, as a result of the volume we leverage in productivity products and personal protective equipment. Within our integrated warehouse automation business, as we expected, sales were down double digits due to difficult comps and the timing of several major systems projects. 4Q and 1Q are the two most difficult quarters that Intelligrated will face as sales were up nearly 50% in each of those comparable periods. As we discussed in our last call, the orders pipeline has been robust, and for the second consecutive quarter, Intelligrated posted significant growth with orders up over 100%, which contributed to more than 30% increase in the backlog year over year. This positions the business well for 2020, as these major projects begin to drive growth starting in the second quarter and beyond. Importantly, Intelligrated's aftermarket service businesses continues to benefit from our large and growing installed base with strong double-digit sales growth for lifecycle support and services. In productivity products, we continue to see distributed stocking, but inventories are now approaching normalized levels, and we expect the business to return to growth in 2020. We have taken significant actions to address the challenges in this business, as we have discussed previously, and we're seeing improvements in our commercial operations as a result, which is reflected in the sequential sales growth compared to the third quarter of 2019. We're optimistic that we'll continue to see further improvements in the business throughout 2020. In the safety business, organic sales for the quarter were down 5% as continued demand for our gas sensing products was more than offset by decreased volumes of personal protective equipment and softer demand in the retail business. Moving to Honeywell building technology, 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, including double-digit growth in our connected software platforms, and growth in security. That was partially offset by building solution sales, which were down for the quarter, as declines in projects, including the energy savings performance contracts business, offset double-digit growth in the airport vertical. HBT segment margins expanded 170 basis points in the fourth quarter, driven by the favorable impact from the spinoffs of the home business. Segment margins, excluding the impact from spin accretion, were approximately flat in the quarter, and we expect this to improve in 2020 as we continue to make progress towards our long-term margin targets for the business. Finally, in performance materials and technologies, sales were up 3% on an organic basis. Process solution sales were up 6% organically, driven by strength across the automation portfolio and smart energy. Additionally, orders in the automation and projects businesses were up double digits, allowing us to exit the year with a strong backlog, notably in our global megaprojects business, which was up double digits. In UOP, sales were up 3% organically because both in petrochemical catalysts and our equipment business, partially offset by declines in gas processing due to fewer domestic cryo unit sales as a result of the continuation of softer midstream energy gas processing markets in the U.S. Backlog was up high single digits in UOP, driven by strong double-digit growth in equipment, which carries lower margins, as you know. Organic sales and advanced materials were down 4%, driven by lower volumes in pricing and flooring products due to the ongoing impact of the illegal HFC imports into Europe. Recent estimates suggest that these illegal imports are contributing annual emissions at least equivalent to that of 3.5 million cars. This means we take a forest the size of Portugal to capture all the illegal emissions. We continue to actively work in partnership with private industry, EU regulators, and EU member countries to address harmful illegal HFC imports. Increasing seizures of illegally imported HFCs are encouraging, but they're not yet meaningful enough reductions to the total illegal imports. While these efforts are ongoing, we'll continue to experience pressure on HFC pricing and volumes For the remainder of advanced materials, electronic materials grew mid-single digits, and packaging and composites was up high single digits. This was partially offset by softer demand in additives and chemicals. So overall, PMT segment margins contracted by 80 basis points in the quarter, driven by advanced materials volumes, the mix of catalyst shipments, and higher mix of UOP equipment, partially offset by improvements in productivity. As we've discussed before, the mix of catalyst sales and equipment project timing in UOP has an outsized impact on margins quarter to quarter. And for the full year, PMT margins expanded 70 basis points. So overall, we capped off the year with a very strong fourth quarter performance in earnings, margin expansion, and cash, as well as strong orders resulting in a healthy backlog as we enter into 2020. Now let's turn to slide six and discuss the markets and our 2020 outlook. As Darius mentioned, in 2019, we managed through a challenging year where trade tensions and the threat and reality of tariffs were constant. The uncertainty of Brexit, interest rate policy, and indications of a possible recession with signals like the inverted yield curve weighed on markets. Today, some of those issues have started to resolve themselves with the phase one US-China trade deal now in place and a more clear path forward on Brexit, but many uncertainties remain as we begin 2020. There's much more work to be done on the comprehensive long-term agreement between China and the U.S. Brexit has a conclusion. However, the execution of their exit from the European Union has yet to play out, and ramifications aren't fully known. Tensions in the Middle East have created the potential for market disruption. The recent health threat of the coronavirus is developing rapidly, and how it will evolve is still unknown. And a highly charged election year in the U.S. brings additional uncertainties for companies to manage through. In addition to that, we are facing discrete sales headwinds in aerospace, as others are, from the 737 MAX production delay in 2020, as Boeing has continued to recalibrate their expectations for its return to service and related production schedules. We are aligned with Boeing's most recent communications that assume the 737 MAX returns to service roughly mid-year. However, the situation remains fluid. So while there are perhaps fewer indications of a broader base recession today, there remain several challenging and potentially fast-changing dynamics that create uncertainty in the macro and caution in our short-cycle business outlook. With these factors, short-cycle outcomes for the year will be difficult to forecast, and you'll see that we have a wider EPS guidance range than is typical for us due to the range of outcomes that could result. Our outlook assumes the Middle East remains relatively stable and that we can continue to deliver, backlog, and obtain new projects in the Middle East. We are assuming monetary policy remains stable and interest rates don't rise, lending support to the economy, and that the U.S. election does not delay investment. We have not estimated a material