Q3 2019 Earnings Call
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Thank you everybody good morning, and welcome to Honeywell's third quarter 2019 earnings Conference call.
With me here today, our chairman and CEO dairy Saddam check and senior Vice President and Chief Financial Officer, Greg Lewis.
This call and webcast, including any non-GAAP reconciliation.
Our available on our website.
Www Dot Honeywell Dot com forward slash investor.
Note that elements of this presentation contain forward looking statements that are based on our best view with the world and of our businesses as we see them today.
Elements can change.
We ask that you interpret them in that light.
We identified the principal risks and uncertainties that may affect our performance in our annual report on Form 10-K , and other FTC filing.
Well this call references to adjusted earnings per share.
Adjusted free cash flow and free cash flow conversion.
The effective tax rate exclude the impact from separation costs related to that to spin offs.
Our homes and transportation systems businesses in 2018.
As well as pension mark to market adjustments and U.S. tax legislation, except where otherwise noted.
Comparisons are to the prior year period, unless otherwise noted.
This morning, we will review our financial results for the third quarter of 2019.
Our guidance for the fourth quarter.
Provide an update to our full year 2019 outlook and share some preliminary thoughts on 2020 dynamics.
As always we'll leave time for your questions at the.
And with that I'd like to turn the call over to chairman and CEO dairy Saddam truck.
Thank you Mark and good morning, everyone. Let's begin on slide two this has been very exciting quarter for Honeywell capped off by another strong financial performance and several important recent leadership changes.
I have asked to Mahoney, what's been the president and CEO , Bob Aerospace segment for the past 10 years to serve as our senior Vice President of enterprise transformation.
In that role Tim oversee Honeywell digital or global cross functional Digitization initiative, that's driving improvements in customer service and efficiency.
Outstanding leadership has enabled aerospace to deliver exceptional results. Additionally, within Errol Tim let the creation of Honeywell's best digital environment I'm looking forward to leveraging that experience and having his expertise in this crucial role as we continue to evolve as a software it industrial.
Right.
[noise], taking over from two as the leader Aerospace as Mike mentioned.
Previous who led our aerospace integrated supply chain. My Kids also served as the president of our defense and space business and that's helped leadership roles rebid, our air transport and regional business.
My first began his career at Honeywell said three decades of leadership experience here. We are fortunate to have someone to Mike's extensive background at the helm with aerospace. These appointments sorry, effective immediately, but Mike and Tim will of course, we're closely together throughout the fourth quarter to ensure a smooth transition.
In addition jumped Kimball has been named senior Vice President and Chief commercial officer wish overseeing our sales and marketing organizations to drive profitable organic growth.
Jeff joins us from Mckinsey, where he's a partner in the transformation practice last Deborah lit has joined our board of director as an independent director embraced the CEO of Los Angeles World airports, where she is overseeing the complete modernization of Lx, including shame and killing champion.
The use of key technologies from deep knowledge.
An experience will critical infrastructure connected buildings and advanced security solutions.
In the valuable to the board and our ongoing transformation.
We have to write leadership team in place deep bench of up and coming leaders <unk> engagement experience board of directors will help us content delivered the results you have come to expect for money.
Turning to slide three let's discuss a few of our recent highlights and wins.
Through our Honeywell connected enterprise, we launch Honeywell for cyber security aimed at helping customers identified and act on cyber related incidents.
Once again had double digit growth in total connected software sales as well as continued growth in connected orders during the quarter.
We announced at Honeywell was appointed by Kuwait integrated patrolling industries to provide technology and production systems to the elsewhere refinery, which will be the largest integrated or refinery and petrochemical plant ever constructed in Kuwait.
In addition, Honeywell was ranked 13th Forbes 2019, world's most reputable companies.
Corporate responsibility.
Our position on this list is a testament to all we have dog and continue to do.
Jimmy strong advocates 40 environment, our diverse employee base and our communities.
Now onto slide four into third quarter would continue to drive strong financial results delivering adjusted earnings per share of $2, an eight cents six cents above the high end of our guidance range.
Grew organic sales by 3% driven by strength across aerospace as well as in our process automation and building technologies businesses.
Aerospace generated double digit organic sales growth for the fifth straight quarter, driven by a strong positions on key platforms robust defense portfolio and ongoing demand aftermarket services.
Our long cycle back almost flock was up approximately 8% year over year, driven by defense and space in your P. bookings as well as the strong warehouse automation orders and Hps project orders, which each increased over 20% in the quarter positioning us well for the remainder of.
A year and into 2020 organic growth combined with the benefits of the portfolio enhancements, we have made in 2018.
And our operational excellence initiatives drove segment margin expansion of hundred an 80 basis points segment margin again exceeding 21% this quarter.
Excluding the favorable margin impact from a spin offs segment margin expanded 80 basis points towards 40 points above the high end of our guidance.
In the quarter, we generated 1.3 billion dollar adjusted free cash flow remain focused on our working capital management every level of the organization they expect to deliver on our cash flow commitment for the full year.
As we've done throughout the year, we continue to execute our disciplined capital deployment strategy during the quarter, we repurchased $1 billion are planning will shares announced that 10% increase in our dividends, our 10th consecutive double digit increase.
