Q4 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to Honeywell's fourth quarter earnings Conference call.
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As a reminder, this conference call is being recorded.
I would not want to introduce your host for today's conference Mark that Vice President of Investor Relations.
Thank you.
Good morning, and welcome to Honeywell fourth quarter, 2000 bonds being ordering them twice wanting to outlooks conference call.
With me here today, our chairman and CEO various adoption.
Senior Vice President and Chief Financial Officer, Greg Lewis [noise].
This call in restaurants, including any non-GAAP reconciliations are available on our website.
W. W Salt Honeywell dotcom forward slash industry.
No doubt the differences mentioned concerning forward looking statement.
Based on our best fueled the world or businesses as we see them today.
Elements can change and we also did you interpret them enough watch.
Again about the principal risks and uncertainties that may affect our performances and all in other words board Osborne centrally and other LTC fundings.
This call references to adjusted earnings per share adjusted free cash flow in France also conversion, Kansas Star who talks rate.
Mmm thoughts from separation costs related to the churn spin off of our home and transportation systems businesses in 2018, I was little worlds pension mark to market adjustment.
Let's talk legislation.
Otherwise noted.
Comparisons versus the prior year period, unless otherwise noted.
This morning, we'll review our financial results for the fourth quarter and full year 2017.
<unk> costs are pulling your 2020 outlook and share our guidance for the first quarter of 20 Twond.
As always we talk to your question Delphia.
With that I'll turn the call over to chairman and CEO scares adoption.
Thank you Mark and good morning, everyone. Let's begin on slide two real very pleased where results. In 2019, you finished like what you have another strong quarter in the fourth quarter was deliberate $2.06 adjusted earnings per share above the high enough the garden strange hundred 30 basis points.
Margin expansion and.
Most importantly, $2.3 billion of adjusted free cash flow, resulting in the fourth quarter conversion of 154%.
Well this conclusion to the year, we met or exceeded our financial commitments on all metrics and 29 team managing to a volatile environment than delivering adjusted earnings per share $8 in 16 cents six cents above the high end over initial 20 Yankee guidance despite the challenging.
<unk> macro environment 20, Nike, we grew organic sales, 5% driven by strength.
Across our much of our portfolio throughout the year growth was driven by commercial aerospace defense.
The solutions building products. We also got strong orders for H.P.S. Mega projects, you'll see equipment and defense.
And over 100%, increasing calibrate or orders during the fourth quarter.
These robust orders contribute towards 10% year over year increase your long cycle backlog. Additionally, in 2019, Honeywell connected enterprise drove double digit software growth.
We expanded segment is marching Hungary, and 50 basis points for 70 basis points, excluding the impact the 28 and spin off both 10 basis points above the high at over 2019 guidance our growth combined product if you rigor and commercial excellence drove margin expansion.
Aerospace building technologies and performance materials and technologies.
Generated $6.2 billion or adjusted free cash flow for the year exceeding the high end of our initial guidance by approximately 300 million and the resulting in hundred 5% free cash flow conversion or hundred and 14% free cash flow conversion, excluding Pat pension income.
We continued to make smart investment our businesses people and communities, we deployed $7.8 billion of capital in 2019 across share repurchases higher dividends, Hi, Richard Capex in two acquisitions, including rebellion Protonix a provider innovative intelligence visual gas modern.
Actions, which we closed in the fourth quarter.
This also includes over 10 investment by Honeywell ventures for over 50 million deployment wouldn't 19, bringing our total venture investments today to over 75 million.
Jamie I have a robust pipe work M&A opportunities.
Nipigon balance sheet capacity deport launched a new brands campaign to highlight some of the most exciting innovations in the right number 13 on Forbes magazine's list of the world's most reputable companies for corporate responsibility lastly, we continue to make progress in our breakthrough and transformation initiatives.
A couple of next in more detail, let's turn to slide three.
We continue to make significant progress on three key initiatives in support of our transformation plus software industrial company.
29 team, we commercialize Honeywell for enterprise performance management software, which helps companies in a variety of industries gapper gain insights from an ultimate autonomously controlled or operations drug efficiency and safety or.
Well forge helped drive double digit connected software growth. This year. Additionally, H.C. used a lead is leading the trends. We should go more recurring revenue models across the company has delivered Q1 s and stronger customer relationships throughout 2019, and we'll continue to drive growth across hardware, all including a 20%.
Connected software <unk> growth component and old growth rate over five years.
We also made great strides our integrated supply chain transformation, you establish supply base management stretch for 11 category or is it across the enterprise enabled our business is take actions to substantially reduce their distribution manufacturing footprint drove improvements in sourcing productivity and into fourth quarter. We began soon.
Broad improvements our inventory we are on track to achieve our long term targets, including half a billion or run rate benefits and a 1 billion dollar reduction in inventory.
On the Honeywell digital installed base notes are wanting Honeywell data driven decision, making we have matured our data management practices digitize key processes through the deployment of new technology platforms rationalize over 500 software applications slides 5.2 million critical Master data records.
Eliminated 20, ERP systems at a reduced websites by 58%.
When complete we expect our digital transformation deliver half a billion dollars a run rate benefits across sales productivity and working capital improvements.
We're very pleased the progress we made each of our transformation initiatives in 2019, and we'll continue to build on this momentum in 2020 as we transform into a softer industrial in summer you had a terrific 29 team both in our short term operating performance and longer term transformation agenda.
