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Operator
Operator
Thank you for standing by and welcome to the Honeywell Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's call is being recorded. I would now like to hand the call over to Sean Mecham, Vice President of Invest Relations. Please go ahead.
Sean Mecham
Vice President of Investor Relations
Thank you. Good morning and welcome to Honeywell's Third Quarter 2024 Earnings Conference Call. On the call with me today are Chairman and Chief Executive Officer Vimal Kapoor, Senior Vice President and Chief Financial Officer Greg Lewis, and Vice President of Corporate Finance Mike Stepniak. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our investor relations website. From time to time, we post new information that may be of interest or material to our investors on this website. Our discussion today includes forward-looking statements that are based on our best view of the world and of our businesses as we see them today, and are subject to risks and uncertainties, including the ones described in our SEC filings. This morning, we will review our financial results for the third quarter, share our guidance for the fourth quarter, and provide an update on full year 2024. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to Chairman and CEO Vimal Kapoor.
Vimal Kapoor
Chairman and Chief Executive Officer
Thank you, Sean, and good morning, everyone. To start, I would like to highlight the significant data chip change announced earlier in the third quarter. After we report our 2024 financial results at the beginning of next year, Greg Lewis will step down as Chief Financial Officer of Honeywell, and Greg will enter a new role as Senior Vice President of Honeywell Accelerator and serve as a special advisor to me. I would like to express my sincere thanks to Greg for his partnership with me through my first year as CEO and his successful performance as CFO since 2018. He guided the company through multiple reorganizations and significant M&A activity, and his leadership was critical to transforming Honeywell into the digital operator it is today. Mike Stepniak, former Vice President and Chief Financial Officer of Aerospace Technologies will succeed Greg in February. Mike will serve as Vice President of Carpet Finance and work closely with Greg and me during this transition. I would like to congratulate Mike and express my deeply rooted confidence in his readiness to lead Honeywell with me into our next stage of growth and innovation as we continue to deliver value for our shareholders. With that, let's turn to slide three. Honeywell demonstrated a commitment to operational excellence in the third quarter, exceeding the high end of our adjusted earnings per share and segment margin guidance ranges, despite sales coming in below our guided range. Near term delays in couple of the project led businesses, lack of short cycle improvement and some discrete supply chain disruption in September in aerospace have caused us to re-baseline our expectations for the year. Although the organic growth of 3% in the quarter was below our guidance, we continue to be encouraged by sustained strength in aerospace technologies output, further sequential progress in building automation and ongoing positive order trends. Before we dive down into more detailed discussion on the results and updated outlook for 2024, I would like to reiterate the strategic priorities that are cornerstone of my tenure as CEO and our latest progress against them. First priority is acceleration of profitable organic growth towards the upper end of our long-term target range of four to 7%. While our recent performance has been below this target, we are accelerating driving new product innovation and commercial excellence to support higher growth rates in future and we're already seeing returns of this strategy. We booked a record $1 billion of orders in UOP showing the strength of our technology and the promise of our sustainability offerings. This quarter, Electra selected Honeywell's flight control computers and electromechanical actuation system for its hybrid electric short takeoff and landing aircraft. Earlier this week, we announced a new partnership with Google Cloud, leveraging Google's Vertex AI and Honeywell Forge to accelerate our customer transition from automation to autonomous operations. By continuing to focus our effort on these key strategies, we are confident that we will be able to deliver organic growth at upper end of our long range in the future. Second, we are making headway on the evolution of our accelerator operating system, transforming the way we run the company to extract incremental value from our operations and drive growth. Accelerator is unlocking new ways for us to leverage our well-established digital backbone to enhance top-end growth and expand margins in addition to successfully integrating our recent portfolio additions. We are leveraging our digital domain through our Honeywell Forge IoT platform, creating recurring revenue streams that are delivering increased value for our customers and shareholders alike. And third, we are accelerating value creation through the simplification of Honeywell and optimization of our portfolio, pursuing a creative, bolt-on and tuck-in acquisition as well as targeted non-code divestitures that will lead to improved financial performance, strong cash generation, and an increasingly attractive outlook for investors. Before we discuss our results for the third quarter in more detail, let me take a moment to talk about in more depth about our progress on portfolio shaping on slide four. The end of the third quarter marks one full year since we announced the reorganization of our businesses around the three powerful mega trends of automation, the future of aviation, and energy transition. I'm proud of the progress we have demonstrated on our portfolio strategy in 2024, particularly as our efforts have borne fruit over the past few months. We have remained disciplined in our commitment to executing strategic bolt-on M&A that aligns with our three key mega trends and are a creative to our financial profile. We have successfully closed four acquisitions this year, representing over $9 billion in deployed capital to M&A. All four deals fit seamlessly into our portfolio, bolstering our capability across automation, aerospace, and energy transition, and enhancing our growth trajectory. We are happy to welcome our new future shapers to Honeywell, and we are excited by the substantial possibilities in front of us as we work to ensure seamless integration across all three business segments. In addition, earlier this month, we took another important step in our simplification journey, announcing our plans to spin off advanced materials into an independent, publicly traded company. As a global leader in sustainability-focused specialty chemicals and materials, advanced materials will be positioned to benefit from financial flexibility to pursue the next generation of sustainable refrigerants and other valuable solutions for customers in electronic materials that support the semiconductor industry, industrial-grade fibers, and highly engineered healthcare applications. This quarter, we also made the decision to reclassify the personal protective equipment, or PPE, business as asset health for sale. This move will help us further strengthen our core business and will be creative to Honeywell's organic growth and margin rate. We will provide more details once a sale has been announced. The acquisitions we have made this year, along with the shared buybacks, dividend, and high-return capex will add up to record $14 billion in capital deployed in 2024. We believe this demonstrates meaningful progress towards strengthening and simplifying our portfolio. However, our work is not yet done and we'll continue to leverage portfolio optimization as a fundamental pillar of growth and margin enhancement into 2025 and beyond. With that, now let me turn it to Greg on slide five to discuss our third quarter results in more detail, as well as provide an update on the fourth quarter and full year guidance.