impact if the coronavirus becomes more significant, which is already impacting aviation, in particular flight hours, and could also have a broader negative impact on supply chains in the economy, as was experienced with the SARS outbreak. We've incorporated the latest communicated build rates, as I mentioned, of the 737 MAX into our own revenue outlook. So knock-on effects of the overall aero supply chain are yet to play out. So while we have confidence in our market positions and have prepared ourselves for the year ahead, it's setting up as an equally and perhaps more uncertain year than the one we just completed. Given that, let's move to slide seven and discuss the markets and the segment outlook. Starting with aerospace, defense remains strong, driven by stable budgets, and we expect growth again in 2020, but at more moderate levels relative to the strong double digits we experienced in 2019. We continue to see healthy demand in business aviation, but we will have tougher comps in the business aviation OE. We expect aftermarket demand across commercial aerospace will continue to grow, driven by flight hours and retrofit modifications and upgrades, as well as the impact of older equipment remaining in service as a result of the delays in the MAX. That will partially be offset by the ADS-B phase-out. However, Arrow will have sales headwinds from the max production delays. We're taking actions to try and mitigate this impact as best we can, including leveraging recent improvements in our supply base to accelerate production from our backlog. And we continue to monitor the max situation closely, as you would expect. Additionally, the impact to our earnings potential due to the max will be somewhat muted as the potential aftermarket offsets with their higher profit levels compared to OE sales will provide some support for segment margins. As a result of these dynamics across aerospace, we're expecting organic sales to be up low to mid-single digits for the year as compared to the high single digits in the fourth quarter and the double-digit growth we experienced in the first three quarters of 2019. Now turning to SPS, we expect strong e-commerce and warehouse distribution macro trends to continue as customers seek and implement differentiated warehousing solutions to meet increased demand. These dynamics contributed to the robust and integrated orders in the second half of 2019, That will fuel warehouse automation sales growth in 2020, and we continue to expect strong services growth from our expanding install base. Excluding the warehousing market, industrial macro indicators remain weakened, which we expect will result in slower industrial safety, sensing, and IoT sales. Productivity Products is executing their recovery plan, as we mentioned, and we continue to expect a turnaround in 2020 as destocking ends with the return to growth expected in the second half of the year. Overall, we expect SPS organic sales to be approximately flat to up low single digits, and we expect SPS margins to begin recovering in 2020, driven by improvements in productivity product margins, productivity actions, and enhanced growth in software and services. In HPT, following the spin of our homes portfolio, our primary exposure is to the non-resi market, construction market, and to the infrastructure and data center markets. While we're continuing to monitor the outlook across construction, today we anticipate Non-residential market overalls remain flat to up modestly in 2020, and we're expecting HPT organic sales to be down slightly to up low single digits. We expect strength in commercial fire and modest growth in security products to continue. In building solutions, we expect continued growth in airports, vertical, and we are focused on driving services growth to mitigate the impact of headwinds from lower energy performance contracts and softer project orders. Building management system strength continues in the near term and driving better execution and pipeline development to deliver ongoing growth. PPMT entered 2020 with a healthy, long-cycle backlog, up high single digits in both UOP and HPS, driven by robust 2019 orders for UOP equipment and HPS projects. The oil and gas market outlook is similar to recent trends, with continued softness in the U.S. midstream gas processing market, but continued demand for megaprojects. Finally, with advanced materials, we expect continued growth from Solstice in our foreign products business and better execution in specialty products. However, the illegal HFC imports into Europe continue to put pressure on growth, particularly through the first half of the year. Given these dynamics, in total, we expect P&T organic sales to be flat to up low single digits for the year. Overall, the strength of Honeywell is our diversified portfolio, and we head into 2020 with a healthy long cycle backlog combined with strong operational playbooks, which will enable us to perform in another tough macro backdrop. Now let's turn to slide eight and talk about how these dynamics come together for our 2020 financial guidance. We have an effective strategy at Honeywell which enables us to continuously deliver on our financial commitments, and that is not changing in 2020. Our focus continues to be on smart investments for the future, new product development, and breakthrough initiatives to fuel growth, all with ongoing productivity rigor and commercial and operational excellence to drive it. These strengths embodied in our transformation initiatives position us to deliver a solid year, even with the unpredictability of the current market backdrop and uncertain short cycle macro environment. For 2020, we expect organic sales growth overall of 0% to 3%, which reflects our balanced portfolio, diverse end market expectations, headwinds from the 737 max production delay, and a cautious outlook on our short cycle businesses in this environment. We expect to expand in March with 20 to 50 basis points for the overall company, consistent with our long-term framework. Below-the-line pension and OPEB income in 2020 is expected to be approximately $830 million, about a $200 million increase from the prior year, or 20 cents of each EPS, which I'll discuss in more detail in the next slide. In addition to pension income, other key planning items to take note of include weighted average share count of approximately 718 million shares, repositioning charges of $375 to $500 million as we continue to fund high-return projects, and the remaining below-the-line items to be in the range of $205 to $230 million of expense. Combined, this results in below-the-line income in the range of $100 to $250 million for the year. Finally, we expect an effective tax rate of approximately 21 to 22 percent for the year. All in, we're guiding EPS to be $8.60 to $9 per share, up 5% to 10% adjusted, including the $0.20 benefit from higher pension income. We expect continued strong free cash flow generation, with adjusted free cash flow of $5.7 billion to $6.2 billion in 2020, driven by high-quality income growth and continued working capital improvements. Compared to 2019, we expect approximately $500 to $600 million of headwinds from higher-planned CapEx investments, an additional payroll cycle due to the calendar, and anticipated environmental