And we're setting ourselves up for strong 2020, and beyond now let me turn it over to Greg on slide four to discuss our fourth quarter results and provide our 2020 outlook.
Thanks curious and good morning, everyone.
The fourth quarter, we grew organic sales by 2% driven by 7% organic growth in aerospace as well as continued growth in our process automation, you'll be building management products businesses Sps contracted during the quarter, but the turnaround of productivity progress products is progressing and intelligrated sales improved sequentially. They were.
Down year over year as expected due to tough comps compared to nearly 50% growth in the fourth quarter 2018.
Importantly orders were up 100% as a major project orders, we anticipated intelligrated materialize to set us up well 20 point.
Our organic growth combined with commercial and operational excellence and the benefits from the portfolio enhancements that we made in 2018 drove segment margin expansion of 130 basis points, which segment margin again exceeding 21% this quarter.
Excluding the favorable impact to the spin offs segment margins expanded by 90 basis points, which was 40 basis points above the high end of our guidance driven by our strong commercial excellence and productivity programs.
We delivered adjusted earnings per share 2006 cents up 11%, excluding the impact of the spin off and above the high end of our guidance. In addition to strong segment profit performance earnings per share benefited from lower share count do our buyback program and a lower adjusted effective tax rate, which more than offset our planned lower pension income.
During the quarter, we generated $2.3 billion of adjusted free cash flow, we conversion of 154% on the strength of improvements in working capital primarily from cash collections and inventory reductions as dairies highlighted we're beginning to see the effects of our supply chain transformation as demonstrated by inventory improvements in the fourth quarter. This resulted in full.
Your adjusted free cash flow of $6.3 billion and conversion of 105% above the high end of our guidance.
We continue to execute our capital deployment strategy in the fourth quarter, we deployed 644 million to dividends and 750 million to repurchases playing ball shares, bringing the total share repurchases for the year to 4.4 billion, resulting in a 3% share reduction which is above the commitment of at least 1% share count reduction.
That we highlighted at the beginning of the year.
We also completed the acquisition of rebellion Photonics and funded two additional Honeywell venture investments now, let's turn to slide five talk about seconds.
Starting with aerospace sales up 7% organic basis, and orders were up double digits, finishing an outstanding year for the business overall.
That's the space grew 9% led by increased aftermarket volumes on key U.S. di di programs and global demand for guidance and navigation systems backlog for defense and space is up double digits. Additionally, demand for Honeywell force drove double digit jetway broken defense.
As you'll recall, we launched yet way for military platforms in 2018, and we continue to be excited about the connected growth opportunities there.
In commercial OE sales were up 4% organically driven by increased deliveries across major OE business aviation platforms, partially offset by Boeing aircraft.
Commercial aftermarket grew 6% organically driven by strong demand in air transport, while business jet aftermarket sales were approximately flat.
Aerospace segment margin expanded 270 basis points, driven by productivity commercial excellence and strong aftermarket volumes 2019 was another outstanding year for the aerospace.
In safety and productivity solutions sales were down 11% on organic basis, driven by lower sales volume productivity products. The impact of major systems project timing, Intelligrated and lower demand for personal protective equipment.
SPS segment margins contracted 330 basis points year over year to approximately 13% similar to prior quarters as a result of the volume deleverage and productivity products and personal protective equipment.
Within our Intelligrated warehouse automation business as we expected sales were down double digits due to difficult comps and the timing of several major systems projects.
For Q and once you are them to most difficult quarters that intelligrated will face as sales were up nearly 50% in each of those comparable periods.
As we discussed in our last call. The orders pipeline has been rolling into the second consecutive quarter Intelligrated posted significant growth with orders up over 100%, which contributed to more than 30% increase in the backlog year over year dispositions the business well for 2020 as these major projects begin to drive growth starting in the second.
Quarter and beyond.
Importantly, its celebrate his aftermarket service businesses continued to benefit from our large and growing installed base with strong double digit sales growth for lifecycle support and services.
And productivity products, we continue to see distributor destocking, but inventories are now approaching normalized levels and we expect the business to return to growth in 2020.
We have taken significant actions to address the challenges in this business as we've discussed previously and were seeing improvements in our commercial operations as a result, which is reflected in the sequential sales growth compared to the third quarter 2019.
Optimistic that we'll continue to see further improvements in the business throughout 2020.
In the safety business organic sales for the quarter were down 5% as continued demand for our gas sensing products was more than offset by decreased volumes of personal protective equipment and softer demand in the retail business.
Moving to Honeywell building technology sales were 3% organically, primarily driven by ongoing strength and commercial fire products in the U.S.
Double digit growth across our sweet building management products, including double digit growth in our connected software platforms and growth and secure.
That was partially offset by building solutions sales, which were down for the quarter as declines in projects, including the energy savings performed contracts business offset double digit growth and the airport vertical.
HBT segment margins expanded 170 basis points in the fourth quarter, driven by the favorable impact and spin off of the home business segment margin, excluding impact instead accretion worth approximately flat in the quarter as we can we expect this to improve in 2020 as we continue to make progress towards our long term margin targets for the business.
Finally in performance materials technologies sales were 3% on an organic basis process solution sales were up 6% organically driven by strength across the automation portfolio and smart energy.
Additionally, orders and the automation in pockets businesses were up double digits, allowing us to exit the year with a strong backlog, notably in our global Mega projects business, which was up double digits.
And you will peak sales were up 3% organically petrochemical catalysts and our equipment business, partially offset by declines in gas processing due to fewer domestic cryo unit sales as a result of the continuation of softer midstream gas processing markets in the U.S.