Greg Lewis
Senior Vice President and Chief Financial Officer
Thank you, Vimal, and good morning, everyone. I'll begin on slide five. We navigated through a challenging operational environment in the third quarter, delivering segment margin and adjusted earnings per share above the high end of our guidance range and 10% increased cashflow despite coming in below our sales guidance. The main driver of the sales miss was performance below our prior expectations in industrial automation as our revenues were sequentially flat across the portfolio. We were also impacted by some discrete manufacturing disruptions in September, including Hurricane Helene and a separate fire at one of our aerospace technology plants. All in, this led to third quarter organic sales growth of 3% year over year with three segments remaining in positive territory and double digit growth in defense and space and commercial aviation original equipment in aerospace. This was the first full quarter of impact from the acquisition of the access solutions and we're pleased with the performance of that business in the early days of integration. We also saw approximately one month of impact in aerospace from the case and Chibiton Abbey acquisitions. On orders, we grew 2% organically year over year with a book to bill of 1.1, led by double digit growth in energy and sustainability solutions and building automation. This order strength drove a 10% year over year improvement in backlog to a record $34 billion. Excluding the impact of M&A, backlog grew 6% year over year and 4% sequentially. Although sales came in below our expectations, profit remained resilient as we leveraged our Honeywell accelerator operating system and cost management capabilities to protect our bottom line. Segment profit grew 6% year over year led by double digit growth in aerospace. Segment margin remained flat at 23.6%, 30 basis points above the high end of our guidance as expansion in industrial automation, building automation and energy and sustainability solutions was offset by higher corporate costs year over year, mainly due to our investment in our digital infrastructure. Earnings per share for the third quarter was $2.16, down 5% year over year. And adjusted earnings per share was $2.58, up 8% year over year and above the high end of our guidance range, driven primarily by segment profit growth and lower interest expense due to timing of M&A deal closures. We took a charge in the quarter as a result of our decision to exit the PPE business in industrial automation. A bridge for adjusted EPS from 3Q23 to 3Q24 can be found in the appendix of this presentation. Free cashflow in the quarter was $1.7 billion, up 10% year over year due to stronger operational income and higher collections. On capital deployment, we put $3.1 billion to work in the third quarter with 2.1 billion in M&A, 700 million in dividends and 300 million in high return capital expenditures. As Zimbal highlighted, we made significant progress this quarter and are on track to deploy over $14 billion in capital this year. And our work is not yet done as we continue to leverage our balance sheet into 2025, reshaping the portfolio. Now let's spend a few minutes on the third quarter performance by business. In aerospace technologies, sales were up 10% organically year over year, the ninth consecutive quarter of double digit growth. Sales were led by double digit growth in defense and space where we continue to unlock volume from a robust backlog through sustained global demand. In commercial aviation, we saw another quarter of double digit growth in original equipment sales as ship set deliveries increased with particular strength in business and general aviation. Commercial aftermarket saw continued growth as global flight activity continues to rise. Despite some discrete supply chain disruptions in September that impacted our air transport OE business, output improved 13% in the quarter as we made sequential progress in supply chain, the ninth consecutive quarter of double digit output growth. Segment margin remained flat year over year at .7% in the third quarter as commercial excellence and productivity actions were offset by cost inflation and mixed pressure within original equipment. Industrial automation sales were flat sequentially but decreased 5% organically in the quarter, primarily due to lower volumes in warehouses and workflow solutions and short cycle safety and sensing technologies. Process solution sales grew 2% year over year and 1% sequentially in the quarter, driven by strength in our aftermarket services and compressor controls businesses, partially offset by demand softness and smart energy and thermal solutions as well as some delays in our projects businesses. Sensing and safety technologies sales declined year over year and sequentially, but the sensing business delivered modest sequential growth for the second consecutive quarter. In productivity solutions and services, orders and organic sales grew double digits year over year when excluding the impact of the zebra license and settlement payments that ended in the first quarter of this year. Industrial automation segment margin expanded 60 basis points to .3% due to productivity actions and commercial excellence, partially offset by cost inflation and volume leverage. In building automation, sales grew 14% year over year and 11% sequentially, thanks to a full quarter of the access solutions acquisition and acceleration in the fire business. Organically, BA sales were up 3% supported by another quarter of solid performance in building solutions. Solutions grew 8% in the quarter, driven by another double digit growth performance in projects and sequential growth in services. Product sales declined slightly year over year, but saw sequential improvement organically to the second straight quarter, thanks to strength and fire. Building automation orders continue to be a bright spot, led by 25% year over year growth in building solutions on continued strong demand in data centers, healthcare and energy. Segment margin expanded 30 basis points to .9% due to the impact of a full quarter from access solutions and commercial excellence, partially offset by cost inflation. Energy and sustainability solutions sales grew 1% organically in the third quarter. Advanced materials grew 3% year on year due to further improvement in specialty chemicals and materials, particularly in spectra and continued growth in flooring products. UOP sales declined 2% as growth in aftermarket services and catalysts was offset by softness due to project timing. Orders in UOP were up over 50% in the quarter to a record $1 billion with strength and core process technologies and a record of more than $200 million in sustainable technology solutions. This marks the third consecutive quarter with ESS book to bill at 1.2. Segment margin expanded 10 basis points to .5% due to commercial excellence, net of inflation. Overall, our accelerator playbook continues to serve us well as we once again demonstrated our ability to protect margins even in a lower growth environment. Healthy orders, record backlog and accretive growth rates across the M&A deals we have closed this year give us confidence in our ability to drive improved organic growth in the future. With that, let's turn to slide six and we can talk about our fourth quarter and updated full year outlook. Due to the incrementally more challenging and market backdrop, we are revising our full year sales guidance range while increasing the midpoint of our segment margin guidance. We are narrowing our adjusted EPS guidance to the high end of the prior range due to that margin outlook combined with favorable adjustment to our effective