We also closed three Honeywell venture investments and completed the acquisition of Trutrak flight systems, a leader in Autopilots 40, experimental like sport and certified aircraft in the first nine months of 2019, you have deployed 5.5 billion to share repurchases dividends.
Acquisitions. Additionally, during the quarter, we issued 2.7 billion. So senior notes to respond this October debt maturities at attractive interest rates further strengthening our balance sheet.
Very pleased to our performance this year I'm confident the team will continue to execute and deliver our full year plan with that I'll turn the call over to Greg will discuss our third quarter results in more detail and provide our updated full year 2019 guidance.
Thank you Derus and good morning, everyone, let's begin on slide five.
We posted another strong performance in the third quarter building on the great first half in 2019.
Aerospace had another double digit organic growth quarter.
Sales were strong across process solutions, you will peak licensing and refining catalyst businesses and building products.
How do you well connected enterprise drove double digit growth in connecting software.
Sps contracted during the quarter, but the turnaround and productivity products is progressing and the large order bookings, we anticipated intelligrated have begun to materialize as evidenced by the over 20% growth in orders during the quarter.
The impact of the spin offs of Garrett and radio in 2018, both lower margin businesses at the time of the spin contributed 100 basis points of segment margin expansion this quarter.
We will lap the favorable impact of these actions in the fourth quarter.
Remaining 80 basis points of this quarter's expansion was the result of our business performance and aerospace drilling technologies and performance materials and technologies, partially offset by the year over year margin decline in safety and productivity solutions that we had signaled previously.
Adjusted earnings per share were $2, an eight cents up 9%, excluding the spinoff intact.
Adjusted earnings per share excludes a $114 million tax adjustment associated with withholding taxes in connection with the fourth quarter of 2017 us tax legislation charge.
With that benefit reported earnings per share in the quarter was $2 in 23 cents.
I will talk in more detail about EPS on the next slide.
Adjusted free cash flow in the quarter was $1.3 billion with conversion of 85%.
Our total adjusted free cash flow for the first nine months was $4 billion up from 3.9 billion. Excluding the spends in the first nine months of 2018.
Cash conversion for the year has been impacted by the timing in our projects businesses, primarily in Intelligrated and PMT.
Overall, a very good performance for the third quarter and above both our margin expansion and our EPS guidance reasons.
Im now moving to slide six and the adjusted earnings per share bridge from the third quarter of 2018.
Consistent with last quarter, the majority of our earnings growth. Excluding the spins came through segment profit improvement 14 cents.
It was driven by organic sales growth continued productivity improvements realized through our operational excellence initiatives and savings from previously funded repositioning projects.
Our share repurchase program with which we have deployed $3.7 billion year to date has resulted in a 3% reduction in share count from last year and provided seven cents of earnings improvement.
Our adjusted effective tax rate was 22% consistent with last third quarter and the outlook. We previously provided.
Below the line items were three said headwind this quarter compared to last year.
Merely due to lower pension income as a result of the pension de risking actions, we took in 2018 and higher funding of new repositioning projects.
We funded a substantial amount of high return projects more than 70 million in the quarter.
Which will support our continued productivity focus transformation and supply chain initiatives and will also help drive segment margin expansion in earnings growth in a range of macroeconomic environments.
Overall third quarter adjusted EPS was six cents above the high end of the guidance, we provided in the second quarter.
Our better than anticipated performance was primarily from stronger segment profit in Aero Sps as well as acceleration of stranded costs removal.
Below the line expenses were about three cents lower than we had expected partially due to benefits from foreign exchange.
So in total EPS grew 9% this quarter another great result, adding to our already strong start to the year.
Now, let's turn to slide seven and discuss the segment performance.
Starting with aerospace sales were up 10% on an organic basis, continuing an outstanding year for the business.
Commercial aftermarket grew 6% organically with strong demand a both across both air transport and the business aviation.
Defense and space grew 17% organically led by global demand for guidance and navigation systems as well as increased aftermarket volumes on key U.S. Department of defense programs.
A lot for defense and space is up nearly 20% and more than two thirds of orders with delivery through 2020 are booked giving us confidence that business is poised for continued growth next year.
In commercial OE sales were up 7% organically driven by growth in air transport shipments and continued strength across business jet platforms.
We saw increased deliveries across major OE business aviation platforms and high demand for components and air transport.
As we've discussed previously we remain aligned to bones stated production schedule for the 737, Max and we'll continue to monitor the situation closely but at this point, we have not seen and do not anticipate a significant impact to Honeywell in 2019.
Commercial aftermarket sales growth was driven by demand across both air transport and business aviation led by growth in retrofit modifications and upgrades.
In addition demand for Honeywell forged for aircraft drove double digit jetwave organic sales growth.
Aerospace segment margins expanded 350 basis points, driven by commercial excellence productivity net of inflation and margin accretion from the spin of transportation systems.
The spin contributed approximately 100 basis points to aerospace's total margin expansion.
As a reminder, this is the last quarter, we'll have the benefit of spin accretion Arrow, we expect aerospace strong organic sales growth and segment margin expansion to continue into the fourth quarter.