Backlog was up high single digits, if you will be driven by strong double digit growth in equipments, which carries which carries lower margins as you know.
Organic sales in advanced materials were down, 4% driven by lower volumes and pricing and fluorine products through the ongoing impact of the illegal HFC imports into Europe . Recent estimates suggest that the illegal imports are contributing annual emissions at least equivalent to that 3.5 million cars. This means we take a forest aside for.
After all the legal emissions, we continue to actively work in partnership with private industry.
Regulators and do you member countries to address harmful illegal HFC imports.
Increasing seizures of legally import agencies are encouraging, but they're not getting meaningful enough reductions to the total illegal imports.
While these efforts are ongoing will the content will continue to experience pressure on HFC pricing and volumes for the fraud for.
For the remainder of advanced materials electronic materials grew mid single digits and packaging composites was up high single digits. This was partially offset by softer demand in assets and chemicals.
So overall PMT segment margins contracted by 80 basis points in the quarter driven by advanced materials volumes, the mix of catalyst shipments and higher mix of you will be equipment, partially offset by improvements in productivity as we've discussed before the mix of catalyst sales and equipment project timing and you will be has an outsized impact on margin.
Quarter to quarter and for the full year PMT margins expanded 70 basis points.
So overall, we capped off a year with a very strong fourth quarter performance and earnings margin expansion and cash as well as strong orders, resulting in a healthy backlog as we enter into 2020.
Now, let's turn to slide six and discuss the markets and our 2020 hours.
[noise] as Gary mentioned, the 2019, we managed through a challenging year were trade tensions in the rent and reality of tariffs were constantly be uncertainty of Brexit interest rate policy and indications that are possible recession, which signals like the inverted yield quarter weighed on markets.
Today some of those issues have started resolve themselves with the phase one us China trade deal now in place and a more clear path forward on Brexit, but many uncertainties remain as we begin 2020.
There is much more work to be done on the comprehensive long term agreement between China and the less Brexit has a conclusion. However, the execution of their exit from the European Union has yet to play out and ramifications are fully known.
Mentioned in the Middle East have created the potential for market disruption. The recent health threat of the close of the Corona virus is developing rapidly and how it will evolve is still a mill.
The highly charged election year, the U.S. brings additional uncertainties for companies to manage through.
In addition to that we are facing discrete sales headwinds in aerospace as others are from the 737 mass production delay in 2020 as Boeing has continued to recalibrate their expectations for its return to service and related production schedules. We are aligned with Boeing most recent indications that assumes the 737 that returns to service.
Roughly mid year, however, the situation remains fluid.
So while there perhaps fewer indications of a broader based recession today, they're made several challenging it potentially fast changing dynamics that create uncertainty in the macro and caution in our short cycle business outlook.
With these factors short cycle outcomes for the year will be difficult to forecast and you'll see that we have a wider dps guidance layman's Bennett typical for us due to the range of outcomes that could result.
Our outlook assumes the middle East remains relatively stable and that we can continue to deliver backlog and obtain new projects through the middle East.
We are assuming monetary policy remains stable and interest rates don't rise lending supports the economy and that the U.S. election, not delay investment.
We have not estimated material impact the foreign buyers becomes more significant.
Which is already impacting aviation in particular flight hours and could also have a broader negative impact on supply chains in the economy as was experience with the Sars outbreak.
We've incorporated the latest communicated build rates as I mentioned at the 737 Max into our own revenue outlook. So knock on effects of the overall arrow supply chain or getting play out.
So while we have confidence in our market positions that have prepare ourselves for the year ahead is setting up as an equally and perhaps more uncertain year than the one we just completed.
Given that lets move to slide seven and discuss the markets and segment outlook.
Starting with aerospace defense remains strong driven by Spiegel budgets, and we expect growth again in 2020, but it more moderate levels relative to the strong double digits. We experienced in 2019, we continue to see healthy demand in business aviation, but we will have tougher comps and the business aviation.
We expect aftermarket demand across commercial aerospace will continue to grow driven by flight hours and retrofit modifications and upgrades as well the impact of older equipment remain in service as result of the delays in the Max that'll partially be offset by the 80 SB.
Stays out.
However, aero will have sales headwinds from the mass production delays were taking actions to try to mitigate this impact as best we can including leveraging recent improvements in our supply base to accelerate production from our backlog and we continue to monitor the mass situation closely as you would expect.
Additionally, the impact to earnings potential due to the Max will be somewhat muted at the potential aftermarket offsets with their higher profit levels compared to only sales will provide some support for segment margins.
As result of these dynamics across aerospace, we're expecting organic sales to be up low to mid single digits for the year as compared to the high single digits in the fourth quarter and a double digit growth we experienced in the first 3.2 thousand 19.
Now turning to Sps, we expect strong e-commerce and warehouse distribution macro trend to continue as customers seeking implement differentiated warehousing solution to meet increased demand.
These dynamics contributed to the robust intelligrated orders in the second half of 2019 that will fuel warehouse automation sales growth in 2020, and we continue to expect strong services growth from our expanding installed base.
Excluding the warehousing market industrial macro indicators remain weekend, which we expect will result in slower industrial safety sensing and IC sales.
Productivity products is executing their recovery plan as we mentioned we continue expect to turn around in 2020 as de stocking and with the returned to growth expected in the second half of the year.