and other payments. This cash generation equates to adjusted free cash flow conversion of approximately 102 to 107% excluding pension income. We believe excluding the non-cash pension income impact better reflects our operating performance and enables more appropriate comparisons to our peers. We continue to have a strong balance sheet with significant capacity and desire to do more M&A, as Darius mentioned. we do have a strong pipeline of opportunities. But in the absence of completing significant M&A, we'll continue to deploy additional capital to repurchases of plenty well shares. Now let's turn to slide nine to discuss our 2020 earnings per share bridge compared to 19. As I noted earlier, we're providing some slightly wider ranges than we typically do as a result of the number of variables that could impact the business over the next 12 months. Segment profit continues to be a key driver of our earnings growth, Continued productivity improvements, commercial excellence, volume leverage, and ongoing benefits from previously funded repositioning will contribute 10 to 45 cents per share. We expect our share repurchase program, which has as a base case the delivery of at least a 1% additional share count reduction, to result in a benefit of approximately 14 cents per share year over year. Our expected tax rate of 21 to 22% is a range of a 7 cent headwind to a 4 cent benefit to EPS. Excluding pension income, below the line items are expected to be in the range of a $0.04 headwind to a $0.12 benefit per share, primarily driven by the range I mentioned on expected repositioning. The last item is the $0.20 increase from the higher pension income as a result of high investment returns in 2019 and lower discount rates in 2020. Including that $0.20 tailwind, we expect earnings per share to be in the range of $860 to $9, as I mentioned previously. So I'd like to take a moment just to discuss the pension dynamics in a little bit more detail. As we've talked about previously, we have de-risked our pension plans. And in 2019, approximately 50% of the plan assets were in more conservative fixed income-like assets, the other half being in return-seeking assets. As a result of the strong equity markets in 2019, those return-seeking assets earned approximately 21% in the year, resulting in over $3 billion of an increase in our pension asset base compared to last year. This higher asset base combined with lower discount rates is driving higher income in 2020, even with lower rates of return expected. Our pension is now 110% funded, and we continue to de-risk that with approximately 60% of our plan assets now in fixed income for 2020. So in summary, while we're cautious about the macro backdrop and the short cycle outcomes are once again hard to predict, we enter the year with a healthy backlog in our long cycle business. We have diversified end markets, a strong playbook, and a solid track record of execution, and we're prepared to deliver another strong year with growth primarily from continued segment profit performance and our capital deployment strategy. Now let's turn to slide 10 for a preview of the first quarter. For the first quarter, we expect organic sales to be in the range of down 2% to up 2% organically, driven by growth in aerospace, continued strength in building products, UOP equipment, and process automation, offset by headwinds from SPS and some of the other short cycle components of our portfolio. Keep in mind Q1 of 2019 was our strongest quarter of the year and will be our most difficult comp. We expect commercial excellence, productivity rigor, and the benefits from previously funded repositioning to drive continued segment profit and segment margin growth with 20 to 50 basis points of year-over-year margin expansion, resulting in segment margins in the range of 20.6 to 20.9 for the first quarter. In aerospace, we continue to see demand in both commercial aerospace and U.S. defense, supported by robust orders growth and firm backlogs, as I've discussed. However, as we've stated, after five straight quarters of double-digit sales growth through 3Q 2019 and high single-digit growth in 4Q 2019, we expect organic sales growth rates to moderate in 2020. Arrow is facing sales headwinds, as are others, from Boeing's most recent recalibrations of the 737 MAX production delays, which will contribute to the more moderate growth rates as we enter the year, although we plan to mitigate some of that impact by accelerating production for our backlog. In SPS, we expect distributed restocking to come to an end in productivity products, although return to growth will likely be a second-half outcome. And we expect slow sales to continue in industrial safety. Intelligrated sales will be impacted by the project timing I mentioned in the first quarter due to a strong growth of approximately 50% last year at this time. But growth from robust orders in the second half of 2019 will contribute to more substantial sales growth in the following quarters. In building technologies, we expect strength in commercial fire and security products driven by demand in the Americas as well as continued strength in airports. We continue to see infrastructure, including airports and data center projects, as opportunities for strong growth in HPT. However, we expect softer project sales in energy and other verticals within building solutions as we begin the year. In performance materials and technologies, we expect to see continued growth in products and services and process automation, and we expect a healthy demand for equipment in UOP. The headwinds in the advanced materials business from the legal imports of HFCs into Europe and lower specialty products demand driven by the slowdown in China will persist in the early part of 2020. We expect the effective tax rate to be between 21% and 22% in the first quarter, and average share count to be approximately 720 million shares. All of this results in earnings per share in the range of $2.02 to $2.07, representing growth of 5% to 8% earnings per share. In summary, well positioned going into the first quarter, with plans in place and ongoing initiatives across all businesses, to drive productivity and margin expansion to mitigate the impacts of the mixed macro environment and the headwinds of the tough comps compared to a year ago. We also continue to have significant balance sheet flexibility to generate strong returns through share repurchases and opportunistic M&A. 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 the strong operational performance from our portfolio in 2019. We continue to execute on our core priorities, and we again delivered on our commitment. We remain cautious on the macro environment of many factors, still very fluid for 2020, and significant uncertainty around short cycle demand. We have a balanced portfolio poised for continued performance despite macro headwinds, and we continue to make significant progress on our transformation initiatives, including Honeywell Connected Enterprise, Honeywell Digital, and our integrated supply chains. Additionally, we're bringing innovative and connected offerings to market to fuel growth, which combined with our strong execution track record, positions us well for 2020 and beyond. With that, Mark, let's move to Q&A.