In Honeywell building technology sales were 3% organically, primarily driven by ongoing strength in commercial fire products in the U.S.
Double digit growth across our suite of building management products, which was aided by improved supply chain execution and strong demand for our tritium connected software platform.
Notably in Europe , the quarter finished stronger than expected after seeing a soft market in the first two months, particularly in Germany.
Building solutions was flat in the quarter with projects growth across both the Americas region, and the airport vertical which were offset by declines in the energy business.
HBT segment margins expanded 390 basis points in the third quarter, driven by the favorable impact from the spinoff of homes business.
As a reminder, this was the last quarter, we'll have the full benefit of the home spent accretion given that the spin occurred at the end of October 2018.
Segment margins, excluding the impact in the spin accretion were up 10 basis points. This quarter and have continued to show improvement quarter to quarter since the beginning of 2019.
Overall was another good quarter from the HBT team.
Before moving on I'd like to remind everyone that the building technology leadership team is hosting an investor showcase event November Twentyth two the 20 Onest at our headquarters in Atlanta, Georgia.
Good morning, his team are going to provide a deep dive into each of the businesses and highlighted strategy and the technology offerings, we bring to the market.
I encourage you to listen to the webcast online.
In performance materials and technologies sales were up 3% on an organic basis process solutions sales were up 7% organically driven by strength across the entire automation portfolio.
We saw growth in maintenance of migration services gas measurement products.
Automation projects and software.
Orders in backlog across PMT were both up high single digits with particular strength in the products businesses in the projects businesses, notably seeing some movement in global measure Mega projects, specifically in Russia, and China, giving us confidence in the momentum of this business.
And you will peak sales were flat organically with growth in refining catalyst and licensing offset by declines in gas processing due to fewer domestic prior unit sales given a software midstream gas processing market in the U.S.
We again saw strong double digit orders and backlog broken yoki with strength in equipment and petrochemical catalyst positioning us well for growth going forward.
Organic sales in advanced materials were down, 2% driven by lower volumes and pricing in flooring products due to the impact of legal HFC imports into Europe , and weaker end market demand and specialty products.
We're actively working in partnership with private industry, he regulators and he member countries to address the harmful legal HST imports. While these efforts are underway, we will continue to see pressure on HFC pricing and volume.
Overall, PMT segment margins expanded by 60 basis points in the quarter.
Driven by direct material productivity commercial excellence Inorganically.
Finally in safety and productivity solutions sales were down 8% on organic basis due to distributor destocking and fewer large project rollouts and productivity products and the impact of major systems project timing in Intelligrated.
Second margins contracted 320 basis points for the quarter, driven by lower sales volumes, which while down year over year was 110 basis points better sequentially than the second quarter.
The management team has taken appropriate cost actions to address the volume de leveraging mitigating some of the softness this year.
They will continue to realign the cost structure in the fourth quarter as we work through the revenue challenges.
And productivity products, we continue to make progress in the commercial turnaround.
Handle inventory levels are burning down as expected and on our and our omni trajectory to reach normalized levels by the end to 2019.
In our Intelligrated warehouse automation businesses as we've previously mentioned a large portion is project base, which results in uneven growth patterns.
Recent market data from seem as September semi annual release highlighted this order contraction in the first half across the material handling market.
They are experiencing high double digit, 29% order contraction with 2% shipment growth.
Our sales were down double digits. This quarter as result of the difficult comps and the timing of major system shifting to the right.
The pipeline of major systems orders, we highlighted previously have started to convert with orders up more than 20% year over year in the third quarter.
The bulk of the sales stemming from these orders will start to show up in 2020.
Intelligrated aftermarket service business continues to benefit from our large and growing installed base.
Again, having a strong double digit growth from ongoing demand for lifecycle support and services.
Moving to safety.
Organic sales for the quarter were flat as continued demand for our gas detection products was offset by decreased volumes of general safety and personal protective equipment.
So overall for the portfolio a strong performance for the third quarter.
With that let's turn to slide eight to discuss our fourth quarter outlook and the updated full year 2019 guidance.
We delivered strong results in the first nine months of 2019 with higher segment profit and earnings per share in the third quarter than initially anticipated and we're seeing continued strength in several key markets. However, we remain somewhat cautious and our outlook given the continued uncertainty in the macro environment and the full year continues to be solidly on track.
We expect organic growth in the fourth quarter in the range of 2% to 4%, which will be driven by continued strength in aerospace and defense, coupled with ongoing demand and building products and process automation supported by a healthy backlog in ERP and continued growth in connected software through Honeywell connected enterprise.
We expect continued segment profit and segment margin growth with year over year improvement of 20 to 50 basis points, excluding the impact into 2018 spins, resulting in segment margins in the range of 20.7% to 21% in the fourth quarter.
Let's look at the segment outlook in a little bit more detail.
In aerospace we continue to see strong demand in both business aviation and in U.S. defense supported by robust orders growth and from backlogs for orders with delivery at the 2020.
We will see tougher comps in business aviation are we in defense given the double digit organic sales growth in the fourth quarter of 18, So we expect the growth to moderate slightly.
And building technologies, we expect continued strength in commercial fire products driven by demand of the Americas continued strength in software and increased project growth in high growth regions.