tax rate. While our pace of sales is not degraded, we have not seen the short cycle acceleration which we anticipated by this point in the year and it's appropriate to reflect that as well as the energy related and arrow output pushouts in our outlook. Our demand profile remains healthy with book to bill of 1.1 and record backlog and we're confident in our ability to accelerate growth within our long-term framework in the coming quarters. We now expect full year sales to be in the range of 38.6 to 38.8 billion dollars representing organic growth of three to 4% down from five to 6% previously. The lower guide reflects the lower third quarter results, a slower recovery in industrial automation and more tempered expectations in pockets of aerospace and energy markets in the fourth quarter. As a reminder, our guidance includes the impact of all four acquisitions, Access Solutions, Chivitinavi, Case and LNG now all closed. Collectively, they will add approximately 800 million in sales in 2024 consistent with prior communications. For the fourth quarter, we anticipate sales in the range of 10.2 billion to 10.4 billion dollars up two to 4% organically. Sales should increase sequentially across the portfolio led by aerospace as we experience additional supply chain unlock as well as continued growth in flight hours and ship set deliveries. Turning to segment margins, our strong result in the third quarter and our commercial excellence and productivity playbook are supporting our bottom line. As a result, we're narrowing our overall segment margin guidance towards the high end, now expecting to end the year between 23.4 and 23.5%, flat to 10 basis points from 2023. That said, the dynamics we highlighted last quarter are still old. Delays in short cycle improvement are leading our long cycle project and original equipment businesses to a larger percentage of our mix, driving margin headwinds. In the long term, this provides us an expanded install base to leverage for high margin aftermarket projects. We now expect overall segment profit dollars to grow between five and 6% for the year. At a segment level, building automation and energy and sustainability solutions will lead the group in margin expansion. For the fourth quarter, we anticipate overall segment margin in the range of 23.8 to 24.2%, up sequentially, but down 20 to 60 basis points year over year as a result of mix within original equipment and aerospace and volume D leverage in industrial automation. Now let's spend a moment on our outlook by business. Looking ahead for aerospace technologies, we still expect low double digit growth in 2024 organic sales with double digit growth in both commercial aviation and defense in space. In the fourth quarter, we expect sales growth of mid to high single digits with particular strength in commercial aftermarket. As previously noted, segment margin in the third quarter outperformed our expectations on better than anticipated mix, but we still see modest year over year segment margin contraction as discrete supply chain disruptions from the third quarter are resolved and we see a corresponding recovery and commercial original equipment volumes. Moving to industrial automation, we're lowering our 2024 outlook for year over year organic sales to a decline in the high single digit range as slower than expected short cycle demand recovery alongside project pushouts and process solutions dampen our outlook for full year organic growth. For the fourth quarter, we expect sales down low single digits with modest growth in projects and aftermarket services offset primarily by softness and sensing and safety technologies and smart energy. Margins will be down overall this year for industrial automation, but up when excluding the impact of the license and settlement payments that ended in the first quarter. In building automation, we still expect full year organic growth in the low single digit range led by continued strength in building solutions and high growth regions, particularly in India and Saudi Arabia. Fourth quarter sales will be up year over year and flat to up sequentially as we see volume improvement led by fire products. Margins should hit their high point for the year in the fourth quarter as improvement in fire and the impact of access solutions support positive mix. For energy and sustainability solutions, the organic growth outlook for the year is still low single digits with typical strong sequential improvement in the fourth quarter driven by catalyst shipment seasonality. We're still expecting full year margin expansion with the fourth quarter at the highest margin rate due to favorable business mix associated with catalyst reloads. We will also see a lift from the first quarter of sales and our newly acquired LNG business. Moving to other key guided metrics, net below the line is now expected to be between negative 650 million and negative $700 million for the full year. For the fourth quarter, net below the line is expected to be between negative 250 million and negative $300 million. We now expect pension income to be approximately 600 million for 2024, up 50 million from our prior guide due to a one-time item that was pushed out from the fourth quarter into 2025. This guidance includes repositioning spend between 150 million and $190 million for the year and between 60 and $100 million for the fourth quarter as we invest in high return projects to support future growth and productivity. We expect the adjusted effective tax rate to be around 20% for the full year and 17% for the fourth quarter. The reduction in expected tax rate is a result of favorable adjustments to income tax contingencies and taxable income mix. We anticipate average share count to be around 655 million shares for the full year and around 653 million shares for the fourth quarter. And we maintain balance sheet capacity to deploy additional capital to achieve the highest shareholder returns. We now expect the year over year impact to 2024 adjusted EPS from the four acquisitions closed this year will be approximately neutral. A bit better than we communicated last quarter. Slight delays to the closing of the case and LNG deals reduce some of the interest expense and planned integration costs in 2024. And as we get our arms around the business, we're refining our near term expectations. We continue to expect one to 2% EPS accretion in 2025 from these deals. A summary of the 2024 M&A impact on our financials is included in the appendix of this presentation. As a result of all these inputs, we expect full year adjusted earnings per share to be in the upper half of our prior range. Now between $10.15 to $10.25 up 7% to 8% year on year. We expect fourth quarter adjusted earnings per share between $2.73 and $2.83 up 1% to 5% year on year. On cash, we're reducing our guidance and now expect free cash flow in the range of 5.1 to $5.4 billion down four to up 2% excluding the impact of prior year settlements. Lower progress in inventory, mainly in aerospace and slowing payment cycles in certain high growth regions has impacted our performance and our expectations. We continue to work on the multi-year unwind of working capital and we will fund high return capex projects focused on creating uniquely innovative technologies for the company. Overall, while we remain cautious on the macroeconomic environment in the short term, our acquisitions are progressing in line with our expectations. Our backlog remains at record highs and we are driving expansion of our install base. Our rigorous operating principles give us confidence in our ability to execute on our long-term growth algorithm. Now let me turn it back to Vimal on slide seven for some closing thoughts.