Overall, we expect Sps organic sales to be approximately flat to up low single digits, and we expect xps margins to begin recovering in 2014, driven by improvements in productivity projects products margin productivity options and enhanced growth in software and services.
In each meeting following the spin of our homes portfolio. Our primary exposure is to the nonresi marketed construction market and for the infrastructure in data center markets, while we're continuing to monitor the outlook across construction today, we anticipate nonresidential market overall remained flat to up modestly in 2020, and we're expecting HBP organic sales to be.
Down slightly up low single digits.
We expect strengthen commercial fire and modest growth in security products to continue.
In building solutions, we expect continued growth in airports vertical.
And we are focused on driving services growth to mitigate the impact of headwinds from lower energy performance contracts and softer products orders.
Building management system strength continues in the near term and driving better execution and pipeline development to deliver ongoing growth.
PMP enter 2020 with a healthy long cycle backlog up high single digit simple you will be and hps driven by robust 2019 orders for you will be equipment at Sps and Hps Providence, the oil and gas market outlook is similar to recent trend with continued softness in the U.S. midstream gas processing market, but.
Continued demand from enterprise.
Finally, with advanced materials, we expect.
Continued growth from salsas, and our 40 products business and better execution in specialty products. However, the illegal HST imports into Europe continue to put pressure on growth, particularly for the first half a year.
Given these dynamics in total we expect PMT organic sales to be flat to up low single digits for the year.
Overall, the strength of 20 wells, our diversified portfolio and we head into 2020 with a healthy long cycle backlog combined with strong operational playbooks, which will enable us to perform and enough in another tough macro backdrop.
Now, let's turn to slide eight and talk about how these dynamics come together for our 2020 financial guidance.
We haven't effective strategy, probably what which enables us to continuously deliver on our financial commitments and that is not changing and 20 point.
Our focus continues to be on smart investments for the future new product development and breakthrough initiatives to fuel growth, all with ongoing productivity rigor and commercial and operational excellence to drive.
These strengths and embodied in our transformation initiatives position us to deliver a solid year, even with the unpredictability of the current market backdrop and uncertain short cycle macro environment.
For 2020, we expect organic sales growth overall zero to 3%, which reflects our balanced portfolio diverse end market expectations headwinds from the 737, Max production delays and a cautious outlook on our short cycle businesses in this environment.
We expect to expand margins 20 to 50 basis points for the overall company consistent with our long term framework.
Below the line pension and OPEB income in 2020 is expected to be approximately 830 million about to about a 200 million increase from the from the prior year or 20 cents of each yes, which I'll discuss in more detail on enough slide.
In addition to pension income other key planning on it to take note of include weighted average share count of approximately 718 million shares repositioning charges of 375 to 500 million as we continue to fund high return projects and the remaining below the line items to be in the range of 205 to 230.
Million dollars expense.
Combined this results in below the line income in the range of 100 to 250 million for the year.
Finally, we expect an effective tax rate of approximately 21% to 22% for the year.
All in we are guiding EPS to be $8.60 to $9 per share of five to 10 set up 5% to 10% adjusted including the 20 said benefit from higher pension income.
We expect continued strong free cash flow generation with adjusted free cash flow of 5.7 billion to 6.2 billion in 2020, driven by high quality income growth and continued working capital improvements compared to 2019, we expect approximately five to 600 million of headwinds from higher planned capex investments.
Additional payroll cycle due to the calendar and anticipated environmental another payments this cash generation equates to adjusted free cash flow conversion of approximately 102% to 107% excluding pension income.
We believe its food excluding the noncash pension income impact better reflects our operating performance enables more appropriate comparisons to our peers.
We continue to have a strong balance sheet with significant capacity and desire to do more M&A as Gary mentioned, we do have a strong pipeline of opportunities, but in the absence of completing significant M&A will continue to deploy additional capital to repurchase Honeywell shares.
Now, let's turn to slide nine to discuss our 2020 earnings per share bridge compared to 19.
As I noted earlier, we are providing some slightly wider range of than we typically do as a result is the number of variables that could impact the business over the next 12 months.
Segment profit continues to be a key driver of our earnings growth continued productivity improvements commercial excellence volume leverage and ongoing benefits from previously funded repositioning will contribute 10 to 45 cents per share.
We expect our share repurchase program, which has as a base case the delivery of at least a 1% additional share count reduction to result in a benefit of approximately 14 cents per share year over year.
Our expected tax rate at 21% to 22% is a range of a seven cents headwind to a four cents benefit EPS.
Excluding pension income below the line items are expected to be in a range, probably four cents headwind to 12 cents benefit per share primarily driven by delays I mentioned unexpected repositioning.
The last item is the 20% increase from the higher pension income as a result of high investment returns in 2019 and lower discount rates in 2020.
Including that 20 cents tailwind, we expect earnings per share to be in the range of $869 as I mentioned previously.
So I'd like to take a moment just discussed the pension dynamics that a little bit more detail.
Talking about previously we have de risks our pension plans and in 2019, approximately 15, 50% of the plan assets were more conservative fixed income like assets the other half being in return seeking assets.
As result of strong equity markets in 2019, those returns seeking assets earned approximately 21% and year, resulting in over $3 billion of an increase in our pension asset base compared to last year.
This higher asset based combined with lower discount rate is driving higher income in 2020, even with lower rates of return expected.
Our pension is now 110% funded and we continue to de risk that with approximately 60% of our plan assets now is fixed income for 2020.