In performance materials and technologies, we expect to see continued growth in products and services and process automation and we expect healthy demand you will p. from the strong backlog, particularly in the equipment business.
The headwinds in the advanced materials business from illegal imports of Hfcs will persist into the fourth quarter.
Finally in eight and Sps, we continue to expect distributor Destocking and productivity products remained a headwind for the remainder of 2019 from both the sales and segment margin perspective.
We expect another very strong quarter for Intelligrated orders, but sales will again be unfavorably impacted by the tougher comps and the timing of those major systems Rollouts.
The next the net below the line impact, which is the difference between segment profit and income before tax is expected to be approximately 155 million in the fourth quarter as we continue to fund repositioning pipeline.
We expect the adjusted effective tax rate to be between 20, and 21% in the fourth quarter and the average share count to be approximately 723 million shares.
So now let's move on to slide nine and we could talk about our updated full year guidance.
On this slide you can see the progression of our guidance throughout the year.
We delivered strong results each quarter continued to expand margins and driven adjusted earnings per share growth of approximately 10% year over year. Despite some deceleration inorganic growth as the macro environment has become increasingly less stable in the second half.
Based on our unity results, we are again, raising the low end of our adjusted earnings per share guidance by 15 cents.
We're narrowing our reported sales range to 36.7 to 36.9 billion with organic sales growth expected to be in the range of 4% to 5%, reflecting a tougher second half, but above the midpoint of our original sales guidance this year.
We're raising the low end of our segment margin guidance by 20 basis points to a new range of 20.9 to 21.0, reflecting the progress we continue to make in driving profitable growth.
We're also reaffirming our adjusted free cash flow guidance to be in the range of $5.76 billion as we remain focused on improving working capital and driving cash throughout all Honeywell businesses.
Our higher full year adjusted earnings per share guidance at 810 to 15 represents earnings growth of approximately 10%, excluding the impact of the spins.
This is an increase of eight cents at the midpoint from our most recent full year guidance passing through the third quarter beat of eight cents as compared to the midpoint of our third quarter guidance range.
This latest update and additional 15 cents low end raise takes US two week 30 sent raise and EPS from the low end of our original guidance range of $7, an 80 cents to $8.10 at the beginning of the year demonstrating the strong progression throughout 2019.
We continue to be confident in our ability to execute even in difficult environments and these updates reflect that.
We have planned for and executed mitigations against externality, such as terrorists, we've taken appropriate and targeted cost actions to reduce cost in areas, where we believe the most exposure to macro instability in market weakness is like.
As a result, the momentum we built throughout the third quarter and a strong finish in Q4 will carry through for an excellent performance this year.
With that let's turn to slide 10, and discuss some of what we're seeing as we head into 2020.
As we head into next year, we're seeing indicators of strength in many of our key end markets, but economic instability remains.
It's clear the growth outlook for the overall economy will not be as robust as it has been in 2018 in 2019.
We do see continued demand growth in key industries, where we have strong positions commercial aftermarket activity will be driven by increases in flight hours, though at a slower pace.
Solid airlines demand ramping of platforms that recently entered into service and continued stable defense budgets.
These drivers across end markets in Aero.
These drivers across end markets position Errol well for good growth in 2020, albeit modestly.
More moderate levels.
Our continued focus on productivity commercial excellence and our transformation initiatives gives us confidence to sustain our margin improvement path the likely at a slower pace than 2019 in Aero.
Nonresidential construction growth with slight moderation should enable continued demand for building technologies products and services and the product and the progress of demo and team are making an operational excellence and new product introductions should provide the opportunity for accelerated margin expansion.
Continuing the product the positive trend that we've seen in HBT through 2019.
In PMT, we expect process automation to continue to grow and we've had continued strong orders and backlog growth for European which positions us well going into next year.
Macro data, suggesting that the softer market in the U.S. midstream oil and gas continues which will affect the gas processing business.
The negative impact in advanced materials from illegal imports of hfcs into Europe , while being proactively address will likely continue into 2020.
We do expect that a growing set of actions that the European Union is beginning to deploy relative to enforcements finds and seizures should result in the slowdown and ultimately the elimination of the illegal imports a refrigerants into the region.
In Sps productivity products is progressing on its turnaround and we expect to return to growth and margin expansion during 2020.
The second half build of backlog with major systems Project Awards for Intelligrated warehouse automation solutions will provide a tailwind to accelerate growth into next year.
And across end markets, we expect Honeywell connected enterprise to continue to drive double digit connected software growth as we see strong initial demand for our Honeywell forge offerings and we'll continue to launch updates for forge throughout 2020.
In summary, we're well positioned in key verticals and end markets with ongoing operational excellence initiatives across all businesses to drive productivity and margin expansion.
We have a robust playbook with multiple levers to protect profit and the events of the market slowdown and significant balance sheet flexibility to generate strong returns through share repurchases and M&A.
Our three transformation initiatives the connected enterprise integrated supply chain and Honeywell digital will continue to provide catalyst for profitable growth.
2020 is shaping up to be a challenging year, we're confident our ability to continue to deliver.
As we did last year, we will provide more detailed guidance once we close out the full year of 2019.