Vimal Kapoor
Chairman and Chief Executive Officer
Thank you, Greg. While we experienced some headwinds in the quarter, we are confident in our ability to weather that macroeconomic backdrop with the operational rigor you expect from Honeywell. We deliver segment margins and adjusted earnings per share above our guidance range in three Q. We have adjusted our outlook to reflect the realities as we now see them in this macro. We continue to make steady progress towards our portfolio optimization as we close out the year. As we look ahead towards 2025, our robust backlog further benefit from a creative growth rates to come from our acquisition and our leading position and attractive end market provide us with a constructive outlook despite the ongoing economic and geopolitical uncertainty. While we think volume growth could remain subdued by muted short cycle growth early in the year, we expect to see organic growth across all four businesses next year. We plan to return to margin expansion again in 2025 as a combination of volume leverage and productivity actions across the portfolio should offset modest mixed headwinds in aerospace from OEM activity and integration of case. We look forward to providing more detailed guidance of 2025 during next quarter's earning call as the backdrop becomes clearer and our portfolio shaping impact solidifies. I remain excited about the future of Honeywell and believe our portfolio shaping efforts are enabling us to drive innovation and solve some of the world's most challenging problems. With that, Sean, let's open up for questions.
Sean Mecham
Vice President of Investor Relations
Thank you, Vimal. Vimal and Greg are now available to answer your questions. We ask that you please be mindful of others in the queue by only asking one question and one related follow-up. Operator, please open the line for Q&A.
Operator
Operator
Thank you. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Julian Mitchell with Barclays. Please proceed with your question.
Julian Mitchell
Analyst at Barclays
Hi, good morning. Maybe just wanted to start off with a sense, maybe flesh out a little bit more any thoughts around next year. Realize we'll get more color in Q4 results, but in the past, you've often given more detailed preliminary thoughts for the out year in October. So just wondered, for example, on the cost side of things, the top line's running light of expectations, but you took down your repositioning expectations for the year. I wondered if there might be a case, given the macro backdrop, to sort of accelerate things like cost cutting measures, maybe do more repositioning to make sure you can get margins up in 2025. So maybe flesh out some thoughts around the margin expansion from here.
Vimal Kapoor
Chairman and Chief Executive Officer
Thanks, Julian. Let me start and then hand over to Greg there. Look, I know my predecessors provided guidance on 2025, but given the current uncertainty in the environment across what we experienced, the wars, the upcoming elections in the US, and multiple factors, we only found thought through then that we do it in January when more facts are known. But I think there are a few comments I'll make. First, there are three important backdrops, which we all should consider for 2025. Number one, our backlog is up 6%, 10 with all the acquisitions. I do believe we have a better quality portfolio. And number three, our cost position is very robust. We have seen that in our margin expansion across all four segments, and that's driven by both productivity and our cost control action. So those are carried forward for 2025. What we're also executing is what's in our control, which is driving growth action through new products, but also continue to drive productivity action to maintain the higher quality P&L. Now, with that backdrop, as we mentioned in our comments, we do expect all four segments to have organic growth in 2025. Now, the specific ranges, we'll share that in January when we have the earnings call, but at this point, we feel confident on that fact. We also believe we will be back to margin expansion in 2025 based upon the actions we really have taken. So I would say the setup is positive. There are uncertainty. On the cost position, you're absolutely right. We are very watchful on that, and we have demonstrated that in Q3. I'm gonna pass on to Greg to explain some of the repositioning numbers, what we have reflected on, and provide specific commentary on that.
Greg Lewis
Senior Vice President and Chief Financial Officer
Yeah, so Julian, the takedown in the repo guidance is really just the Q3 number being lower, on the low end of the range. So if you look at our guidance for the fourth quarter at 60 to 100 million, that's roughly the same as what we had implied. And so the takedown from 150 to 225 to now 150 to 190 is really just the third quarter being on the low end. We have a very robust productivity and repositioning pipeline. That process, as you know, we've owned for years. And to Vimal's point, we're not sitting here in October thinking the world is coming, crashing down in 2025. So it's not like we need to ramp up dramatically a major reduction in census to address that, in which case then, maybe you would see a much bigger, near-term repo change, but we're gonna always be watchful. So that's really, I wouldn't read too much into the repo guidance coming down other than just having been in the low end. We've given ourselves plenty of flexibility in the fourth quarter to take appropriate productivity actions and we'll do so.
Julian Mitchell
Analyst at Barclays
That's very helpful, thank you. And then just a very quick follow-up around, as we're thinking about portfolio movements and so forth, you announced advanced materials spin, you've got PPE and assets held for sale. Just wondered sort of, to what extent Vimal, the changes in the sort of organic backdrop on top line and what's happening with margins, do they have an effect on increasing the urgency of portfolio measures or you think about them as sort of somewhat two independent tracks?
Vimal Kapoor
Chairman and Chief Executive Officer
I would say the portfolio actions are driven by two factors. First is the fit in the Honeywell portfolio, building Honeywell into three simplified mega trends, which I committed exactly a year back. So if you see our actions on both advanced materials and PPE, they reflect that commitment. I would say the PPE business in particular is gonna help Honeywell accelerate organic growth and more margin expansion. Advanced material business is more neutral on a fixed basis. Going ahead, the portfolio actions are never completed. I would say that we're gonna constantly look at now, given we have completed this phase, what else we could add or subtract to improve the quality of portfolio of Honeywell. What I'm really proud of, Julian, is all the four acquisitions we have made, they are in the high growth and verticals. They are in defense, they are in LNG, they are in access solution, which are high demand markets. And that certainly is improving the growth profile of Honeywell, apart from the fact the actions we are taking on the core portfolio.
