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Ari
Host
Good day, ladies and gentlemen, and welcome to Honeywell's third quarter earnings release. At this time, all participants are in a listening-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 click on the raise hand icon at the bottom of your Zoom screen. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Reena Vaidya, Director of Investor Relations. Reena, please go ahead.
Reena Vaidya
Director of Investor Relations
Thank you, Ari. Good morning and welcome to Honeywell's third quarter 2021 earnings conference call. On the call with me today are Chairman and CEO Dariusz Adamczyk and Senior Vice President and Chief Financial Officer Fred Lewis. Also joining us are Senior Vice President and General Counsel Anne Madden and Senior Vice President and Chief Supply Chain Officer Torsten Pils. This call and webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com forward slash investor. Honeywell also uses our website as a means of disclosing information which may be of interest or material to our investors for complying with disclosure obligations under Regulation FD. Accordingly, investors should monitor our Investor Relations website in addition to following our press releases SEC filings, public conference calls, webcasts, and social media. 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 based on many factors, including changing economic and business conditions. 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 10Q and other SEC filings. This morning, we will review our financial results for the third quarter of 2021, share our guidance for the fourth quarter and full year 2021, and share some preliminary thoughts on 2022 planning. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to Chairman and CEO, Dari Sadamsha.
Dariusz Adamczyk
Chairman and CEO
Thank you, Rina, and good morning, everyone. Let's begin on slide two. Our outstanding discipline and execution enable us to deliver third quarter results that met or exceeded our financial guidance in an increasingly challenging environment. We achieved a high end of our third quarter adjusted earnings per share guidance range and exceeded the high end of our segment margin guidance by 60 basis points. despite significant headwinds from inflation and supply chain constraints, which tampered down our top-line growth potential. Despite that, organic sales were up 8% year-over-year, driven by double-digit organic growth in safety and productivity solutions, the commercial aerospace aftermarket from advanced materials, and UOP. Segment margin expanded 130 basis points to 21.2%. driven by strong actions that we took across the portfolio to address the headwinds we faced from inflationary pressures and supply chain disruptions. Specifically, we've continued to operate our strong productivity playbook. We took swift pricing action that allowed us to stay ahead of the inflation curve. We drove a 4% increase year over year on the top line and yielded approximately 40 basis points of margin expansion net of inflation. Adjusted earnings per share was $2.02, up 29% year-over-year, achieving the high end of our guidance range. We delivered a strong third quarter despite a volatile backdrop that included a hurricane, our PMT factory corridor, power blackouts in China, and the persistent and ongoing impacts on the supply chain more broadly. I am pleased for our disciplined execution, which enable us to navigate the challenges in the macroeconomic environment and capitalize on the ongoing recovery in our end markets. I continue to be encouraged by the strength we are seeing in many areas of our portfolio. Orders across Honeywell are up high single digits, year over year organic, excluding the impact of COVID-related mask business which has seen significant demand decline since the pandemic has been subsiding. Orders across Hanua were up double digits year over year. Backlog was up 7% to $27.5 billion and up 9% excluding the impact of COVID mask orders, driven by strength in many of our segments and positioning us to deliver next phase of the recovery as we head into 2022. As always, We continue to execute on our rigorous and proven value creation framework that drives outstanding shareholder value. Now, let's turn to slide three to discuss some of our exciting recent announcements. Last month, United Airlines and Honeywell announced a joint multimillion-dollar investment in Alder Fuels, powering the biggest sustainable fuel agreement in aviation history. Alder Fuel is a cleantech company that is pioneering first-of-its-kind technologies for producing sustainable aviation fuel, or SAF, at scale. When used together across the fuel lifecycle, the Alder technologies, coupled with Honeywell's eco-finding process, have the ability to produce a carbon-negative alternative to today's jet fuels. As part of the agreement, United is committing to purchase 1.5 billion gallons of SAF when produced to United's requirements, which is one and a half times the size of the known purchase commitments of all global airlines combined. Making this easily the largest publicly announced SAF agreement in aviation history and demonstrating the power of Honeywell Technologies continue to bring to the oncoming global energy transition. We also recently announced the acquisition of Performix, a provider of manufacturing execution system, or MES, software for the pharmaceutical manufacturing and biotech industries. This acquisition builds on our strategy to create the world's leading integrated software platform for customers within the life sciences industry who are striving to achieve faster compliance improved reliability, and better production throughput at the highest levels of quality. The Performex MEX software joins Honeywell's large and growing portfolio of automation solutions for the life sciences industry, including Sparta Systems quality management software and Honeywell's Experian process knowledge system. The combined offerings will address life sciences customer needs across the product lifecycle. from automation project execution to optimal production to sustainable quality. Lastly, we unveiled an all-new aircraft cockpit system earlier this month called Honeywell Anthem, the first in the industry built with an always-on cloud-connected experience that improves flight efficiency, operations, safety, and comfort. Honeywell Anthem offers unprecedented levels of connectivity, an exciting and intuitive interface model after everyday smart devices, and a highly scalable and customizable design. This next generation flight deck is powered by a flexible software platform that can be customized for virtually every type of aircraft and flying vehicle, including large passenger and cargo planes, business jets, helicopters, general aviation aircraft, and the rapidly emerging class of advanced air mobility vehicles. In fact, Honeywell Anthem has already been selected by Vertical Aerospace and Lilium for their vertical takeoff and landing all-electric aircraft. As these announcements highlight, we're continuously innovating and enhancing our portfolio, exciting new technologies aligned to our long-term strategic objectives. Now, let me turn it over to Greg on slide four to discuss our third quarter results in more detail.