With that I'd like to turn the call back over to Derus, who will wrap up on slide 11.
Thanks, Greg overall, we're pleased with and encouraged by the performance from our businesses in the first three quarters of 29 team.
We continue to execute our commitments to shareowners are generating strong organic growth in many end markets and in many ways to further expand margins and grow earnings.
Continue to invest in our businesses growth initiatives and deployed capital generate high returns.
Our track record of execution continues and we're making progress in our business transformation initiatives, including Honeywell connected enterprise Honeywell digital and supply chain transformation.
We still have a lot of work to do these initiatives, but I'm pleased to early progress and the significant opportunities they provide for Honeywell.
Mark let's move to QNX.
Thank you Daria.
Areas and Greg are now available to answer your questions have any please open the line curcumin.
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Thank you everyone. Our first question is coming from Sheila Kahyaoglu with Jefferies. Please go ahead.
Hi, good morning, everyone and thank you for the time.
Gary maybe for you for you on Aerospace can you talk about this business a little bit how you're thinking about it as part of Honeywell longer term, because they get bigger or maybe even smaller I ask this because the management change clearly, but I look at five quarters that double digit organic growth and operating margins close to 27% and I ask myself the businesses that is like.
So if you could just touched upon that for a second.
Well I think it's pretty good I mean anytime you get double digit growth and their car margin serves terrific, but we don't think that that kind of growth as far as part of over you know maybe certainly we're in a very favorable economic conditions, but as we kind of look into 2020.
We continue to be bullish on this business you know the management change really has.
Nothing to do the market conditions, I mean, I think frankly enhanced our core skill set that is very unique to we're trying to accomplishing Honeywell digital we're trying to template what was done in aerospace because they are substantially more advanced Arista Honeywell.
Tim expressed the desire and I fully agreed and current shipped to take out a new role to wrap up kind of his career and Mike maps and it's been a terrific leader for decades and Honeywell. So I think this is kind of a natural transition, but I wouldn't read into the management changes has anything to do with.
Aerospace market conditions, you know what I'd point to figures such as 60% of our orders are ready backlog through 2020.
I think flight hours are going to continue our aftermarket business is strong there's a lot of BG platforms that are ongoing production rates are strong.
We will see the 737, Max returned to higher productions rates and back to service. So I don't see any kind of a doom and gloom scenario for the aerospace segment for the foreseeable future isn't my second quite bullish on it.
Thank you very much and no I didn't imply that about Tim I think Mike and Tim are probably got partners.
Then just on the defense business do you see that slowing down into 2020, you've mentioned before that you're trying to sell out for all of 2020 kind of how you think about the growth profile at about 40% yeah.
Yeah, I think that tough comps are going to view, obviously tougher because you had double digit growth for.
For five consecutive quarters, but I don't think there's I'm anticipating any kind of a crash or negative growth, we're still expecting to grow next year. That's the expectations. Those are owed and plants, we're going to provide you more detail in early 2020.
But overall the business continues to have levers for growth and also for continued margin expansion because I think something that gets dramatically understated is our focus on productivity, which you saw in our margin profile this quarter, which is continuing to restructuring driving Honeywell digital transformation.
The power one on the commercial and fixed cost side and you see that come through in our numbers. So no matter what the market conditions are that's part of the hardware.
Thank you.
You're welcome.
We will take our next question from Scott Davis with Melees Research. Please go ahead.
Good morning, guys.
Morning.
Thanks.
I guess, just don't mind going around the world, a little bit and give us more granularity on what you're seeing and.
Specifically, China, I guess, and then you know western Europe , or maybe even Brazil, Mexico et cetera.
Sure I mean, I think overall, our even despite some of the negativity in the news we actually so pretty good growth both from a revenue and orders perspective, you know bite bar chart at the best quarter of the year.
I think mid single digit in terms of revenue growth strong double digit orders growth bookings up double digits. So actually had a very very good quarter in China, our long cycle business has performed extraordinarily well and it was a good quarter.
Despite wouldn't read in Europe , Honeywell had a very strong quarter in Europe as well I mean up mid single digits strong growth across the board probably the only exception was Italy, we have a little bit of a tougher but overall Europe was strong.
Hey, I'm actually had a pretty good quarter as well and they were up to think about kind of.
Mid single digit growth.
And again some of the challenge economies there.
Was.
And with a pleasant surprise based how we're doing Russia actually did well middle east and while it a little bit of the soft spot was yeah, which was a bit unusual for us in Q3, but we're still expecting in India double digit growth for the year, So I'm not particularly alarmed by the one data point and then you know US obviously continues.
To be strong so.
Overall.
Focus I look at revenues and.
More importantly orders, which is what positions us for 2020 was actually pretty strong story and wonder was very encouraging.
Good to hear and just a completely different follow up but just be what this what does the customer adoption of forge.
Look like and.
In the context of you know as it is it kind of Trialing and San will give us a try per year as it is it more longer term contracts is there.
Something in the middle as or some sort of standardized agreement that's starting to emerge as you get deeper into the.
I think Scott that that varies based on the franchise I mean.
For some of the connected are further at than others. You know for example in Q3, we have connected buildings and cyber security.