So in summary, while we're cautious about the macro backdrop and the short cycle outcomes are once again, it's hard to predict we entered the year with a healthy backlog in our long cycle business. We have diversified end markets, a strong playbook and a solid track record of execution and we're prepared to deliver another strong year, which rose primarily from continued segment profit.
Performance and our capital deployment strategy.
Now, let's turn to slide 10 for appreciative of the first quarter.
For the first what are we expect organic sales to be in a range of down 2% to up 2% organically driven by growth in aerospace continued strength in building products, you will be equipment in process automation offset by headwinds from Sps and some of the other short cycle components of our portfolio keep in mind Q1 of 2000.
And at 19 was our strongest quarter of the year will be more our most difficult comp.
We expect commercial excellence productivity rigor and the benefits from previously funded repositioning to drive continued segment profit and segment margin growth with 20 to 50 basis points year over year margin expansion, resulting in segment margins in the range of 20.6 to 20.9 for the first quarter.
And the aerospace we continue to see demand both commercial aerospace and defense supported by robust orders growth and from backlog as I've discussed. However, as we've stated after five straight quarters of double digit sales growth through Three Q2 019, and high single digit growth in Four Q2 019, we expect organic sales growth rate to moderate in 2020.
Yeah.
Early spacing sales headwinds as our others from Boeing's most recent recalibration of the 737 mass production delays, which will contribute to the more moderate growth rates as we enter the year, although we plan to mitigate some of that impact by accelerating production more backlog.
And Sps, we expect distributor destocking to come to an end and productivity products, although returned to growth will likely get second half outcome.
Expect slow sales to continue with industrial safety.
Intelligrated sales will be impacted by by the project timing I mentioned in the first quarter due to strong growth of approximately 50% last year at this time.
But growth and robust orders in the second half of 2019 will contribute some more substantial sales growth in the following quarters.
And building technology, we expect strength and commercial fire and security files driven by demand in the Americas as well as continued strength in airports, we continue to see infrastructure, including airports and data Center project as opportunities for strong growth in HBT. However, we expect softer project sales and energy and other verticals within building solutions as we begin here.
In performance materials technologies, we expect to see continued growth and products and services and process automation and expect to healthy demand for shipping you will.
The headwinds in the advanced materials business from illegal imports of each of season to Europe , and lower specialty products demand driven by the slowdown in China will persist in the early part of 2020.
We expect the effective tax rate to be between 20, 122% in the first quarter, an average share count to be approximately 720 million shares.
All of this results in earnings per share in the range of $2, a two cents to $2 of seven cents representing growth of 5% to 8% earnings per share.
In summary, well position going into the first quarter with plans in place and ongoing initiatives across all businesses to drive productivity and margin expansion to mitigate the impacts of the mixed macro environment and the headwinds in the tough comps compared to year, though.
We also continue to have significant balance sheet flexibility to generate strong returns through share repurchases and opportunistic M&A.
With that I'd like to turn the call back over to various will wrap up on slide 11.
Thanks, Greg overall, we're pleased with strong operational performance from our portfolio in 2019, we continue to execute our core priorities and we again delivered on our commitment.
We remain cautious on the macro environment as many factors still very fluid for 2020 and significant uncertainty around short cycle demand.
Balanced portfolio poised for continued performance despite macro headwinds and we continue making significant progress our transformation initiatives, including Honeywell connected enterprise Honeywell digital from our integrated supply chain. Additionally, we're bringing innovative connected offerings to market to fuel growth, which come out of our strongest.
You should track record positions us well for 2020 and beyond with debt Mark let's move to Q1 it.
Thank you Garrett.
And Greg are now available to answer your questions.
Please open the line 69.
Thank you the floor is now open for questions. At this time, if you had a question or comment. Please press star one on your Touchtone phone.
At any point. Your question has been answered you may remember yourself from the Q by pressing star too.
Yes that when you pose your question. Please pick up their handsets. Thank you and our first question is coming from Steve Tusa with JP Morgan.
Hi, guys good morning.
Morning.
Just on the free cash.
Mentioned, a few items, obviously stronger in a you know 19, you mentioned a few items influencing.
2020.
Disagree with using eight and adjusted conversion metric.
Ultimately a.
Cash for shares on matters, but what is the if anything kind of flip in 21. So as you know is 20 220 to be viewed as kind of the base for growth or is there anything you know timing wise. It was pulled into 19 that influx of 20, and then 21, it's kind of a more normal base to grow off of.
Yes, so we always talked about our free cash flow conversion adjusted and we guided at last year, even weve, 95% to 100% adjusted we highlighted the both in our press release materials. Both for the way we have done a previously adjusted men. We also adjusted for pension income just to be true.
Transparent about both of those metrics.
The particularly with the increase in pension income going into 2020 I'm. So that's really the that's that's what you're seeing there in terms of those in the but both of those numbers are strongly above 100.
Per se so in terms of the 2019 into 2020 differences what I tried to highlight in the.
In the opening Steve is really a couple of things on first we are going to stay in a bit more capex as we go into 2020 and that's in support of our our transformation initiatives in the supply chain.
Some additional capacity for some new product for some new products.
We also have just from a calendar perspective going to have an extra payroll cycle and in 2020, So thats, just math and and for US that's call. It between 100 $200 million.
A headwind that will come and go into 2020, a and then in terms of.
Our environmental and other liabilities those numbers will move a little bit and so there's probably a 100 ish million made the $200 million a flex that we have in there for 2020 also.