Greg
Senior Vice President
Thank you, and good morning, everyone. As Darius highlighted, we executed with the typical level of rigor that you have come to expect from Honeywell and delivered on our commitments despite a challenging backdrop. Our third quarter was strong, with sales up 8% organically to $8.5 billion, segment margins expanding 130 basis points to 21.2%, resulting in 36% incremental margins, and free cash flow of more than $900 million, up 20% year on year. Our third quarter performance demonstrates our ability to deliver for our shareholders in all environments. Now let's take a minute to discuss how each of the segments contributed to that. Starting with aerospace, third quarter sales were up 2% organically as the ongoing recovery in flight hours drove another quarter of strong double-digit commercial aerospace aftermarket growth. As expected, air transport aftermarket sales continued to gain momentum, growing more than 10% sequentially from the second quarter and growing 40% year over year. Commercial original equipment returned to growth in the quarter, driven by strong demand for business jets. the growth in commercial aerospace was partially offset by defense in space, which was down 17% in the quarter, primarily due to supply chain constraints, which limited our deliveries. Excluding those impacts, defense in space would have been down mid-single digits in the quarter, an improvement versus the first half run rate. Aerospace segment margins expanded 390 basis points to 27.1%, driven by growth in our high-margin aftermarket business, strong productivity from our lower cost base, and pricing. Building technology sales were up 3% organically, driven by broad-based demand across the building products portfolio, as well as continued growth in building solution services. Orders were up double digits year-over-year for the fourth straight quarter, driven by demand for fire products, building management systems, and projects. Backlog for building solution services was up over 35% year-over-year, positioning the business for growth into 2022. In addition, our healthy buildings portfolio maintained strong customer momentum with approximately $100 million of orders in the quarter, bringing year-to-date orders to $250 million. HPT segment margins expanded 190 basis points to 23.5%, driven by pricing and productivity partially offset by inflation. In PMT, sales were up 9% organically, led by 29% growth in UOP and 14% growth in advanced materials. UOP sales growth was driven by higher petrochemical catalyst shipments, and their backlog grew double digits year over year, which should drive growth well into 2022. Process solution sales were down 2% organically as the recovery in projects has lagged, partially offset by high single-digit growth in thermal solutions and lifecycle solutions and services. HPS orders were up 20% year over year, driven by broad-based demand across the portfolio, providing confidence in the longer-term outlook of the business. PMT segment margins expanded 260 basis points to 22.2% in the quarter, driven by pricing, strong operating leverage, and a healthy mix of UOP. In safety and productivity solutions, despite battling supply chain and inflation challenges, sales were up 21% organically, driven by another quarter of double-digit warehouse and workflow solutions growth, productivity solutions and services growth, and gas analysis growth. Orders in these three businesses were also up double digits year over year, resulting in a robust SPS backlog of more than $4 billion. Personal protective equipment sales declined year over year as mass demand declined meaningfully. This was partially offset by growth in the hearing, gloves, and fall protection categories. SPS segment margins contracted 70 basis points to 13.2%. Driven by unfavorable business mix, which combined with targeted investments and supply chain challenges and untelegraded, drove inefficiencies in manufacturing and installation as the business has been scaling to outsized growth, which was 60% organically this quarter. Finally, growth across our portfolio was underpinned by continued progress in Honeywell Connected Enterprise. Our connected buildings and cyber solutions delivered another quarter of double-digit organic growth, and third quarter recurring revenue growth was once again up double digits year over year. So overall, we delivered strong organic sales growth, drove 130 basis points of improvement in segment margins, 60 basis points above the high end of our guidance, despite the challenging environment. For the quarter, we delivered GAAP earnings per share of $1.80 and adjusted earnings per share of $2.02, up 29% year over year, achieving the high end of our guidance. A bridge from 3Q20 adjusted EPS to 3Q21 adjusted EPS can be found in the appendix of this presentation, which includes reference to a $160 million non-cash charge related to ongoing UOP matters that are described in our Form 10Q. The majority of our year-over-year adjusted earnings growth, 26 cents, was driven by our strong segment profit improvement. Below the line items were a $0.13 tailwind driven by lower repositioning and higher pension income. A lower effective tax rate of 22.9% and lower weighted average share count of 699 million shares drove a $0.04 and $0.03 benefit respectively. We generated $900 million of free cash flow in the quarter as increased earnings. Excuse me. as increased earnings, increased in working capital due to growth of the business and related supply chain challenges. I'll tamp that down a bit. Finally, we strategically deployed $1.5 billion primarily to share repurchases, dividends, and capex in the third quarter, which significantly exceeded operating cash flow. We paid $646 million in dividends, deployed $208 million to capital expenditures, and reduced $650 million of Honeywell shares. reducing our weighted average share count to 699 million. Total capital deployment was up 44% year over year. In all, this was another strong quarter under difficult circumstances. We continue to manage through the multi-speed recovery across our portfolio, making disciplined investments for the future and meeting or exceeding our commitments while proactively addressing macroeconomic challenges. With that, let's turn to slide five to discuss the impact of the supply chain constraints we're facing and how Honeywell is adapting to address those challenges. As we saw last quarter, the world continues to face persistent supply chain challenges as the sourcing environment for direct materials and electrical components continues to be tight. Logistics capacity remains strained, and labor availability becomes more challenging, all driving constraints in operating and inflationary pressures on our cost base. Semiconductors remain an acute problem due to a structural disconnect between supply and demand, driven by canceled industrial and automated automotive orders during COVID-19, as well as unplanned growth of 5G, personal computing, and consumer electronics. We've also started feeling pressure in aerospace as the supply chain broadly ramps up more slowly than needed, leading to parts challenges due to deteriorating supplier deliveries. While we have been mitigating the overall risk by proactively partnering with distributors and alternative suppliers, the challenges accelerated in the last quarter, constraining growth in some of our businesses. The most effective businesses in our portfolio are SPS, Aerospace, and HPT. We provide guidance ranges for our quarterly and annual outlook in order to incorporate an adequate level of risk for things