In terms of strong double digit growth somewhere a little further behind we have more mature offerings I would say in cyber and.
Okay. The aircraft segment to building segment several of them are still in the development sites. So some of Omar.
That's typically how you started a engagement of our customer you kind of do a proof of concept.
Customer is happy that proof of concept moves up to a broader assignments or what are some that are in a broader rollout stage and some that are proof of concept stage as an example of our success in.
Major player in the Middle East.
A proof of concept for us, which which was highly successful and that say players now rolling out our forged solutions to that.
Higher oil and gas infrastructure, which will be worth millions of annual dollars per year. So I think it just depends which one we're talking about but I think overall affords we're still in early innings and we're just launching the barriers for job offerings.
Well good luck here. Thank you guys. Thank you. Thanks.
Moving next we'll go to Steve Tusa with JP Morgan. Please go ahead.
Hey, guys good morning.
Morning.
Can you just first walk through anything in the model for fourth quarter with regards to the segments that you'd want to highlight I mean, you know Sps is obviously, one that that I think would be helpful to get a little bit more kind of pointed.
Guidance around whether it's organic growth there.
Or or profits and any of the other businesses that.
We may see variability outside of just kind of normal.
Seasonality in comps.
Yeah, So I think you're going to see something.
Pretty pretty consistent with what Weve, what we've just done in the in the third quarter, obviously theres variability ranges around all of them.
But as as I described to think arrows going to continue to lead the path from a from a growth perspective, and I think we're going to see mid single digit kind of growth low low to mid single digit kind of growth and PMT and HBT.
And I would expect to see Sps.
Down single digits again in the fourth quarter and.
On the orders perspective, as we talked about in the in the prepared comments.
We're we had a great intelligrated quarter, 20% plus growth in orders and we've been talking about those major systems projects coming in we expect more of that in the fourth quarter.
And that that ought to help us.
Get gift sets for for next year, and then with the from a margin expansion perspective, I think you're going to see the the obviously the removal of the spin comparisons going to change the overall reported numbers, but I would expect to see.
Margin ranges that are run going to look fairly similar from.
Third into the fourth quarter broadly speaking with the same it's the same play but there is I don't expect I don't expect like a big divergence from one quarter to the next in any particular business.
Is it's 15% margin still a credible number at ASP NSN.
You know if you don't see progress there over the next kind of 12 months.
What kind of actions.
Can you take.
Yes, I think 15% is still a credible margin rate to build back from as we enter into 2020 and again.
If you look as if you look at productivity products.
As an example, it's it's essentially kind of flattened out. So so we're we're showing organic declines, but the absolute value of the revenues has really kind of flatten out over the last few quarters, and so and as we talked about in the channel.
That inventory level is going to come down to a normalized level and for Q. So as that begins to reaccelerate add as Adam as we continue to get a.
Additional growth and the in the aftermarket size Intelligrated I, absolutely expect to see margins continue to.
Bounce back and expand into 2020, yes, just I want to adequately.
Got you had just at a couple of things that one is I think.
Although maybe at a high level, obviously, we would like to print battery cells from Sps, but in terms of productivity products.
We're executing what we should be executing the inventory levels are dropping and are and we know exactly what they are they drove double digit sales.
Right.
We see our sales out data improving.
Better activity commercial activity on our tier one wins so.
It's still not resulting in the.
Financial results, we hope to see but the progress from Q over Q is good we've also.
Enhance some of that talent in that business and we've had some new people joining so I would say that productivity products were very much on track Intelligrated, which is maybe the other part of this story.
And as we discussed at the into Q2.
Exactly to orders, we expected to get 24% growth intelligrated year over year. They came in late they came in late in September which aggregate muesli when they come that late and it's still.
Projects kind of business takes at least a couple of months to convert orders gift to convert orders into revenues, so probably won't see more of that until we get to.
The next 2020, but the other expectation I want to highlight is we're expecting another robust booking quarter in intelligrated in Q4 this year so.
I think we're not.
Or unit at all about what's going on how great. It I think that market has been challenged during the first half the year. When you look at data points from seem on some of our industry competitors I think we're very much in line or even better than some of them.
Not I think.
Right.
One last quick one for you just on aerospace.
Is there can you just talk about what the combination of any kind of potential headwinds from.
Upgrades from this year.
Combined with kind of the Honeywell specific growth initiatives, whether it's connected or anything like that is that a is that a neutral to next year year over year is that a still a positive slight negative can you just discussed the kind of dynamics between those two moving parts.
Yeah, Yeah sure I think.
I think short stories kind of neutral I think what do we get into next year is probably a little bit tougher comps, giving that double digit growth rates I think that that realistically if some puts and behind missiles. I mean is the second 37 Max.
Fail be back in service next year so.
We'll get a little bit more or we probably some of the older aircraft will not be flying so, we'll probably have a little bit more of the aftermarket stream.
I think Weve business aviation will continue to be robust, we're very bullish on defense and space seeing good growth in space and the helicopter markets again.
I think probably the toughest things on a year over year basis will be the comps comps will be tougher.
But I'm not sure theres any kind of major.
One timers that I think.