So those are really the the major items that you'll see but our cash flow performance and the overachievement that we had in the fourth quarter relative to our own expectations were heavily anchored around our working capital improvements. We we did a tremendous job with our.
Commercial and and collections teams on the receivable side, we've been doing a lot around the on transforming how we do credit to collections and then we've talked about inventory being our bugaboo for sometime now and if you look at the free cash flows thing you'll see for the first time in a while we actually were able to get.
Cash from inventory as were specifically are starting to tune some of those dials and and.
You know a more disciplined way.
And with against some of the things that Thorsten team are driving from a transformation prospectuses, Arizona, Yeah, just to add a couple of things Steve than maybe just a couple things on the year over year basis, and these are not dramatic impacts, but overall, our cash outlays are them slightly higher in 2020 versus 2019 due to restructuring so that's probably another factor.
No I wouldn't get to focused about a baseline of 2020, obviously, we have some capex to spend which is the driver enough payment cycle. That's an extra one so that's just a math works outside them necessarily mean that 2020 miles to based on what I do want to highlight something and I think it's a point that's been this completely which is.
If you look at the cash flow generation of this company versus what it was three years ago, we're about $2 billion higher on 15% to 20% relax sales growth I think that point has been true just missed completely and I'm extraordinarily proud of the team in terms of that they've been able to accomplish in terms of cash generation. After all that gives us.
Require politics or reinvest in the business will pass back to our share owners are like to both I think that's the thing that really matters.
So to say that makes sense. So basically a few hundred million dollars that is kind of timing related and in 20 is that is that kind of how we should think about at a high level.
Yes, sorry, Okay, and then one last quick one.
Just on HBT.
What's going on there with the I mean, you guys had a pretty positive investor day, and now kind of framing a year with a little bit of a decline at the low end what kind of popped up is that kind of performance contracting JC I talked about that is being weak as well what's kind of the drag there.
That's exactly it Steve we basically our energy contracts or performance contracts, primarily driven by the government sector sector, we've seen a substantial drop off.
In in that segment of the business in order orders that has not been sort of the focus of.
The government sector.
Lately and Thats been a problem that's been a significant business for us in the past and Thats dropped off that's the orders there have dry bulk double digit. So that's the probably the one problem area that we've seen in terms of orders, but you know that ASP. So we're always going to have an issue somewhere but if we look at our long cycle orders for the quarter.
Across Honeywell, 15% growth I don't want to sort of bypass step back in a book to bill ratio of 1.7. So I think it it was incredibly successful quarter prudent long cycle orders perspective, and just to maybe quote you one other factor.
A place like China orders up north of 20% and backlog up nearly 50%. So I view this quarters, just an outstanding from out.
We're winning in the marketplace. Okay. One quick one whats your year end share count and then I'll leave it there just yearend ending share count.
Ill leave it there thanks a lot.
I think we've talked about 718.
Yeah.
Well take our next question from Scott Davis with Smelliest research.
Hi.
Good morning, guys.
Good morning.
A lot of a lot of information here that's super helpful that pick this is the first quarter where weve.
At least for the 2020 guide where supply chain seems to be a.
Starting to become a tailwind and I guess my question really asked area. So it's just become a linear tailwind meaning.
You get some benefit in 2020, 720, 122 or is there some sort of a step up that occurs over time as you kind of post season investment.
Cycle.
I think it's a gradual improvement I think I was extraordinarily pleased to what we saw in terms of our inventory management inventory has been a bit of a bubble for hung local long time and it would actually made some really nice progress in the second half the year I don't think there or any miracles for us out there, but I expect that progress to continue.
There was reflective in our cash flow for Q4.
Also we are focused on our delivery our quality and so on and.
Hosting and his team are doing a really nice job driving those improvements and I expect to you a gradual improvement year over year, and then you know transformation I mean, we dropped our fixed cost footprint 19, we haven't even more aggressive.
A planned for 2020 and 2021, so you're going to kinda continued to see that progress from fixed cost reduction, which auction obviously makes us a much more variable cost company, which is something that I very much desire.
Yeah Super helpful and I don't think you mentioned the word.
M&A or or deals of any course in the prepared remarks and was that yes, I mean I missed it of course, but because that purposeful and the context, there's just not a lot.
Relatively expensive market out there or is it just oh part of the planning.
Right now.
As we get announced when they get enough.
Yes, I mean, we did do rebellion in December which isn't a big acquisition, but it really.
An interesting one which is basically the use of imaging for advanced gas detection. So it's very as much of technology oriented company in the industrial segment, which fits really really well with industrial safety, but also fits well with.
Productivity solutions.
And our Hps business. So we were very thrilled to get that work in terms of M&A. We continued to be very active I can tell you and.
The environment, we're seeing is yeah, the prices elevated but what I can also tell you is that you know kind of because theres. So much Cashel walk Washington, So much capital deployed we're seeing very aggressive sort of due diligence and the kind of terms that.
Others are willing to accept so I think were affecting that because we're going to continue to be very cautious company and really studied the market, but we also have to kind of look we'll get ourselves in terms of you know what's risk that's reasonable what isn't so it's a it's a very robust M&A marketplace and we expect to do deals.
2026.
Helpful. Best of luck guys. Thank you.
Yeah.
Well take our next question from Julian Mitchell with Barclays.
Hi, good morning.
The only maybe it's the first question around the Capex hike, but you mentioned it sounded pretty substantial maybe give us some idea of how long capital spending stays elevated and also.
In terms of the the split of if the Capex increase maybe between growth focus store or new product initiatives versus some of those supply chain internal self help measures.