just such as this as we see these dynamics in the last few quarters. We are managing this situation aggressively on a daily basis and have deployed the full strength of our reengineering efforts to qualify alternative parts, which has mitigated some risk on our productivity solutions and services, advanced sensing, and fire businesses. We created tiger teams using advanced digital tools to track shortages and deploy a number of actions to liberate supply in the market. We also continue to mitigate inflation in materials, freight, and labor in our operations through targeted regular pricing actions. For the longer term, we're developing dual-source platforming strategies and executing long-term supply agreements with some of our key suppliers. This, coupled with strengthening direct engagement with the semiconductor OEMs and foundries, will improve our ability to secure increased volumes in the future. We do expect this environment to persist into the fourth quarter and the first half of 22. We'll continue to adapt as we manage through this period. With that, let's turn to slide six to talk about our expectations for the fourth quarter. As we enter the fourth quarter and given the ongoing challenges I mentioned, we expect sales to be in the range of $8.5 to $8.9 billion, down 4% to flat on an organic basis, which includes the impact of the COVID-19-driven mass sales decline. Excluding this impact, organic sales would be down 2 to up 2 organically. We would also normally see a seasonal step-up from the third to the fourth quarter, which this year will be somewhat dampened by the unique calendar impact of having more days in the third quarter than we do in 4Q. In aerospace, we expect our commercial business to continue to improve as business aviation and air transport flight hours continue to accelerate, driving continued sequential and year-over-year growth in the commercial aftermarket sales. The pace of the air transport acceleration will continue to vary regionally, with domestic travel recovering faster than international. Commercial original equipment build rates will also continue to progress gradually. Defense and space sales will be down due to lower demand from U.S. DOD programs driven by moderating U.S. defense spend and soft international defense volumes. We will continue to manage through the constraints as the aerospace supply base ramps up, but we are expecting to miss out on potentially hundreds of millions of dollars worth of shipments due to these continued challenges in Q4. We now expect organic sales growth to be down mid-single digits for the year in aerospace. In building technologies, we expect continued strong demand across the portfolio as the world continues to reopen and sustainability solutions take hold, driving sales and orders growth in the fourth quarter. We will face ongoing pressures from the supply chain constraints, but continue to work our mitigation actions as we anticipate mid-single-digit sales growth for the year. In PMT, we see continued strength in the short-cycle HPS businesses, though this will be tempered by the slower recovery in projects. Our strong orders growth in the third quarter will support a growth acceleration into 2022. For UOP, we're pleased with our robust 3Q performance and expect continued growth into the fourth quarter and into 22, supported by the strong backlog, which is up double digits year over year. Last, we expect continued healthy demand for products across the advanced materials portfolio. We expect PMT organic sales to be up low single digits for the year. In safety and productivity solutions, we expect another quarter of robust growth in our warehouse and workflow solutions and productivity solutions and services businesses. In our productivity solutions and services business, which is having an outstanding year, backlog remains up triple digits year over year, which combined with our integrated backlog that is over $2.4 billion, gives us confidence in these businesses for the remainder of 21 and into 22. Mass demand has accelerated, as expected, as the world recovers from the pandemic, though we will partially offset this softness with strengths in other areas of the PPE portfolio. Finally, we expect to see strength in our short-cycle gas analysis and advanced sensing businesses, driven by double-digit orders growth in the third quarter. We'll continue to manage through this challenging supply environment, which will impact our growth potential, but will record strong double-digit growth for the year. Now let me turn to our expectation for our other core guided metrics. For our fourth quarter segment margins, we expect to be in the range of 21.2 to 21.7%, up 10 to 60 basis points year over year. We expect margins to continue to benefit from pricing actions ahead of inflation, volume leverage, and ongoing productivity from our streamlined cost base, despite the headwinds from unfavorable business mix and integrated and efficiency challenges due to supply chain environment. Fourth quarter net below the line impact, which is the difference between segment profit and income tax, income before tax, is expected to be in the range of negative $10 million to negative $95 million, with a range of repositioning between approximately $140 million and $215 million as we continue to fund ongoing restructuring projects. We expect the effective tax rate to be approximately 20% and average share count to be approximately 698 million shares. As a result, we expect fourth quarter adjusted earnings per share between $2.03 and $2.13, down 2% to up 3% year-over-year. Given these fourth quarter expectations, full-year organic sales growth will be in the range of 4% to 5%, narrowing the range we provided last quarter to $34.2 to $34.6 billion. We are once again raising the low end of our segment margin guidance by 10 basis points for the year to a new range of 20.9 to 21.1%, representing expansion of 50 to 70 basis points for the year. We expect margin expansion in Arrow, HPT, and PMT as we carefully invest back into the business while managing the multi-speed recovery across the portfolio. Our fixed cost management remains a focus and we are tracking favorably to the permanent reduction of $1 billion of fixed costs from our 2020 cost actions. We expect our net below the line impact to be in the range of 40 to $125 million, including capacity for 400 to $475 million of reposition. Our full year effective tax rate will be approximately 22% and weighted average share count will be approximately 701 million for the year over delivering on our minimum 1% reduction in shares. This will take adjusted earnings per share to a range of $8 to $8.10, up 13% to 14% year over year. This maintains the high end of our previous guidance and raises the low end by 5 cents. Despite these challenges, we are maintaining the same cash flow outlook for the year in the range of $5.3 to $5.6 billion. Now let's turn to page seven and review our guidance progression throughout the year. Since we provided our initial 2021 guidance in January, we have navigated through several uncertainties, the ongoing global pandemic, supply chain challenges, unprecedented raw material inflation, and labor market challenges. And at each turn, our rigorous operating principles have enabled us to continue to demonstrate our resilience. At our latest update, we have adjusted our sales outlook purely due to the constraints we are battling in the supply chain. which dampened 3Q and our fourth quarter sales potential. We continue to have a robust backlog of demand. Despite these changes to top line expectations, we