In terms of the arm using song, we're continuing to invest in our PD engine on debt Thats been very successful for us.
And.
Obviously Ford's will grow so that's those are kind of the major puts and takes great. Thanks a lot.
Thank you.
Our next question will come from Jeff Sprague with vertical research partners. Please go ahead.
Yes. Thank you good morning, everybody.
One vendor.
Hi, just a couple of things for me first can you just elaborate a little bit on what's going on with the net below the line items, what's driving that change from your prior outlook to the current outlook.
Restructuring and other debt I mean is primarily the the three cents favorability.
Again, roughly 30 million in the third quarter, a lot of that has to do with foreign currency and Theres still a number of other things below the line. So basically the $50 million Delta is 30 million of our actual Threeq, you and a 20 million dollar.
Round about lower number in the fourth quarter.
Again, no there is no huge.
Needle mover in there and there's going to be a range around that number two I mean, we say about 155, but that'll move around.
A little bit as well.
And it's the largest stuff moving around like other income and pension and the like what's the actual restructuring outlook for Q4.
We've got a sizable capacity if you remember I think we booked something like $300 million of restructuring in 2018 in the fourth quarter and we've got capacity loaded in there for something similar we're working our pipeline and.
As we always do we continue to carry that restructuring pipeline and we'll take advantage of.
The projects that we that we have as we exit the year, Yes, I think maybe Jeff just something else to it we kind of give you a point number until the line impact and I think that.
Approximately.
I think we're probably going to revisit that for next year, because it really isn't a point number there is some movement in it can happen from quarter to quarter.
I think just to be that precise and give you that precise number.
It's probably a little bit inaccurate I mean that we try to get as close as we can't or estimates, but we have some moving pieces in there is that that Greg just described so.
Thank you.
I don't think there was anything major that move there is no major assumption something in somewhat but a couple of low things move 20 $30 million, which given the size of our company is in March and you'll get a different outcomes I wouldn't I wouldn't read too much into it.
Understood and then just on.
Project late slip long cycle order dynamics on quite encouraging because this elaborate a little bit on the cash flow impact of that it does sound like.
Maybe the cash like one some of this is stretching out a little bit.
You know what kind of opportunity DSC, perhaps the unlock some more cash from working capital or other elements and the next year, Yes, I would say that.
We use the right word at the cash cycle I Wouldnt call. It a problem I mean, we had.
Obviously very strong.
Projects related results as we were in last year, and then coming into the early part of this year.
And thats cycle down a bit with the with the orders pattern that we had seen previously and now is that cycles back up you're going to you're going to restart the advance.
You are going to restart the advanced cycle on on a lot of those large projects and so we expect to start seeing.
That's coming back through and then we continue to do a lot of work around inventory as well.
The our inventory, while while it hasn't been a huge.
Year over year.
Cash flow cop problem for us, it's still growing and we're trying to take that down every year as we try to become more and more efficient. So we're still working our.
Initiatives around trying to drive inventory down as well and we hope and expect that's going to be supportive as we continue to move into the fourth quarter and into next year from a free cash perspective.
As Greg pointed out I think the biggest mover for us here in Q into Q3.
As sort of this movement around the.
Advances slash on builds and much of our projects business that that's really the biggest needle mover and.
Got a lot of our orders right, we weren't able to collect the cash.
And.
From a last year perspective, a lot of those orders came in earlier in the year. So we had the benefit of the advances that's not the case. This year knows that was a big swing I would maybe not as big of a factor, but our reinvestment ratio was the highest in Q3 versus the whole year. So thats, probably the other backdrop, but not the major one for though.
For the cash outcome.
Great. Thank you.
Yes.
Well take our next question from Deane Dray with RBC capital markets. Please go ahead.
Thank you good morning, everyone.
According warranted.
Hey on P.M.T. and process in particular was impressive did you hear about these projects in Russia, and China. We've heard from your competitors in process about push outs of projects in particular and are you seeing push outs anything at the margin that you'd call out.
So we were actually very pleased to for such global major projects. This quarter. I mean, we were up strong double digit actually in that segment. So that was one of their really nice stories for us for the quarter problem, even better than we expected. So really really nice progress in Q4 looks quite robust as.
Well, so hopefully we'll be able to secure those as well, but I think that was one of the more positive stories for us in the quarter and good orders growth in Russia, China some of the.
Instead of and.
That are presumably challenge, but frankly, we're not seeing that.
Got it and this might be a bit of a rhetorical question, but based upon the upside in defense and space This quarter.
Yes, the 17% growth and core revenues and commentary about 2020 are you do you see Honeywell disadvantaged at all in some of the defense industry consolidation that we're saying.
No I don't I Act.
Sure.
Generally assistant final system provider, we are component tier one provider dose I don't think.
That calculus changes with the consolidation that's happening we've continued to be a good supplier to a lot of goes.
Integrators and.
System providers, but I don't see that dynamic changing.
That's helpful. Thank you.
Thank you protecting.
Moving next to Julian Mitchell with Barclays. Please go ahead.
Hi, good morning.
Maybe want to tight pneumoniae, maybe just the first question around.