Thank you, Darius. Darius and Greg are now available to answer your questions. Abby, 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. And our first question is coming from Steve Tusa with JP Morgan.

Hey, guys. Good morning. Morning, Steve. Good morning. Just on the free cash, you mentioned a few items obviously stronger in 19. You mentioned a few items influencing 2020. I kind of disagree with using an adjusted conversion metric. Ultimately, cash per share is what matters. Is anything kind of flipping in 21? So is you know, is 20 to be viewed as kind of the base for growth, or is there anything, you know, timing-wise that was pulled into 19 that influences 20, and then, you know, 21 is kind of a more normal base to grow off of?

Yeah, so we've always talked about our free cash flow conversion adjusted, and we guided it last year, even, and I believe 95 to 100% adjusted. We highlighted the, both in our press release materials, both the way we had done it previously adjusted, and then we also adjusted it for pension income just to be transparent about both of those metrics, particularly with the increase in pension income going into 2020. So that's really the – that's what you're seeing there in terms of – and both of those numbers are strongly above 100%. So in terms of the 2019 into 2020 differences, what I tried to highlight in the opening, Steve, is really a couple things. First, we are going to spend a bit more CapEx as we go into 2020, and that's in support of our transformation initiatives in the supply chain, some additional capacity for some new products. We also have, just from a calendar perspective, we're going to have an extra payroll cycle in 2020. So that's just math. And, you know, for us, that's, you know, call it between $100 and $200 million for of headwind that will come and go in 2020. And then in terms of our environmental and other liabilities, those numbers will move a little bit. And so there's probably $100-ish million, maybe to $200 million of flex that we have in there for 2020 also. So those are really the major items that you'll see. But our cash flow performance and the overachievement that we had in the fourth quarter relative to our own expectations were heavily anchored around our working capital improvements. We did a tremendous job with our commercial and collections teams on the receivable side. We've been doing a lot on transforming how we do credit to collections. And then we talked about inventory being our bugaboo for some time now. If you look at the free cash flow statement, you'll see for the first time in a while we actually were able to get cash from inventory as we're specifically starting to tune some of those dials and you know, a more disciplined way, you know, with, again, some of the things that Torsten and the team are driving from a transformation perspective. So, Darius, I don't know if you want to add to that.