have not only maintained the high end of our segment margin and adjusted EPS guidance, but we have further increased the low end of both ranges and maintained our previous free cash flow guidance. These are excellent proof points of our ability to execute in all economic cycles. In total, I'm encouraged by the strength we are seeing in key areas of the portfolio as we head into 2022, particularly driven by strong orders growth and backlog position, as well as aggressive supply chain tactics that are mitigating risks, enabling us to deliver on our long-term commitments. Now let's move to slide eight, where we can talk about some of the preliminary thoughts we have on 2022. With the commercial aerospace recovery in view, upcoming capital reinvestment in the energy sector, non-residential construction spending returning to 2019 levels, and the exponential growth we continue to see in e-commerce, we have a strong setup for 2022. We expect organic growth in all four segments driven by strong portfolio-wide demand and backlog, underpinned by year-to-date orders growth of 17% in HPT, 14% in Aero, 10% in PMT, and 6% in SPS, or 8% in SPS if we exclude the COVID mask business. This, coupled with the strategies we have in place that are focused on driving uniquely innovative and differentiated technologies to address the world's increasing demand for digital transformation, process technology, and sustainable solutions, gives me confidence in our future. However, we do expect growth in the first half of 22 to be constrained due to continued challenges from labor force uncertainty, supply availability, and logistics challenges. Inflation will continue to be a factor under these circumstances, though our pricing rigor as reflected in our margin rates will help us. We do expect changes to corporate tax legislation, though the exact impact of that is as of yet unknown. With these dynamics in mind, let's look at our key markets. In aerospace, we expect strong growth in our commercial aerospace business. Ongoing improvement in global flight hours will drive growth in our commercial aerospace aftermarket. We also expect original equipment build rates, which have lagged the flight hour recovery, to ramp up in 2022. In defense and space, we expect flat to low single-digit growth year over year as U.S. and international defense budget spending stabilizes and our supply challenges abate. In HVT, we expect non-residential construction growth and an ongoing return to public spaces to drive demand for building products, services, and projects. We also expect continued demand for our portfolio of healthy building solutions, as well as tailwinds from U.S. infrastructure plans. We expect a large backlog to draw from as well as we end in 2021. In PMT, we're assuming improved macroeconomic conditions and higher stable oil prices will improve growth in UOP and also help recover automation projects in HPS. We expect continued strength in advanced materials driven by demand in the auto, construction, and healthcare sectors. For safety and productivity solutions, we expect strong demand in our productivity solutions and services, gas analysis, and advanced sensing businesses. We also execute on our robust backlog of major projects in our warehouse and workflow solutions businesses. However, we will face constraints to growth as supply chain challenges continue in the first half of 2022. Mass demand will remain at our lower second half exit rates as the world recovers from the pandemic. For overall Honeywell, we expect margin expansion to be driven by aftermarket recovery in aerospace, accelerating catalyst shipments in UOP, and improving mix in SPS. Our strong productivity and pricing actions, which should carry through to next year and provide potential upside, will enable key investments to support medium-term top-line growth, including a step up in R&D and our digital initiatives. We look forward to completing the combination of Honeywell Quantum Solutions with Cambridge Quantum Computing, which is a very big strategic step forward for us, but will be a minor drag on our margins. We have significant balance sheet capacity for M&A and share repurchases, and we expect to reduce our share count by a minimum of 1% again in 2022. So overall, we have some insight into our end markets and a lot of confidence in our continued operational execution, which will give us the ability to deliver another strong financial performance and continue to execute our strategy to be the premier software industrial. We'll provide more specific inputs once we close out the year. So with that, I'd like to turn the call back over to Darius.
Dariusz Adamczyk
Chairman and CEO
Thank you, Greg. Before we wrap up, I'd like to take a minute on slide nine to discuss an important topic, Honeywell's culture of inclusion and diversity. Our commitment to inclusion and diversity enables better decision-making, helps build competitive advantages and further long-term success. Inclusion and diversity is one of our foundational principles, and Honeywell expects all employees to exemplify these principles. We continue to build on our initiatives to promote racial equality and inclusion and diversity, including employing mandatory unconscious bias training to our global workforce, establishing a global IND steering committee co-sponsored by me, and fortifying Honeywell's IND governance structure by embedding IMD councils into each business group. We also established 2021 goals for each of my direct reports that include an annual objective of driving diversity with his or her organization. These initiatives have yielded results. Women and people of color represent a higher percentage of the workforce at Honeywell compared to our peers. In addition, representation of women and people of color at Honeywell has increased each year since 2018, which is a testament to our ongoing commitment to hiring, developing, and retaining diverse talent. Now let's wrap up on slide 10. We delivered an on our third quarter commitments despite a challenging backdrop. As always, we remain laser focused on executing our strategic objectives and investing in growth opportunities that position our business well for the next phase of recovery. We're executing on our proven value creation framework with the rigor you can expect from Honeywell, which will continue to consistently drive shareholder value. With that, Reena, let's move to Q&A.
Reena Vaidya
Director of Investor Relations
Thank you, Darius. Darius, Greg, Anne, and Torsten are now available to answer your questions. We ask that you please be mindful of others in the queue by only asking one question. Ari, please open the line for Q&A.
Ari
Host
Thank you, Rina. The floor is now open for questions. If you have a question, please click on the raise hand icon at the bottom of your Zoom screen. Once you're called to ask your question, please make sure you unmute your microphone. We will now take our first question from Steve Tusha. from JP Morgan. Steve, over to you.
Steve Tusha
JP Morgan
Hey, good morning. Can you hear me okay?
Scott Davis
Mildius Research
Yes.
Steve Tusha
JP Morgan
Great. Just on the organic growth guidance for next year, Would you expect first half to be to actually grow or are you looking at it being kind of more like the fourth quarter? And then, I mean, you talked about all four segments growing, I guess. Does that mean like, you know, will you decelerate from this year because of the first half? Like maybe just give us some a bit of guideposts on kind of what the messaging is on on first half versus all of next year on this front.