Sure. So we've been around 800 million as you know for the last couple of years and it was like an eight twentys early thirtys or so and so when I say elevated this is not massive increases were talking about 100.
Hundredish type of increases.
Year on year, and I would say, it's probably 50 50 split between you know increases relative to the transformation and increases relative to some new capacity for some of our new product launches that we're doing so I.
I wouldn't this is not like we're making one massive block investment and something huge here, but as we go through this transformation.
In the supply chain, it's going to require it's going to require capital. So 50, 50, I would say and think about in sort of like a 100 150 type of potential increase year on year end, but it would just to add to that I do I. Our our total on these investments substantially north of 30%. So I mean, if you think about that kind of.
<unk> returns versus M&A whenever we're going to see those kinds of turns on more than happy to deploying more capital.
It's going to make us a better clunky into long term. So I think that that this increasing capital I think should be viewed as a positive not in that get you had again, where we talk about our free cash conversion just to get back to that permit and we've said many times. We are not like pinpointed on 100, you know if we've got good investments and where we're going to make them. So.
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That's helpful. Thank you and then my second question I'm, just around safety and productivity solutions not so much in the productivity solutions pieces I think that's well understood that maybe on safety.
You know that did rollover in the fourth quarter.
Just maybe give us some understanding of was that a surprise to you and what you've seen a b C. It will look like in terms of safety sales.
Yeah, I mean, I think there it's the markets some of the industrial markets overall have been relatively soft we don't think that goes anything sort of unusual going on that business. It's a reflection of bad I mean, it's not you know obviously.
It's a market that seem a flattish to down some of the segments that we play in we saw that so you know we're this is probably one you know why we have some uncertainty about the short cycle like Thats, one of the tougher businesses to call for us.
We are concerned about what's happening in China around Toronto virus, and so on and that just the impact in China.
Really the impact on the global industrial production, because youre global supply chain. So I think you have to look beyond just China.
You know, but we're optimistic that the markets are going to improve but there's an inherently something unusual going on in those in that in that business.
Great. Thanks.
Thank you thanks.
We will take our next question from Andy Kaplowitz with Citi.
Good morning that.
Good morning entity.
Okay. So Greg just focusing on your hair guidance for 2022 weeks. Since you can you could you elaborate in the headwind on you could incur from the Max gross margin, obviously too early to tell the kinda back in time commercial after market. There are lot of moving parts in that business.
You know, whether it's a brief to concentrate our efforts are the mandate you've been struggling on the news can't do it initiatives that are well. So how do you think about the resiliency of commercial aftermarket until the 20.
So.
Lastly, the with Boeing is doing with the Max returned to service has and will have an impact on the aftermarket performance and I think we were all we're all aware they fly the older claims longer and so the floor.
Has the increased demand in that sense when when you think about our guide.
Or what's happening with the match you should think about we're gonna have probably a low to mid single digit.
You know headwinds to the aerospace growth because of the production schedule changes and so we talked last year about it being rather minimal because the numbers were smaller.
But now with Boeing announcing the stoppage of production and you know there will meet your return to service and the ramp up the rebranding.
We are going to be taking down our deliveries to them much more significantly than we did.
In the back half of 2019 so.
We talked about we will try to utilize some of our other existing backlog and hopefully the supply base can you provide us.
You know some additional material input so that we can you know.
Different labor and try to serve some or other customers in a way to offset some of that but it's hard to say, how that's going to work out. That's that's why we're we are being a bit cautious because that's all very fresh use as you know within weeks.
And so the impact to even our supply chain is on them.
The revenue impact is meaningful I mean, it's you know think about kind of a made triple digit impact for millions of dollars. That's obviously, we can we think we can offset some of that both through our revenues in backlog reduction, but but it's from a revenue.
That's not an insignificant and by the way. We're just we're completely along into the bone perspective. So that's what that's what's reflected in our current outlook.
Thanks for that Guy gets you already mentioned, China in Q4 was pretty strong in terms of orders, but you won't look around the world.
But you did in Q4 and what's your expectation talked to 2020, we understanding that this uncertainty out there I think you Q3, China U.S. here for a strong which they can you need to come that would happen to these regions in Q4 yeah.
Interestingly Q4, I mean, obviously, a China was a highlight both kind of on the orders growth rate and by the way China is accelerating for us so you've seen a higher rate of growth Q2, Q3, Q4 Q4 was even higher so we're encouraged by what we're seeing there Doug the orders give us so actually.
Try this one of a really nice storage for us the other place to highlight and I think I've talked about this before which is Latin American with a lot Latin America was also up high single digit.
Obviously, we would have to be taking a lot of share there given the fact that relative those economies aren't exactly robust and are struggling so I'm very very pleased with what's happened there middle East continues to be a a region of strength for us.
We had some tougher comps, but think low to mid single digit kind of growth rate probably that the low light for us was western Europe .
That's that's been kind of soft in Q4, I think a couple of the countries that I'd look to dip that were particularly soft will be Italy, and another runs which were weak overall.
India was okay. In Q4, frankly, it was a little bit lower than we had hoped to me the low to mid single digit kind of growth numbers. You know there's there's some we haven't that's it and that's a country of strength for us, but slightly below our expectations.
And.
Russia actually did quite well for us as well and the segments that and so sort of a mixed story, but the highlights certainly being China will fund the actual performance and the bookings.
Well.
Very interesting thanks, guys.
Thank you next.