Yeah, just to add a couple of things, Steve, and maybe just to add a couple of things on a year-over-year basis, and these are not dramatic impacts, but, you know, overall our cash outlays are going to be slightly higher in 2020 versus 2019 due to restructuring, so that's probably another factor. You know, I wouldn't get too focused about a baseline of 2020. Obviously, we have some capex to spend, which is the driver in a payment cycle. That's an extra one, so that's just a math worked out. So I don't necessarily mean that 2020 now is the baseline. But I do want to highlight something, and I think it's a point that's been missed completely, which is if you look at the cash flow generation of this company versus what it was three years ago, we're about $2 billion higher on 15% to 20% in the last sales growth. I think that point's been just missed completely. And I'm extraordinarily proud of the team in terms of what they've been able to accomplish in terms of cash generation. After all, that gives us more firepower to actually reinvest in the business or pass back to our shareholders or likely both. And I think that's the thing that really matters.

Okay, so just, Dave, that makes sense. So basically a few hundred million dollars, that is kind of timing-related in 20. Is that kind of how we should think about it at a high level?

Yes.

And then one last quick one. Just on HBT, what's going on there with the, I mean, you guys had a pretty positive investor day and now kind of framing a year with a little bit of a decline at the low end. What kind of popped up? Is that kind of performance contracting? I know JCI talked about that as being weak as well. What's kind of the drag there?

That's exactly it, Steve. We basically are energy contracts or performance contracts primarily driven by the government sector. We've seen a substantial drop-off in that segment of the business in orders that has not been the focus of the government sector lately, and that's been a problem. That's been a significant business for us in the past, and that's dropped off. The orders there have dropped off double digits. That's probably the one problem area that we've seen in terms of orders. But we're always going to have an issue somewhere. But if we look at our long cycle orders for the quarter across Honeywell, 15% growth. I don't want to sort of bypass that fact. And a book-to-bill ratio of 1.7. So I think it was an incredibly successful quarter from a long cycle orders perspective. And just to maybe quote you one other fact, in a place like China, orders up north of 20% and backlog up nearly 50%. So I view this quarter as just an outstanding promote, you know, Honeywell winning in the marketplace.

Okay, one quick one. What's your year-end share count? And then I'll leave it there, just year-end ending share count. I'll leave it there. Thanks a lot.

I think we talked about 718. Yeah.

We will take our next question from Scott Davis with Mellius Research.

Hi. Good morning, guys. Good morning.

A lot of information here, and it's super helpful. But I think this is the first quarter where we've, well, at least for the 2020 guide, where supply chain seems to be starting to become a tailwind. And I guess my question really is, Darius, has this become a linear tailwind, meaning you know, you get some benefit in 2020, some in 21, 22, or is there some sort of a step up that occurs over time as you kind of post these investment cycle?

I think it's a gradual improvement. You know, I think I was extraordinarily pleased with what we saw in terms of our inventory management. You know, inventory has been a bit of a bugaboo for Honeywell for a long time, and we actually made some really nice progress in the second half of the year. Now, I don't think there are any miracles for us out there, but but I expect that progress to continue, and it was reflected in our cash flow for Q4. Also, we're focused on our delivery, our quality, and so on, and Torsten and his team are doing a really nice job driving those improvements, and I expect a gradual improvement year over year, and then transformation. I mean, we dropped our fixed cost footprint in 2019. We have an even more aggressive plan for 2020 and 2021, so you're going to kind of continue to see that progress on fixed cost reduction, which obviously makes us a much more variable cost company, which is something that I very much desire.

Yeah, super helpful. And I don't think you mentioned the word M&A or deals of any course in the prepared remarks. I may have missed it, of course, but was that purposeful in the context of just not a lot, relatively expensive market out there, or is it just not part of the planning? right now, and deals are getting announced when they get announced.

Yeah, I mean, you know, we did do Rebellion in December, which isn't a big acquisition, but really an interesting one, which is basically the use of imaging for advanced gas detection. So it's very much a technology-oriented company in the industrial segment, which fits really, really well with industrial safety, but also fits well with productivity solutions. and our HPS business. So we're very thrilled to get that one. You know, in terms of M&A, we continue to be very active, I can tell you. And the environment we're seeing is, yeah, the prices are elevated. But what I can also tell you is that, you know, kind of because there's so much cash awash and so much capital to deploy, we're seeing very aggressive sort of due diligence and the kind of terms that, others are willing to accept. So, you know, I think we're assessing that because we're going to continue to be a very cautious company and really study the market. But we also have to kind of look within ourselves in terms of, you know, what's risk that's reasonable, what isn't. So it's a very robust M&A marketplace, and we expect to do deals in 2020, certainly.