If you look at how demand trend in recent months you'd called out Intelligrated picking up late in Q3 and also some of the HBT activity in Europe I wondered if there was anything else that you would highlight the got better or worse.
Over the past sort of two or three months as you move through it and also maybe how your road and repositioning and Capex spending plans may have changed when you're thinking about 2020 if at all.
Yeah I mean.
In terms of con some of the changes I think we had a relatively slow start in Europe for month, one month two of the quarter and.
Were little bit concern heading into September but September actual was very very robust and economies like Germany, France. The UK all did very very well so.
So we had although we were worried but.
September was very very robust much better than sort of what the industrial GDP print would have you believe.
So that will certainly better.
Yes, Ken as we think about 2020, it's probably as Greg pointed probably be a tougher economic environment. In 2020 that is in 2019, but on the flip side of that I don't I don't see some fall off the cliff I.
Idle.
As I look at our backlog as I look at our.
Growth rates in terms of the long cycle businesses the level of bookings, we have for defense and space Dsps pickup that we're expecting.
Reasonable.
Comps for aerospace Salto tougher, but maybe not double digit but still good growth.
We're certainly not far from planning 2020, right now based on what we see as Doom and gloom kind of a year that's for sure and.
If anything.
Hopefully there'll be some more positive outcomes looks like Brexit may reach a positive conclusion based on the news. We're hearing this morning, hopefully they'll be more of that positive news to go here in Q4 yen as it relates to a repositioning I think were as we go into 2020, we're going to have ample capacity to continue dry.
Having our reposition.
Portfolio and pipeline.
As we have this year as well so I expect that to continue to be.
A big part of our productivity.
Playbook for 2020 also.
Thanks, and then.
Following up may be on Sps, specifically in that context, you now in the third quarter of your organic sales decline in that business.
When we thinking about the longevity of this downturn should we assume a classic sort of short cycle duration as maybe five quarters of sales decline there.
In the recovery post that.
I'd like to that maybe just give us an update on how comfortable you feel with the market share in productivity products in particular.
Yeah I think.
As stated in the last quarter I think productivity products is a.
The business, where we're focused on some improved commercial activity. We saw some good signs of that in Q3, and if you look at the margin profile incremental margin profile from Q2 to Q3. It was better the team has adjusted or cost structure to the market reality or their revenue base.
But yes, I mean, I think we're trending in the right direction. So we do expect productivity products to return to growth in 2020, Thats, that's very much our expectation.
Based on what I'm seeing today Adam.
See anything which would.
Prevent us from doing that so you know I can't tell me, whether its expected five quarters or three or four but we expect growth in 2000, Twentys kind of the short story.
Thank you very much.
Thank you.
We'll take our next question from John Walsh with Credit Suisse. Please go ahead.
Hi, good morning.
Good morning, good morning.
Just I guess a question around price and maybe also a little bit discussion around the price cost equation.
It looks like at least per the Q price decelerated a touch in Q3, but obviously the very strong margin performance I would assume you're pretty green on price cost, but can you maybe talk a little bit about that dynamic and how that's playing out in the next year as we're kind of still seeing some input deflation.
Yes, I mean, we've we've continued to have a strong cadence around our price across the company. So.
As we head into next year I'm, not expecting that we're going to hit a wall.
And not be able to continue to get price in the marketplace and I said the cost as as markets are slowing down we're also.
Doubling down on our procurement.
Team in terms of driving our our material cost deflation program as well so we're going to keep pushing hard on both of those on both of those levers and expect that to be a net positive for us as we go into 2020.
Got you and then maybe just on a highlighting the balance sheet capacity I mean anything to call out there as we look into next year if.
There might be anything to do on the deal front, obviously, you announce some some small things in the release today, but how should we think about the use and the and the deployment of that next year, yes.
So first of all we continue to be very active with our M&A pipeline and.
Theres a lot of things going on today.
As we speak or particularly given everything that's happening in the marketplace and we hope that that will actually have a benefit as we go forward in terms of asset prices, possibly coming down and making some things a bit more attractive.
As you saw with our stock purchase program, we continue to do that pretty aggressively and as we go into next year I think we'll continue to to use that as a lever for us. It's been very successful here and I think barring any large deals I think we're going to continue to be targeting to take out at least a percent of.
Our share count on a year on year basis. So.
Both of those are are going to be consistently deployed in terms of our expectations. We did we did that various mentioned our refinance some of our debt. We've got some debt coming due in October so we refinance that in the third quarter. So we still.
Retain a very very strong balance sheet with a lot of access to capital and.
With our strong cash flow and a repatriation program.
I think we've got a lot of ammunition for us to to go head end use as we head into next year.
Great appreciate the color.
And that does conclude today's question and answer session. At this time I'd like to turn the conference back over to Mr., Dave dump truck for any additional or closing remarks.
I want to thank our shareholders for continued support of Honeywell, we have delivered strong results each quarter. This year and have continued to make great progress on our initiatives and delivered on our commitments. We are well positioned in attractive end markets multiple levers for value creation and operational excellence in place we're focused on.
Continuing to outperform for our share owners, our customers are implodes looking forward to sharing our results as well as our 2020 outlook during our fourth quarter earnings call in late January Thank you for listening.
Thank you everyone. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.