Julian Mitchell
Analyst at Barclays
Great, thank you.
Operator
Operator
Thank you. Our next question comes from the line of Steve Tusa with JP Morgan. Please proceed with your question.
Steve Tusa
Analyst at JP Morgan
Hello, can you hear me?
Joe Ritchie
Analyst at Goldman Sachs
Good morning, Steve.
Steve Tusa
Analyst at JP Morgan
Yeah, so sorry, just missed the first part of the call. Can you just talk about any kind of trajectory on, you know, into kind of 25 and some of the puts and takes? I know, you know, you guys had talked to being within the range on organic a few weeks ago, but also just, you know, whether the margins can be a, you know, kind of a trend line here, any updated thoughts on kind of the 25 look?
Greg Lewis
Senior Vice President and Chief Financial Officer
Sure, Steve, maybe I'll start. You know, as we talked about, even when we saw each other in Europe, we still expect all four businesses are gonna grow next year, and we're gonna be coming out of the year with a lower exit rate than we had planned. It's still gonna be, you know, a positive exit rate. And so when we think about the setup for next year, again, way too early for guidance, we'll do that in January. We do expect all four businesses to grow, and we expect margin expansion broadly across the portfolio, with Aero probably being the one that's going to remain, I would say, you know, around its current level, organically with, that's the one area where it'll get headline pressure from the acquisitions, though all those acquisitions, and particularly in the Aero's, you know, instance are gonna be very strong growth rates, so very healthy segment profit growth overall.
Steve Tusa
Analyst at JP Morgan
Okay, great, and then just on the free cash flow cut, what's the, is that just an earnings cut, or is there something else going on in working capital like that?
Greg Lewis
Senior Vice President and Chief Financial Officer
Yeah, the two big items there is, as you know, the biggest pile of inventory we have is in aerospace, and that's been the hardest nut for us to crack, and particularly given all the dynamics that you're seeing in the industry over even the last 90 days, we just don't see the ramp down that we had been trying to drive there specifically. We've made nice progress in both IA and BA on inventory reduction, but not in Aero, and then the other part of that, I would just say, is in our high growth regions, we're seeing payment cycles slow, and I think, again, that's a little bit of a reaction to oil prices and a little bit of disruption happening around the Middle East, and so those two things are really what we're reflecting in the guide on cash. We do expect, again, as we go into next year, we're gonna still work the acceleration on working capital reduction effort, and hopefully the environment will participate in a way that's gonna be more conducive to that. We're gonna continue to do our work as we've done on the digitization of our working capital, particularly inventory and planning side, to try to unlock that balance.
Steve Tusa
Analyst at JP Morgan
Great, okay, thanks a lot. Thanks to you.
Operator
Operator
Thank you. Our next question comes from the line of Nigel Koh with Wolf Research. Please proceed with your question.
Nigel Koh
Analyst at Wolf Research
Thanks, good morning, and hope all is well. Hi, guys. Just on the aero performance, maybe just touch on the Boeing strike and how you dial that into your sort of 4K outlook, and then within the performance in commercial aftermarket, the plus 8%, can you dissect that between ATR and Bizjet? I'm assuming Bizjet's gonna be a bit more challenged there. Just does any help there would be helpful.
Vimal Kapoor
Chairman and Chief Executive Officer
Yeah, let me start here, and I'll pass on to Greg. I would say the Boeing circumstances are obviously very challenging. We all saw the results of the strike board yesterday night, which is unfortunate. I would say from a Honeywell perspective, we have been working very closely with Boeing to make sure that we have a coordinated way of dealing with our shipments to the Boeing. The next punchline of that is, thankfully, there is no impact of that into our revenue in Q4. We are adjusting some shipments into aftermarket, Boeing's customers, and so on, and we really have to now really start thinking about 2025 based upon how things are shaping up, but for Q4, there is no specific impact into our numbers. Maybe Greg, you wanna answer the second question?
Greg Lewis
Senior Vice President and Chief Financial Officer
Yeah, so on the commercial aftermarket side, as you saw us report, high single-digit growth overall, and as your Spidey senses are telling you, it's double digits in ATR, and it's single digits in BGA, and again, I don't think that should be a surprise to anyone as the international market continues to expand on flight hours, as it has throughout the course of the year. We're still outgrowing in BGA the flight hours growth, given all of the nice work the team has done on their RMU portfolio, so that continues to be a positive for us in terms of trying to do the decoupled growth approach that we've been so successful at over the years.
Nigel Koh
Analyst at Wolf Research
Great, thanks, that's helpful, and just a quick one on the portfolio. PPE, no surprise there, but maybe size the reps and margin for PPE this year, and then I guess the only other thing on the agenda right now is continuum. We're still hoping to monetize that next year.
Greg Lewis
Senior Vice President and Chief Financial Officer
Yeah, so the PPE reps are about a billion one, we're not gonna get into the margin profile, you can probably get close with some of the information you've learned over time, and then I'll pass it on to you.
Vimal Kapoor
Chairman and Chief Executive Officer
Nigel, as we have said, we absolutely want to monetize Honeywell Investment at the right time. The key focus area for us is continue to make progress on the technical mind stone, because that will feed into commercial customer acquisition, which will feed into IPO in that order. And we are making nice progress on the technical front. Earlier in the year, we worked with Microsoft to prove the error rates in quantum computing, which is a big mind stone, and we did prove one of the highest fidelity computing platform. We also made some announcement on the capability relative to logical qubits in Q3. So we are making progress on expected line on the technical front, which is very, very positive factor to know. That will now feed into the next step to acquire customers. The strategy of monetizing continuum hasn't changed, the timing will be depending upon as we make progress in the actions we have highlighted earlier. Great, thanks,
Nigel Koh
Analyst at Wolf Research
Bill.