Helpful. Best of luck, guys. Thank you. Thanks, Seth.

We will take our next question from Julian Mitchell with Barclays.

Hi, good morning. Maybe it's the first question around the capex hike that you mentioned. It sounded pretty substantial. So maybe give us some idea of how long capital spending stays elevated and also in terms of the split of the CapEx increase maybe between growth-focused or new product initiatives versus some of those supply chain internal self-help measures?

Sure. So, you know, we've been around 800 million, as you know, for the last couple of years. I think it was like in the 820s or 830s or so. And so, you know, when I say elevated, this is not massive increases. We're talking about 100, you know, 100-ish type of increases year on year, and I would say it's probably 50-50 split between increases relative to the transformation and increases relative to some new capacity for some of our new product launches that we're doing. This is not like we're making one massive block investment in something huge here, but as we go through this transformation in the supply chain, it's going to require capital. 50-50, I would say, and think about it in sort of like 100, 150 type of potential increase year on year.

And by the way, just to add to that, the IRR in total on these investments, substantially north of 30%. So, I mean, if you think about that kind of a return versus M&A, whenever we're going to see those kinds of returns, I'm more than happy to deploy more capital because it's going to make us a better company in the long term. So, I think that this increase in capital, I think, should be viewed as a positive, not a negative.

Yeah, and again, we talk about our free cash conversion, just to get back to that for a minute, and we've said many times, we are not pinpointed on 100. If we've got good investments, we're going to make them.

That's helpful. Thank you. And then my second question, just around safety and productivity solutions, not so much on the productivity solutions piece, because I think that's well understood, but maybe on safety, you know, that did roll over in the fourth quarter. Just maybe give us some understanding of was that a surprise to you and what you think this year will look like in terms of safety sales?

Yeah, I mean, I think, you know, there it's the markets. The industrial markets overall have been relatively soft. We don't think that there's anything unusual going on in that business. It's a reflection of that. Obviously, it's a market that's flattish to down. Some of the segments that we play in, we saw that. This is probably why we have some uncertainty about the short cycle. That's one of the tougher businesses to call for us. You know, we are concerned about what's happening in China on coronavirus and so on, and not just the impact in China, but really the impact on the global industrial production because these are global supply chains. So I think you have to look beyond just China. You know, but we're optimistic that the markets are going to improve, but there is inherently something unusual going on in that business.

Great. Thanks. Thank you. Thanks.

We will take our next question from Andy Kaplowitz with Citi.

Good morning, guys. Good morning, Andy.

Hey, so Greg, just focusing on your arrow guidance for 2020, to the extent you can, could you elaborate on the headwinds that you could incur from the max, either growth or margin? And obviously, it's too early to tell the coronavirus impact on commercial aftermarket, but there are a lot of moving parts in that business. You know, whether it's a brief decline in flight hours or the ADSP mandate, you've had strong alarm news, you know, connecting initiatives are doing well. So how do you think about the resiliency of commercial aero aftermarket in 2020?

So, you know, obviously what Boeing is doing with the max return to service, you know, has and will have an impact on the aftermarket performance. And I think we're all aware of, you know, they fly the older planes longer and so therefore, you know, has an increased demand in that sense. When you think about our guide for what's happening with the MAX, you should think about we're going to have probably a low to mid single digit, you know, headwind to the aerospace growth because of the production schedule changes. And so, you know, we talked last year about it being rather minimal because the numbers were smaller. But now with Boeing announcing the stoppage of production and their mid-year return to service and their ramp up, their re-ramp, we are going to be taking down our deliveries to them much more significantly than we did in the back half of 2019. So as we talked about, we will try to utilize some of our other existing backlog, and hopefully the supply base can provide us some additional material inputs so that we can divert labor and try to serve some of our other customers in a way to offset some of that. But it's hard to say how that's going to work out. That's why we are being a bit cautious because that's all very fresh news, as you know, within weeks. And so the impact to even our supply chain is unknown.

The revenue impact is meaningful. Think about kind of a mid-triple-digit impact for millions of dollars. Obviously, we think we can offset some of that both through RMUs and backlog reduction, but from a revenue perspective, it's not an insignificant... And by the way, we're completely aligned to the Boeing perspective, so that's what's reflected in our current outlook.

Thanks for that, guys. And, Gary, as you already mentioned, China in Q4 was pretty strong in terms of orders. But you can walk us around the world, what you did in Q4 and what your expectations are for 2020, with the understanding that there's uncertainty out there. I think in Q3, China, U.S., Europe were all strong. You're expecting India to come back. So what happened to these regions in Q4?