Dariusz Adamczyk
Chairman and CEO
Yeah, so the short answer to your question, Steve, is that, yeah, we do expect the first half to grow. You know, I think how much is going to be a little bit dependent upon some of the supply chain challenges that we pointed out that we're seeing in Q4. You know, frankly, we see it this way, which is on semiconductors, we actually see some positive tailwinds as we head into the first half next year. So that's good. I don't think that they're going to be completely alleviated, but it's going to get better. When it comes to some of the other components, particularly for aerospace and some of the tier two, tier three suppliers, particularly castings, forgings, things of that nature, you know, we're not sure where we are in that improvement cycle because it really just kind of popped up in Q3 and a more acute phase. So we're a little more cautious there. But the short answer is we do expect growth in the first half of 2022. You know, what I will say is that, you know, we have, we'll have some headwinds in SPS in due to sort of what I call COVID-related masks. But, you know, I think those are going to be particularly acute in Q1 of next year. They're evident here in Q4 of 21, and to a lesser extent, Q2 of 2022. And then, you know, it's kind of going to, we're going to get back to the normal run rate. So, you know, as you can see, I mean, you know, it's the year 22 is setting up terrific. I mean, we're a double-digit orders growth in each of our SPGs, one exception, SPS is sort of call it single digit. But if you exclude the impact of the COVID masks, we would be up double digit as well. So the only constraint that we see is to some extent the supply chain. And at least in semiconductors, we think that Q4 is the peak of those challenges. That's the way we see it today. Now, I will say this lastly, which is it's a dynamic environment. You know, there were some puts and takes here in Q3 that were probably more takes than positives. So we're going to monitor this as closely as Q4 evolves.
Greg
Senior Vice President
And that's even why we have such a wide guidance range for the fourth quarter. You know, $400 million of revenue range is wider than we're typically doing, and it's exactly for those reasons.
Steve Tusha
JP Morgan
So does terrific mean, you know, acceleration from 21? That's just my follow-up. Thanks.
Dariusz Adamczyk
Chairman and CEO
Thanks. Well, I think it's, all I can say is we expect growth in the first half. And when we get together with you in January, February to give you our outlook, we'll have a better view, but we certainly expect growth. The backlog supports that. And our story hasn't changed from really the end of Q2 earnings report. I think the setup for Honeywell for 22, 23 is terrific. There's nothing here that, that makes me want to change my mind. Yes, we're going to have to deal with some supply chain challenges. They're here. They're real. They're probably understated in the market. I think that, frankly, it's only recently that it's been realized how severe they are. But, you know, we've incorporated that in our guide for Q4. And, you know, and I think we're working diligently to try to resolve them. I mean, we've been at this for 12 weeks now. And it's not just one way. It's not just pushing suppliers harder. It's also doing redesign, alternative products, finding different ways to generate revenue. So I think we've got a pretty good playbook. But I will understate this. The challenges are real and fairly substantial.
Ari
Host
Our next question comes from Julian Mitchell from Barclays. Julian, over to you.
Julian Mitchell
Barclays
Thanks very much. Yes, good morning. So maybe my question would focus on the revenue outlook in aerospace. So I think the guidance for this year has come down, you know, three quarters in a row now in that division. So just wanted to try and understand, you know, your level of confidence in when the defense and space piece will return to growth again. Is it sort of early next year or towards the end of the year? And also any updated thoughts on commercial air or aftermarket and how you think your own revenues will lag or move in line with the recovery in traffic because of spare parts and so forth.
Dariusz Adamczyk
Chairman and CEO
Yeah. Okay. Yeah. So, Julian, a couple of points. On defense and space, as you saw, we kind of had a frankly, a bit of a disappointing double digit negative for Q3. But remember that had we not sort of had some of these supply chains challenge, which really became very evident in Q3, because think about these as Q3, Q4 suppliers, which are smaller, which reduced capacity during the pandemic. And now we're getting a lot of demand, not just from us, but probably some of the other aerospace players. It's going to take some time to work through that, but we would have been down mid-single digits in Q3 had that not happened. You know, we have, unfortunately, more paths due than we want in defense and space. That's went up substantially in Q3, and we've got to work our way through that. What I will tell you about defense and space is if you look at our bookings or where we are at this cycle, early Q4 versus where we were at the same period of last year, that gives us some, well, quite a bit of confidence that we're looking at flat to low single digits. Now, that could get even better. I don't know that it's going to get a lot worse. What we're seeing here is, if you recall, if you go back to 2020, we had very strong orders and revenue in 2020 in defense and space. And you see the effect of some level of usage and destocking by some of those defense and space customers and distributors. So we're optimistic about normalization net in 22. And based on what we see today, and this is important to say today, and this could change, we see flattish to low single digit growth. And let's now switch gears and talk about commercial aftermarket. You know, we see that continue to improve it. You saw that strong growth in Q3. We think it's going to continue to get better. We're still nowhere near the 2019 levels, but it continues to get better. As you know, November 8th We're going to open up the borders and more international traffic is going to step up. So, you know, as more international comes back, as COVID abates, which we think we're going to happen here in Q4 and Q1 next year, we see continued growth in our aftermarket, coupled with stronger growth in OE, both in air transport, as well as BGA. So the setup for aerospace, I think for 22 is quite good. Greg, I don't know if you've been here. No, I think you got it.
Ari
Host
Great, thank you. Thank you. Our next question comes from Scott Davis from Mildius Research. Scott, over to you.
Scott Davis
Mildius Research
Hey, good morning, guys and Ann. Hopefully you can hear me okay. Darius, can you quantify what you think supply chain costs you in revenues in the quarter? Do you have a sense of that? And if you have a sense of that, Darius, do you have a sense of... Can you delineate between like a lost sale and a delayed sale? You know, how much of that is kind of gone forever versus just pushed into the next quarter or whatever?
Dariusz Adamczyk
Chairman and CEO
Yeah, no, I can. So think about the impact in Q3 of about $300 million, plus or minus. And think about what's embedded in our Q4 outlook of an impact of $300 to $500 million. Now, in terms of loss forever versus push, it's not lost forever. I mean, you know, as I talked about, some of, unfortunately, some of our past dues going up and that went up, you know, two to 300 million just in Q3. So, it's not lost. We've got to be able to get our supply chain to function much more effectively and efficiently. And that's exactly what Torsten and his team are working on. But we don't envision that as lost. customers still need those products. And frankly, I think, you know, when this earning cycle ends, I don't think we're going to be that unique in terms of some of the bottlenecks that we're seeing.
Scott Davis
Mildius Research
Okay.
Dariusz Adamczyk
Chairman and CEO
Thank you. Good luck, guys.