Vimal Kapoor
Chairman and Chief Executive Officer
Thank you.
Operator
Operator
Thank you. Our next question comes from the line of Scott Davis with Miele's Research. Please proceed with your question.
Scott Davis
Analyst at Miele's Research
Hey, good morning, guys. Welcome, Mike, to the call. Hey, guys, you made this announcement with Forge and Gemini AI. I mean, what's the deliverable here? I can kind of see the, conceptually see what you're doing, but what do you kind of envision as the, out the other side, the real kind of killer app for customers?
Vimal Kapoor
Chairman and Chief Executive Officer
Yes, Scott. I can give you a two-minute version while I also have a two-hour version of this. The short answer is that as we are connecting more and more our customer assets into our Forge platform for the last, I would say, about two to three years, the obvious next question for us is, what are we gonna do with that data as we keep expanding our customer base through connectivity? So we're looking ahead and looking to look at the AI model, the vertex AI capability which Google has, provide us some unique capabilities which will create a new application on top of that data. So it's a, it's consistent with the strategies Scott have already always highlighted, monetize and install base. So monetize and install base by connecting the install base and then having more capability through partnerships like this. At the same time, we do expect some of our edge devices, our products which connect with the building or with the process unit or with the warehouse, things like scanners, think of gas detection devices, embed AI at the chip level and have the Google's nano AI program embedded into that. It makes those products more capable. We expect to launch first off one of them in early 2025. So this is not a long-term dream. This is imminently happening shortly. So all in all, this is continue to build upon our commitment of organic growth focus through new innovation and we are partnering with companies like Google to expand our horizons there. And I'm very excited about it. I do expect this gonna help us support our organic growth profile in the years ahead.
Scott Davis
Analyst at Miele's Research
That makes sense. And just, Intelligrated obviously has been the kind of the gift that keeps on giving. It was great for a while and then it's been not so great here for a few years. But how do you fix that business? It doesn't seem to be as much value at the customer level perhaps as we all once thought. And is it a product innovation issue Vimal? Is it just that the market itself is just too cyclical or perhaps too concentrated with a couple big customers and maybe they have too much power in the channel. But how do you fix this thing? I'll just leave it at that and thank you.
Vimal Kapoor
Chairman and Chief Executive Officer
Yeah, I know. I understand the frustration around Intelligrated and so are we given the performance. Look, the good news is we saw slight sequential growth in that business in 2003 and we expect that trend to continue in 2004. Speaking differently, the business is definitely at its bottom with a slight turn around. As I look ahead, I do see business becoming very concentrated actually on aftermarket. 2025 or aftermarket maybe actually 60% of the revenue. It used to be 30 when we acquired it. So it's almost become double. We have rebased on our cost base, Scott, to nearly a billion dollar run rate revenue which we have today. I think the real constraint here is customer adoption rates. We have talked before the value proposition is extremely compelling. However, the capital investment required for fixed sortation system is high. And making that commitment on a long-term basis, you can't decide to automate one warehouse. You have to basically commit to all of them. And that commitment therefore tends to be several hundred million or sometimes even a billion dollars. And that's really I've observed in my two year watch of this business is a constraint. So I would say we will continue to run this business as efficiently as we can. The 2025, the business has baseline to a point. It won't be a drag to the Honeywells numbers anymore. And we will continue to put our actions in place to make it a better business in the years ahead.
Scott Davis
Analyst at Miele's Research
Thank you. Best of luck guys.
Dean Dre
Analyst at RBC Capital Markets
Thank you.
Operator
Operator
Thank you. Our next question comes from the line of Chris Snyder with Morgan Stanley. Please proceed with your question.
Sheila Cagliari
Analyst at Jefferies
Thank you. I wanted to ask on the ARO organic growth into Q4, slowing to mid to high singles. And I think you said earlier that there's no impact from the Boeing strike in that. So I guess, is there any spillover impact from the fire at the fire station? Is this the same facility you saw in Q3 or does this kind of, where you see ARO market growing here in Q4?
Vimal Kapoor
Chairman and Chief Executive Officer
Look, Chris, ARO has been, it's nine quarters we have been growing double digits. So it just one is the elevated level of comps that certainly makes it challenging. But two important facts here to share. In Q3, we had two discrete events which are transitionary in nature. We unfortunately had a fire in one of our plants. The plant is back up and running. So we lost that revenue. And we also saw the last week impact of the lean because we do have large ARO facility in Florida and we could not shift for last couple of days of the quarter. Moving ahead into Q4, our acceleration is good. I mean, if you see in Q3, our volume growth is 13%. Now, if you used to be in high teams, it has come to the low teams. And that's where the volume extension through supply base with elevated levels is really the problem we are really solving for. By no dimension, our outlook has changed. Our outlook for ARO for the year is still low double digit. That's what it was earlier too. So it's not really changed. We have possibly missed an upside opportunity there. That's how I will put it. There was a case here, we would have beaten that low double digit to a better number, but some of the supply chain pushouts have really made it more of a not 2025 event. Our backlog, our past views are now continues to be greater than 2 billion. They have grown further. Not a good news from my customer perspective, but at the same time, we're getting forward that backlog next year, which will help us to have very similar profile of growth in 2025 as we are experiencing in Q4 this year. So remain very positive and optimistic. I'm also very excited about the case acquisition, which is going to further expand the profile. It's a meaningful business size, $750 million. We do expect a high growth rate in defense segment, which is also going to help and shape 2025 number for ARO on the top line growth.
Sheila Cagliari
Analyst at Jefferies
Thank you. I appreciate that. And then maybe kind of turning over to industrial automation. It's been a couple of years now of pretty steady, meaningful declines. And I understand that a lot of these end markets are challenged, whether it's warehouse or scanners, or even safety and sensing. But when you look at Honeywell's performance in industrial automation, compared to the end markets you serve, do you feel like the company is holding share, or do you think that the company might be losing share, or maybe even gaining share across these end markets? Thank you.