Yeah. Yeah, interesting Q4. I mean, obviously, China was a highlight, both kind of on the orders side. Growth rate, you know, and by the way, China is accelerating for us. So, you know, we've seen a higher rate of growth, Q2, Q3, Q4 is even higher. So we're encouraged by what we're seeing there. The orders give us, so actually China is one of the really nice stories for us. The other place to highlight it, and I think I've talked about this before, which is Latin America. I mean, Latin America was also up high single digit. And obviously we have to be taking a lot of share there given the fact that those economies aren't exactly robust and they're struggling. So I'm very, very pleased with what's happened there. Middle East continues to be a region of strength for us. We had some tougher comps, but think low to mid-single digit kind of growth rate. Probably the low light for us was Western Europe. That's been kind of soft in Q4. I think a couple of the countries that I'd look to that were particularly soft would be Italy and the Netherlands, which were week overall. You know, India was okay in Q4. You know, frankly, it was a little bit lower than we had hoped, you know, low to mid-single-digit kind of growth numbers. You know, there's some, you know, we haven't, that's a country of strength for us, but slightly below expectations. And, you know, Russia actually did quite well for us as well in the segments that we're playing. So, Sort of a mixed story, but the highlight certainly being China, both on the actual performance and the bookings growth.

Very interesting. Thanks, guys. Thank you.

We will take our next question from Jeff Sprague with Vertical Research.

Hey, thank you. Good morning, everyone. A couple quick ones from me. Just on the productivity products, Darius, a little surprised to hear you're not expecting a return to growth to the back half into the back half the comps are you know very easy in the first half do you feel like you have the you know the product to actually you know drive the business and kind of you know take a little bit better control your destiny relative to kind of just what the noise is going on perhaps in the channel so to be clear i am expecting a return to growth and productivity product so i think we

I think we've got our signals crossed somewhere there. And just to give you some very specific data points, the sales out in the channel for productivity products has grown every quarter last year. We've more or less normalized our channel position now by the end of 2019. We actually saw growth in the scanning portfolio in productivity products, and we've been able to secure a couple of good wins. The toughest comp still for productivity products is Q1. We anticipated that. It's not news. But as we get further and further out the year, I do expect growth in productivity products. And I have the data that gives me that confidence. So that's not an I wish and a hope. I have some data points that says that that's a reasonable outcome to expect, unless, of course, something goes wrong with the market. But actually, I'm very pleased with the kind of progress that's been made the team that we now have in place and the products that we have to the marketplace.

I was just going by slide seven there on the second half. Just thinking about the guide overall, when you read what you put on slide six, it doesn't sound like you're being super conservative, but then when you talk and with the width of the range, it does in a way feel conservative. Could you just address that? I mean, zero at the low end feels pretty conservative, particularly if, you know, if you pull out a zero in Q1, which is your toughest comparison, right, then, you know, you probably are on a path for something, you know, better than that as the year unfolds.

Well, you know, Jeff, I think we've been pretty consistent in our approach in terms of forecasting and outlooks, which is When I'm not sure of something, or myself and Greg are not sure of something, we're going to give you a wider range. We're not going to promise things that we either don't have visibility to or can't do. I would also tell you a couple other things. There are quite a few unknowns. Coronavirus right now, as an example, is something that's very difficult for us to predict around the impact. You know, if things go back and our factories reopen Monday or a week from Monday, which is kind of the schedule, well, then, you know, maybe it's conservative. What if they don't? What if this continues to spread? What if it gets worse? You know, that impact could be substantially worse than what we're expecting. You know, the short cycle is a little bit unpredictable. We talked about there was a prior question, industrial safety, it's tough. It's tough to call that right now. You know, as I look at a lot of the reports from a lot of the shorter cycle-oriented peers, they exactly have not been stellar. I mean, so, you know, we're trying to call it, I don't know about conservatively, when we don't know and we don't know that much about short cycle right now. You know, we're going to kind of err on certainly a little bit of wider range and we'll see what happens. And obviously, like we do every year, As the year progresses, we'll update you and we'll refresh our guidance. I'm very happy with our long cycle. I mean, you know, a 10% growth in the backlog is very good. So that gives me some confidence, and we'll see how the year progresses.

Yeah, and on the long cycle, just one more if I could. Obviously, projects are normally subject to delays and the like, but... As it stands now, is most of that backlog deliverable in 2020? It's tied to expected activity in 2020?

No, some of it is beyond 2020. I mean, you know, we sort of expect a normal conversion cycle. I mean, it's, you know, for example, some of the integrated backlog goes all the way into 20, yeah.

15 months.

Yeah, 15, 18 months. So it's a longer cycle. But nevertheless, I mean, The makeup of it isn't dramatically different in terms of execution versus end of 2018. So it kind of looks the same. It's always more than one year. So it's not inconsistent with what we've seen in the past. Great. Thank you very much.

Okay, Abby, I think we'll take two more questions.