Ari
Host
Thank you. Our next question comes from Nicole DeBlaise from Deutsche Bank. Nicole, over to you.
Nicole DeBlaise
Deutsche Bank
Guys, good morning.
Ari
Host
Morning, Nicole.
Nicole DeBlaise
Deutsche Bank
Maybe you could talk a little bit about, you know, how you're thinking about driving 4Q margin expansion despite, you know, at the midpoint a revenue decline. And the reason I ask is, you know, just how are you driving cost cutting in an environment where I know things are tough, but you're also, you know, up against a very strong backlog with the potential for growth to really bounce back in 2022. So kind of how do you balance that against cutting costs for the short-term issues that you're facing? Yeah.
Dariusz Adamczyk
Chairman and CEO
Yeah, well, yeah, you know, first of all, Nicole, I don't, you know, cost cutting is not what we're doing. We're actually investing this year, particularly in businesses like Intelligrated, which are growing at Clifton, probably no other business has seen before. But, you know, the biggest lever here, and I think one of the best operational stories for Honeywell that you see here in Q3 is our pricing discipline. I mean, we think we gain in terms of a price costs 40 to 50 basis points of margin expansion and that's what you're seeing come through in our margins i mean you know i think that was a terrific commercial execution by the team and uh they did a great job so this is not so much a function of sort of cost cutting this is more of a function of commercial execution yeah i i would agree i mean if you think about it um
Greg
Senior Vice President
Nicole, last year, obviously we were in a substantial cost cutting mode and our repositioning pipeline and the projects around that reflected it. This year, we always say that we continue the productivity playbook, fixed cost power one, create operating leverage by growing sales and holding fixed costs flat as just a mantra of the way we work. And so to Darius's point, we're not doing massive cost cutting. We are being smart about where we're putting it back, though, and we are using the things that we spoke about last year in terms of automation and our digital capabilities to help us deliver. I mean, I'll be honest, this... the the supply chain work that we're doing that torson and the team are doing are are very much enabled by our honeywell digital uh tools and capabilities and some of the visibility that he's put into his own um capabilities in the supply chain to manage so so this isn't about you know cutting costs it's about managing them properly and we are investing back in the business as darius mentioned um but you know we're we're going to be doing it um diligently So I feel pretty good about the margin rate expansion. You know, you would see the implied margin rate expansion is a little bit lower than what our guide was previously, simply because the sales numbers are down. So we'll have a little bit less operating leverage, you know, from an opportunity standpoint, but still very healthy margin expansion in Q4.
Dariusz Adamczyk
Chairman and CEO
Yeah, and just to add to that, and this is an important point, you know, Honeywell Digital kind of has two elements. Number one is it helps us to operate the business better, and Torsten and his team have done a great job instrumenting exactly how do we uncork some of these bottlenecks that we're seeing. I mean, you know, it's not perfection. It's not that we're going to completely avoid them, but I think we're doing a nice job. And second of all, which is continue to drive productivity, as Greg pointed out, through automation. Automation is a big lever for us and one that, frankly, we're using aggressively, both in sort of our manufacturing facilities, but also in the office environment. And it's been enabling us to drive productivity.
Nicole DeBlaise
Deutsche Bank
Thanks for the clarification, guys. Super helpful.
Ari
Host
Thank you. Our next question comes from Jeff Spriga from Vertical Research. Jeff? Over to you.
Jeff Spriga
Vertical Research
Thank you. Good morning, everyone. Hey, good morning. Sort of a related question. Darius and Greg, one of the other themes out of earnings season so far is kind of the double-edged sword element of backlog. In other words, things not priced in the backlog for the current inflationary market. Given that you run with relatively large backlogs, I just wonder if you could address the profitability in your backlog. Do you have inflation protection issues? and any particular headwinds we should think about as that backlog converts?
Dariusz Adamczyk
Chairman and CEO
That's a very good question, Jeff, and we've thought about that one. And you're right. You know, with aged backlog, you've got to be very, very careful because if you don't go back and revisit your backlog and reprice it, then you're going to have a problem. And I can tell you that's a very active exercise we're doing because, as you can imagine, I mean, just to quote some figures, I mean, steel is up 198% year over year, nickel 25%, copper 46%, aluminum 66%. I mean, these are fairly substantial increases. So what we've been doing all of our businesses, and particularly long cycle ones, is trying to go back and reprice some of our backlog. You kind of almost have to do that because, and not to even mention labor inflation, which we're also seeing. So it's part of our playbook, part of our exercise, and exactly what we've been trying to do.
Ari
Host
Okay, thank you very much. Our next question comes from Josh Okrabwinski from Morgan Stanley. Josh, good morning and over to you.
Josh Okrabwinski
Morgan Stanley
Hey, good morning, everybody. So I guess one question for Darius and Torsten, since he's on the line as well. How's that $500 million of supply chain that you guys talked about at the 2019 analyst day looking? I mean, you're probably looking at the composition of that a little differently today, just given how much has changed. And then just a smaller follow-up, how do we think about the cadence of UOP catalyst shipments from here? Those look pretty solid in the quarter.
Dariusz Adamczyk
Chairman and CEO
Yeah, let me start with the UOP question. I'll turn it over to Torsten for the other. I mean, you know, UOP's bookings remain very, very strong. You saw that both in revenue and booking rates here in Q3. So we're optimistic. And keep in mind, you know, which really gets us excited also, and I've talked about this before, HPS follows UOP by a 12 to 18-month cycle. So UOP leads, HPS follows. And so that sort of gives you another good indicator that we should see a nice impact in HPS 12 to 18 months from now. We've done this analysis before, and that's the typical lead cycle. So not only is this good news, and let's face it, I mean, we all read the same articles. The world needs more energy. Some of it is going to come from renewables, but frankly, some of it is going to have to come from hydrocarbons as well. So we think that that's overall the world right now is energy short, and there's going to be a reinvestment cycle, both in renewables and to some extent hydrocarbons. I'll turn it over, of course.