Vimal Kapoor
Chairman and Chief Executive Officer
Yeah, Chris, we serve multiple end markets here. So I can't give you a very brief and short answer on that. I would say on the whole, the market drivers are the contributing factors on the performance of the industrial automation business. I mean, there will be always exceptions there, but that really drives it. Also bear in mind that this business is extremely global, and we look at the end market with the lens of US, which we all sit here, and that's what we observe. But this business has a strong presence in Germany, this business has a strong presence in China, and we cannot ignore some of the economic dynamics going in those parts of the world. And then you have material revenue there, it's certainly having its own impact. So I would say that the one-liner for that is we are just shaping up with the market. Looking ahead, I would say 2025, there are two headwinds we have, or 24 are behind us, which makes me believe very, very strongly that industrial automation will grow in 2025. The first headwind will be gone is the rebase signing of the integrated volumes, business volume. It's, we had mentioned in one of the earlier calls, it would be around a billion dollar, that's where they're shaping up. So we don't have that headwind. We do believe we can sustain that volume, looking ahead in 2025. And we had three quarters of the royalty from Zebra in our numbers in 2024, which won't appear in 2025. So from a comp's perspective, let me correct that. We have only one quarter of this year, so from a comp perspective, it's a small number. So in 2025, we don't have to deal with that too. So those going away and markets normalizing to a certain degree, even they remain constant, we are still gonna grow. At every normalized markets today, we do expect a positive performance in that business in 2025. Thank you.
Operator
Operator
Thank you. Our next question comes from the line of Sheila Cagliari with Jeffries, please proceed with your question. Thank you so
Chris Snyder
Analyst at Morgan Stanley
much guys, and good morning. General, going back to Aerospace and Greg, if we could talk about, can you tell us what the rate was in Q3, how you think about it in Q4, and the acceleration Q3 to Q4, is that not a change in the max rate? Is it just the supplier that just popped up?
Sean Mecham
Vice President of Investor Relations
Sorry, Sheila, I think you broke up for a second. Would you mind restating the question?
Chris Snyder
Analyst at Morgan Stanley
Oh, sorry about that. So just on the max, can you give us an idea where you are on max in Q3 versus Q4? And if it is unchanged, what results in the Q3 to Q4 margin deceleration of about 250 bips, going to around 25%?
Vimal Kapoor
Chairman and Chief Executive Officer
Yeah, so on the Q3, I will answer the second portion, the margins Q3 to Q4 is just the drivers of the OE shipments. So some of the discrete manufacturing disruption in what we had in Q3 ended up having directly lower OE volume, which helped us in terms of the mix, and that drove the margin in Q3. So as those supply chain disruptions are getting released in Q4, those shipments are going to occur, which again pushes the margins to a different trajectory. So I think that's a fundamental shift there. I think
Greg Lewis
Senior Vice President and Chief Financial Officer
our comments on the Boeing situation is just that their demand on us has not gone down demonstrably from what it had been previously. There doesn't mean there's not some disruption in our ability to ship in Q3 versus Q4. We definitely had that challenge, but the demand on us has not changed meaningfully from Boeing.
Sean Mecham
Vice President of Investor Relations
The last one I would add is just to say that three Q is better than we would have thought on the margin, given that mix. And then there's some reversion in the fourth quarter. So overall, the full year is really unchanged from what we communicated previously. It's just what goes in which quarter. Got it.
Chris Snyder
Analyst at Morgan Stanley
And then hopefully you could hear me on the commercial aftermarket. In Q3, it lagged a bit, 8%. Maybe we just modeled it wrong, but it seemed like it was mostly BGA. So when you think about aftermarket being the growth leader in Q4, is that continued double digit in ATR, any color there, or is it BGA picking up again?
Greg Lewis
Senior Vice President and Chief Financial Officer
In aftermarket. You're not correct. Yeah, the aftermarket will be stronger in ATR than BGA. That's just, that's gonna continue to be that way for some period of time.
Chris Snyder
Analyst at Morgan Stanley
Got
Operator
Operator
it. Thank you.
Vimal Kapoor
Chairman and Chief Executive Officer
Thanks, Sheetha.
Operator
Operator
Thank you. Our next question comes from a line of Dean Dre with RBC Capital Markets. Please proceed with your question.
Dean Dre
Analyst at RBC Capital Markets
Thank you. Good morning, everyone. Hey, Dean. Hi, everyone. Hey, I think it was just about a year ago that you did the resegmentation. And one of the outcomes was you identified that there was roughly 10% of revenues that would be divested, maybe half of them chunky, others kind of very small below the radar screen. So does PPE, would that be part of it? And I would trust advanced materials is not part of that 10%. So just, what's that pipeline look like?
Vimal Kapoor
Chairman and Chief Executive Officer
Yeah, so Dean, when I announced it last year this time, it was an initial view of the portfolio which had less fit relative to the three mega trends. There were portions of advanced materials which were part of it. But when we did the work, the shareholder value was much higher for the whole spin versus the smaller part, which make us this decision of announcing the spin a few weeks back. So that was definitely part of the parameter and a smaller scope, but ended up being big. PPE was part of that scope. So I would say on a broader strategy basis, we are directionally down for the near term, but portfolio work is never complete. We are constantly gonna look at what else is a less fit in Honeywell now, even though everything fits into either future of aviation, energy transition or automation. Now the question I'm asking is relative to the growth rates and margin expansion runway and vertical fit and things of that nature. And we'll constantly make our portfolio, active portfolio management as part of our operating system. We have a lot of balance sheet capacity. So we certainly want to use that and liberate that to the benefit of building a better business. So those are some of the comments I will offer you.
Dean Dre
Analyst at RBC Capital Markets
What would be the timeframe for other divestitures?