Okay, thank you. We will take our next question from Nicole DeBlaze with Deutsche Bank.

Yeah, thanks for the question. Good morning, guys. Good morning. So my first question is just around, you know, you guys talked about short cycle as obviously another item of uncertainty in 2020. Can you talk a little bit about what you saw from short cycle trends in 4Q throughout the quarter? And was there maybe any signs of, like, weakening throughout December and into January that gives you concern into the first quarter? Or have you seen more, like, stabilization?

I would tell you that as we exited the year, it was relatively stable, but I would tell you that also January with the China situation is going to be one we're going to have to read into pretty closely. I wouldn't highlight a huge problem to solve at this point just yet, but certainly there have been some weakening trends as we exited December and into January in a few places. The short cycle is one we're going to watch very closely. Darius mentioned a couple of areas in Europe in particular as well.

Okay, got it. Thanks, Greg. And then secondly, just around process, if you guys could talk a little bit more about what you're seeing from the backlog perspective and areas of strength. One of your big competitors talked about some big LNG projects coming through recently, so it would be great to hear where the strength is coming from for you guys.

Yeah, well, I think, you know, for us it's probably three main components of strengths. By the way, HPS had a terrific quarter. Double-digit orders growth. The business is doing incredibly well. We're thrilled with their performance. But specifically, you know, LNG is coming through. Some of the mega refining petrochemical complexes is the – Another place of growth. And, you know, we're starting to do a bit more in the renewable segment. That's actually one of the focus areas for P&T in general, and we're seeing some improved activity in renewables. So I would highlight those three as areas where we're seeing growth with a terrific bookings and orders outlook in Q4. Thanks, Darius.

I'll pass it on.

And our next question is from Nigel Coe with Wolf Research.

Thanks, guys. Thanks for fitting me in. I appreciate it. So, yeah, we've obviously covered a lot of ground and appreciate all the details, by the way. Just want to clarify on the payroll cycle, Greg, you called out, you know, $100 million, $200 million. Is that just a cash impact or does that also impact earnings?

That's right. Payroll. Yeah, payroll. That's our payroll. Right.

But is that just cash or the earnings?

No, no, it's cash. It's just cash. Generally, at the end of the year, we carry an accrual. The way the calendar falls, we pay every two weeks on a Friday. It happens all the time the exact same way it happens next year. The Friday is going to be right before the year end.

Understood. Thank you very much. And then my main question is on the 20, 50 bits of segment margin expansion, how does that look by segments? And the spirit of my question is, Should we expect SPS to be sort of a heavy contributor to that, maybe aerospace a little bit less, so any color on that. And then kind of the subtext here is you're obviously doing a lot of restructuring this year up to half a billion dollars in your plan. Is that all cash, and what kind of paybacks are you getting on that spend?

Yeah, so let me unpack that. First of all, we're not giving segment margin expansion guidance individually. You know, we should expect, of course, that SPS will improve, you know, given the degradation we saw in 2019. They've obviously got a lot more, you know, room to run given that depression we had this year. You know, the other three businesses I think all have, I'll call it, equal opportunity on margin improvement overall. So, you know, that's the way I would think about that from a segment perspective. As it relates to the restructuring, a high percentage of the restructuring that we have on the balance sheet is cash-oriented. And we do expect that is going to essentially get carried out over two and a half to three years' time. As Darius mentioned, a heavy amount of that will be in 2020 and then in 2021 and a little bit of a tail-off into 22. But as it relates to the project, you can think about them really in sort of two categories. Those that are really tied to call it site consolidations, those are above the cost of capital, clearly high single-digit, low double-digit type returns. Those that are more associated with call it back office productivity and organizational redevelopment and so on, those are carrying far higher returns to them. So that's kind of what we are looking at.

Great, thank you. And one quick clarification on the share count reduction question. It doesn't feel like you got a whole lot dialed in for 2020, about a billion and five by my calculations. Is that the right zone?

Yeah, that's in the ballpark. Again, we are at a minimum going to buy back 1% of our shares for sure. And then, you know, as we discussed, if the year progresses and we're not seeing a lot of M&A activity and, you know, it looks like an attractive opportunity as we did here in 2019, we won't be afraid to go back into the market and scoop up some of our own shares.

Great. Thanks, guys.

That concludes today's question and answer session. At this time, I'd like to turn the conference back to Mr. Darius Adamczyk for any additional or closing remarks.

I want to thank our shareholders for continued support of Honeywell. We remain focused on continuing to outperform for our shareholders, our customers, and our employees. We have delivered our commitment-strong results each quarter and continue to make great progress in our growth and transformation initiatives. We have a great portfolio and continue to execute well. I'm excited for 2020, and we expect another high performance year for Honeywell. Thank you all for listening, and have a great weekend.

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