Torsten Pils
Senior Vice President and Chief Supply Chain Officer
Yeah, I mean, the $500 million, they are split primarily between our short cycle business, especially in SPS and HPT, and the long cycle business in aerospace industry. So that's what we are seeing. First saw a dramatic impact on the short cycle business, but now in Q3 really saw that supply shortages are kicking in also in the long cycle and the aerospace business. But the majority sits primarily in the semiconductor related short cycle business.
Ari
Host
Okay, thanks a lot, guys. Thank you. Thank you very much. Our next question comes from Dean Dre from RBC Capital Markets. Dean, good morning. We'll come back to Dean. Our next question comes from Andrew Obin from Bank of America. Andrew.
Dean Dre
RBC Capital Markets
uh yes can you hear me yes good morning good morning uh good morning uh just a question uh follow-up question a uh on china when are you guys uh you know see china re-accelerating and another question is if i look at hbs and uop china has been a huge market huge source of growth and what we've been reading is you know because of these energy constraints in china china is reassessing
Andrew Obin
Bank of America
some sort of more commoditized energy intensive industries like textiles, but more importantly, chemicals. We've read about some large chemical projects being canceled. What does it mean for sort of HBS and UOP in China going forward? Thank you.
Dariusz Adamczyk
Chairman and CEO
Yeah, well, first of all, you know, we actually, just to give a data point from Q3, our growth in China continues to be robust. We're up high single digits in Q3 and we actually don't see that debating. So our position in China continues to be very good. You know, our orders rate continuing to be, you know, there's, as you know, there's probably a focus in China right now to actually generate more energy, particularly to support um the industry right now that's happening in q4 so we actually think that's going to create a very favorable investment environment and business opportunity for us and the other business opportunity for us which we're very excited about is a focus in China on sustainability. And when we think about some of the UOP HPS solutions in our sustainability technology solutions business, that's going to create a giant opportunity for us in China and frankly, one we're very excited about. So we think that there's going to be kind of a twofold opportunity here. I think there's going to be a reinvestment cycle, what I call a little bit more of the traditional energy, but really an an accelerated and more pronounced investment cycle in renewables and and as you know we have we have a very strong position in china and we think we could be a major player in that sustainability fight our next question comes from andy kaplowitz from citigroup andy good morning guys good morning
Andy Kaplowitz
Citigroup
Darius, many of the multi-industry peers that you have have been relatively acquisitive over the last six months. We know Honeywell's been active also, but its level of activity has been maybe a little lower given the size of your company. So is this just a function still of valuation being pretty high? And I know, Darius, you spoke about this before. You spoke in last quarter, I think, just about being more aggressive with the balance sheet. So what does that mean? Do you see a step up for Honeywell and M&A related activity over the next year?
Dariusz Adamczyk
Chairman and CEO
Yeah, I mean, Yeah, I think, you know, M&A is sort of still the desired way to deploy capital. I mean, you know, we have done Sparta this year, although it didn't require cash. We think the CQC Honeywell Quantum Solutions is a very important and meaningful transaction. Yeah, it's a merger, not a deployment of capital, but nevertheless, it is a transaction that's critical for us. We just did performance grant. It's a smaller, it's a smaller acquisition, but it's a critically important one. And you see a little bit of a pattern, right? Sparta, life sciences, performance, performance, life sciences. We like that segment and we're going to continue to look. Yeah. You know, With this level of – with this kind of interest rate environment that we have today, the M&A market is overheated. It is what it is. But I've said we're not going to stay on the sidelines forever. I mean, yes, versus any historical metric, the multiples are high. And I don't love it, but the market is what the market is. It doesn't mean we're gonna stay on the sidelines forever and wait for it to turn. I mean, it's been this way. If interest rates go up, But we are active. We're looking at numerous deals and, you know, nothing is 100% in the world of M&As, but we're hopeful that we'll be able to get something done and certainly want to deploy our capital in that way. But it has to be the right business. It has to fit our technology orientations. It has to be at the right value point, although nothing is cheap these days. And, you know, we're thrilled with what we're doing with Sparta. I think that's been, you know, looking back at this, it's been about six months plus since we've acquired that company. It's going to be a winner. I'm very confident with that. Appreciate it, guys. Thank you.
Ari
Host
Our next question comes from Peter Arnett from Baird. Peter?
Peter Arnett
Baird
Yes, can you hear me? Yes. Good morning, Peter. Hey, good morning, Darius. Great. Darius, maybe you could just talk a little bit about how you're viewing SPS kind of margins, the outlook going there. You talk a little bit about, you know, kind of improved, you know, mix and execution, but obviously you're up against some, some headwinds there in that business. You talked a little bit about supply chain and also just the PP&E business declining. How should we think about just kind of the outlook improving margins in SPS?
Dariusz Adamczyk
Chairman and CEO
Yeah. Yeah. Well, you know, As you know, the fastest growing business in SPS is Intelligrate. It is margin diluted. We've been talking about that. And look, that business grew 60% this quarter. Any business growing at that kind of pace is going to have some challenges. But you coupled that kind of level of growth, which pulls on things like electronics, steel, metal, with the supply chain challenges we have, it's going to have some efficiency challenges, particularly since there's a strong correlation between third party buy, our own manufacturing and installation. And when those things don't work together well, there's some challenges. I can tell you we're investing heavily in that business to really prepare it to be a $4, $5, $6 billion business, which is the path that it's on. So there's an investment play, there's an efficiency play and so on. Having said that, a lot of our other businesses such as AST, such as PSS, at an absolutely terrific quarter. PSS has been a great success story for us. It's winning in the marketplace. So we think that this sort of margin challenge is going to abate over time, particularly as we made some of the process improvements and investments in Telegrid.
Greg
Senior Vice President
Yeah, I would just echo that. I mean, we've always talked about this as creating an end market for ourselves to follow later with services and software. That's still our expectation. As Darius mentioned, when the material availability doesn't match up with the installation labor, it becomes challenging. And that's really what we're facing right now. We'll get through it. But, you know, it's this availability of material, you know, throughout the supply chain, you know, creates some big challenges when you're seeing this type of growth. Appreciate the call. Thanks.