Vimal Kapoor
Chairman and Chief Executive Officer
I won't put a specific timeline here. I would say that we want to be a prudent utilization of our balance sheet capability. And the events will be more determined by the opportunity set. The opportunity set of acquisitions. And similarly, the fit is less, we need to get convicted. We have to do that work and then really start working on some of the possible portfolio actions there. So there's nothing new definitive which we are working on, but you never say never because this is a constant activity.
Dean Dre
Analyst at RBC Capital Markets
Thank
Operator
Operator
you. Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.
Joe Ritchie
Analyst at Goldman Sachs
Hey, good morning guys. Hi Joe. So can you, I may have missed it, but can you please elaborate on the project delays that you're experiencing in both process solutions and UOP. So what are the root causes and then how do you see that rectifying going forward?
Vimal Kapoor
Chairman and Chief Executive Officer
Joe, I would say the conversion rates typically we see, we end up doing approximately 50% of our revenue in month three of every quarter. And we have a well proven run rate of conversion of smaller projects, both in process solution and smaller, you know, catalyst shipment. And that's what really didn't occur on the normal run rate in Q3. So that's what we observed for the first time that push-outs are happening at this point of time. At the same time, I will also give you another data point. UOP had its historic high in its history order booking in the same quarter, a billion dollars, which are large new projects. People are committed investment for new process technology or new equipment. So those are the dynamics going on. The long cycle commitment continue to hold. The short cycle push-outs are also occurring at the same time. And we have factored that into our Q4 earnings forecast now that we expect that some of those project push-outs will continue to occur till we say stability. And probably the root cause of that, I would assert in that the two factors. I would say there's a lot of uncertainty in Middle East due to war situation and oil price fluctuation we all observed there. And we all are equally awaiting on outcome of US elections. So I think that uncertainty causes making any moderate investment also a bit of a consideration for our customers. And that's driving the push-out. And we do expect as things settle, some of these should become back to the normal case ahead.
Joe Ritchie
Analyst at Goldman Sachs
Got it, that's helpful. So mostly this is basically exogenous factors, not anything internal that's impacting. Okay, and then I guess maybe, yeah. And then the second question is just, look, the defense business has been, I think double digits now for four out of the last five quarters and recognize that you're benefiting from the fact that supply chain is normalizing. I guess, how do we think about that into 2025? Is this a business just based on the normalization of the supply chain that should continue to see this level of growth, call it high single digits to double digits type growth into next year?
Vimal Kapoor
Chairman and Chief Executive Officer
Yeah, I do believe that. I think our order books there are strong in defense. And in fact, the bond remains very strong. We have demonstrated now for two quarters in a row our ability to take supply chain actions specifically to the defense supply chain. And we do expect to maintain this momentum in 2025. It will remain the headline for aerospace growth, specifically not only the core business that we will always own, but the acquisition of a case, which is a entirely self-defense segment. Our near term mix of defenses is gonna go up and growth rates are gonna be at, I would say relatively elevated rate compared to the core aerospace business.
Joe Ritchie
Analyst at Goldman Sachs
Okay, great. Thank you very much. Thank you.
Operator
Operator
Thank you. Our final question this morning comes from the line of Andy Kaplewicz with Citigroup. Please proceed with your question.
Andy Kaplewicz
Analyst at Citigroup
Hey, good morning, everyone. Andy and Andy. I know you've talked about accelerating new products now and evolving the accelerator operating system. How much could that accelerating or maybe the focus on what good looks like across your portfolio help in 25 versus 24? Would you anticipate a material step up in core growth from your initiatives, even if markets maybe stay a little muted, more muted than expected outside of Arrow?
Vimal Kapoor
Chairman and Chief Executive Officer
Yeah, I think short answer is yes, Andy. We have done work and we really track what I call new product category. So fundamentally what we have evolved our operating system is think about the products as core products, which we always have and refreshing them because we have to keep share. You can't keep them stale. And then adding new product categories, which we don't have today. Those skew numbers don't exist in our ERP system. And that those products which are being launched in 24 or early 25 are gonna be a larger number compared to what we had in 24 run rate. So that does give me a confidence that that's gonna act as an enabler for us to deliver our growth in 2025. Specifics will share when we do the earnings call, but fundamentals do look attractive on that space.
Andy Kaplewicz
Analyst at Citigroup
Got it, and then maybe just a little more color what you're seeing in terms of landscape by geography. It's interesting to see that buildings products has started to improve. Is that a function of European building products getting any better? And I know you mentioned some macro headwinds in China obviously. So what are you seeing out there?
Vimal Kapoor
Chairman and Chief Executive Officer
I would say in pockets, I mean if you call specifically on the building business, we did observe good recovery in Europe in our short cycle businesses in building automation. I would say we have crossed the trough in Europe and we are on a moderate recovery there. We certainly see that. In China, I would say that's not true. Honeywell continues to be in mid to high single. We have said that before, we will perform well in China thanks to our aerospace and energy segment, but our automation businesses are flagged to slight contraction. We are not observing any change in trajectory, which then get reflects on the performance there. So some pockets are recovering Europe, not so much in China and headline of our growth, which we mentioned in our prepared remarks also, we do see strong growth in India and Saudi Arabia. Those two countries are become catalysts of our growth. We have a moderate amount of revenue there. So certainly double digit revenue growth certainly helps on our top line.
Andy Kaplewicz
Analyst at Citigroup
Appreciate all the color.
Operator
Operator
Thank you. Thank you. This concludes our question and answer session. Mr. Kapoor, I'll turn the floor back to you for any final comments.
Vimal Kapoor
Chairman and Chief Executive Officer
I wanna express my thanks to our shareholders for your support and to the Honeywell Future Shaper who will help us to achieve our accelerated growth goals. I believe our future is bright and we look forward to updating you on the progress. Thank you for listening and please stay safe and healthy.
Operator
Operator
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
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