Ari
Host
All right. Our next question comes from Dean Dre from RBC Capital Markets. Dean, are you there? Yes.
Dean Dre
RBC Capital Markets
Thank you. Good morning, everyone. Hey, Dean. Hey, Dean. Hey, sorry. I was juggling multiple calls this morning. So thanks for letting me get back in. I want to circle back on a topic that Josh raised and just the idea of UOP leading HPS. And it just begs the question about the oil and gas industry capex cycle. It's really been slow to recover here, but now with that spike in oil prices, what's your expectation on release of new projects? Even, you know, as simple as MRO has still been lagging as well. But what's your outlook there, please?
Dariusz Adamczyk
Chairman and CEO
Yeah, I think this is becoming fairly obvious. And we all read the same articles and see what's going on, which is there's going to have to be a reinvestment cycle. As much as we all want sustainable and renewable technologies to take over sort of energy needs tomorrow, it's probably going to be a little bit of a longer journey. And it's very clear to me that there's going to be a reinvestment cycle. We're seeing a good reinvestment cycle, what I call some of the shorter projects, refurbishment focused at the installed base. uh we're we're strong believers there's going to be a fairly strong reinvestment cycle in 22 and 23 here i think that's necessary so so so we're we're bullish on that that segment and you know certainly the price of oil price of gas support that kind of investment i mean you know if you look at gas and oil i mean that they're very very attractive levels what we need now is some level of stability so so that's good but let me give you a couple of other specific data points Our renewable fuel orders this past quarter were up 86%. I mean, I think we forget sometimes that we just characterize UOP as oil and gas. It is not just oil and gas. It has an incredibly strong green fuels portfolio, which is winning in the marketplace. And we've seen 86% growth. Also, some of the energy storage controls orders were up 64%. this past quarter in our HPS business. So those are just a couple of data points for you that we are very excited about the energy future. We have a portfolio that's going to play in it. Having said that, there's going to have to be a reinvestment cycle in sort of what I call the old energy infrastructure.
Dean Dre
RBC Capital Markets
That's real helpful. Thank you.
Ari
Host
Thank you. All right. Our next question comes from Joe Ritchie from Goldman Sachs. Joe?
Joe Ritchie
Goldman Sachs
Thanks. Good morning, everyone. Morning, Joe. Guys, when I take a look at your performance just from a growth standpoint and what we're seeing from a backlog orders perspective, you know, HBT is probably the one where we're seeing the biggest disconnect. And so I'm curious if you can maybe just provide a little bit more color on whether it's specific components, labor, what specific regions you're really seeing some of these supply issues, supply constraint issues, and when we would expect some of that to alleviate for the growth to really pick up.
Greg
Senior Vice President
Yeah, this is one of the places where the electronics shortages are very acute. And so, you know, the fire business in particular uses some very specific semiconductors which have been extremely short. I think, you know, Doug Wright and the supply chain team I've done a very good job of trying to free up capacity from other distribution points. They've also been doing we talked a little bit about the reengineering work they've done a lot of reengineering to try to include different chipsets into some of their into some of their platforms. So this this one is really pretty acutely tied to the whole you know, capacity expansion that's going on in the, in the fab industry. So I think we're going to feel this. We talked about the, you know, the fourth quarter and into the first half of the year, this is one of the businesses. I think we're going to feel that probably more than others, but it will come to an end. I mean, that, that I think it's a, it's a very, it's not, it's not a thousand parts, you know, it's measured in like 10, you know, tens of parts here. Okay. Thank you.
Ari
Host
Our last question comes from Sheila Caglioglu from Jeffries. Sheila, over to you.
Sheila Caglioglu
Jeffries
Good morning, Darius and Greg, and thanks for fitting me in. Good morning, guys. You guys noted to an earlier question, too, defense was down mid-single digits as the supply chain issues. Maybe could you parse a little bit about how much of that mid-single digit decline came from USDOD O&M budgets declining versus international programs? And somewhat related to that, you know, margins are still growing pretty nicely despite the supply chain issues and the OE growth in the quarter and arrow. So is defense materially lower or was there a better price in the segment?
Greg
Senior Vice President
Yeah, maybe I'll take the last one first. I mean, think about the operating leverage that we're getting across the portfolio, pretty heavy in aerospace in particular. I mean, that was the, you know, we talked about our cost reduction programs last year, and Aero, you know, was at the top of that list, PMT second in terms of the level of fixed cost takeout. So, So part of what you're seeing from aerospace in terms of, you know, almost 400 basis point improvement is a big operating leverage that they're getting, even though it's on only 2% revenue growth. You know, in terms of the split between USDOD and international, I think what we're seeing is similar to what we spoke about before. I mean, the USDOD and international are both down, from a demand perspective as we're going through that recalibration, if you will, on some of the pre-buying that had been done last year. And we do see the supply chain issues that we're having are really in a lot of the mechanical spaces. So I expect that we'll start seeing that improve as the supply chain, the aerospace supply chain complex you know, ramps up, you know, into the fourth quarter, into the early part of next year. I don't know, of course, if you want to make a few comments on that.
Torsten Pils
Senior Vice President and Chief Supply Chain Officer
Yeah, I mean, this is, we've seen this in 18, 19, and we were eventually able to grow this by 18, 19, 20% year over year, and this will kick in the next couple of years.
Sheila Caglioglu
Jeffries
Great. Thanks so much.
Ari
Host
Thank you. That concludes today's question and answer session. At this time, I would like to turn the conference back to Darius Adamczyk for any additional questions. Darius, over to you.
Dariusz Adamczyk
Chairman and CEO
I want to thank our shareholders for your ongoing support. We delivered strong third quarter results and continue to navigate effectively through uncertainty while gaining traction in key strategic growth vectors and positioning ourselves to capitalize on improving key end markets. Thank you all for listening and please stay safe and healthy. Thank you.
Ari
Host
Thank you. This does conclude today's conference call. You may disconnect at this time. Have a wonderful day.
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