We will take our next question from Jeff Sprague with vertical research.
Hi, Thank you. Good morning, everyone couple of quick ones for me just on the probably couldn't be products. There is a little surprised to hear you're not expecting a return to growth to the back half into the back half the comps are very easy in the first half do you feel like you have.
You know the product actually drives the business and trying to.
Take a little bit better control your destiny relative to kind of just what was going on perhaps in the channel.
Oh, it can be clearly I'm expecting a return to growth and productivity products are conclude.
We've got our signals crossed some for or is there and just to give you. Some very specific data points. The sales out in the channel for productivity products has grown every quarter or last year.
More or less normalized or channel position dollar by the end of 2019, we actually saw growth and the scanning portfolio and productivity products and we've been able to secure a couple of good wins, the toughest comp still for productivity products as Q1, we anticipated that it's not news.
But as you would get further and further up the year I do expect growth and productivity products, So and I have to data to that gives me that confidence so that's not and I wish it I hope.
I have some data points that says that that's a reasonable I'll come to expect also of course, something goes wrong with the market but.
Actually I'm very pleased to the kind of progress that's been made the team that we now have the in place and the products that we have to the marketplace.
No I'm just going by slide seven now in the second half I'm just thinking about the the guide overall.
You know what do you read what we put on slide six it doesn't sound like you're being Super Conservative, but then when you.
Talk and with the you know the with the range it does.
The way feel conservative.
Can you just address that would mean zero at the low end feels pretty conservative, particularly as you know if you if you pull out a zero in Q1, which is your toughest comparison right then.
You probably are on a path with something better than that as the year unfolds.
Yeah well.
Jeff I think we've been pretty consistent in our approach in terms of forecasting about books, which is we're not what I'm not sure if something or myself and the Greg I'm not sure if something were going to give you a wider range and so we're not going to the promise things that we don't either don't have visibility or can't do I would also tell you.
A couple other things I mean does.
But if you on those and the Corona virus right now as an example is something that's very difficult pull us to predict or on the impact I mean, you know if things go back and our factories, we opened Monday or weak for Monday, which is kind of the schedule.
Then you know maybe it's conservative what if they don't want to this continues to spread what if it gets worse.
You know that impact could be.
Could be substantially worse than what we're expecting.
You know that showed cycles, a little bit of unpredictable we talked of there's a prior question industrial safety. It's tough it's tough to call that right. Now you know as I look at a lot. The reports from a lot of the shoulder cycle oriented peelers exactly have not been stellar I mean so.
You know, we're trying to call. It I don't know about conservatively is when we don't know and we don't know that much about short cycle like though we're going to kinda Aaron.
Certainly a little bit a wider range and we'll see what happens and obviously like we do every year.
As the year progresses, we will update you and we'll refresh our guidance I'm I'm very happy with our long sorry, I mean.
10% growth in the backlog.
He is very good so that gives me some confidence and.
Yeah, you're progressive.
Yeah, and I'm on the long cycle, just one more if I could.
Obviously projects are normally subject to delay and the like but.
As it stands now is is most of that backlog deliverable in 2020, its pipe the expected activity in 21.
No. It's some of that is beyond 2020 net.
We sort of expecting norm normal conversion cycle I mean, it's.
For example, some the Intelligrated backlog is goes all the way into 2018.
Shifting funds.
18 months, so it's it's longer cycle, but nevertheless, I mean, it the make couple that isn't dramatically different in terms of execution versus 20.
End of 2018, so it's it's kind of looks the same it's always more than one here. So it's not inconsistent and seeing the past.
Great. Thank you very much.
Yes, I do think to work.
Okay. Thank you we will take our next question from Nicole Deblase with Deutsche Bank.
Yeah. Thanks for the question good morning, guys.
Ladies and some of the mining. So my first question is just around you know you guys talked about short cycle as obviously another.
Certainty in 2020 can you talk a little bit about what you saw from stretches cycle trends in four key throughout the quarter and was there maybe any signs of like weakening throughout December and into January and it gives you concerned into the first corner or have you seen more like stabilization.
I I would tell you that as we as we exited the year. It was relatively stable, but I would tell you that also January with the China situation is going to be one we're gonna have to read into pretty closely so no no I wouldn't highlight.
A huge problem to solve at this point, just yet but certainly.
There have been some weakening trends as we exited December into January in a few places in China on the short cycle is one we're going to watch very closely there as mentioned a couple of areas in Europe in particular.
Okay.
Okay got it thanks, Craig and then.
Secondly, just around process I think you guys could talk a little bit more about what you're seeing from that backlog perspectives and areas of strength on one of your bank competitors talked about some big LNG projects coming frail I've recently said it'd be great to hear you know why the strength is coming from freight.
Yeah, well I think you know for US is probably three main components of strikes by the way.
H.P.S. had a terrific quarter double digit orders growth for business is doing incredibly well.
We're thrilled with their performance, but specifically.
LNG is coming through.
Some of the Mega refining petrochemical complex is.
Another or place of growth and you know, we're starting to do a bit more of the renewable segment. That's actually one of the focus areas for PMT in general and we're seeing some improved.
Activity for in renewable so I was high like those three is areas, where we're seeing growth with a terrific bookings and orders outlook in in Q4.
Thanks, Dan.
Our next question is from Nigel Coe with Wolfe research.
Thanks, guys. Thank sort of looked at me I'd appreciate it.
Important item. So yeah, we have up to kilogram and appreciate all the details by the way I'm just want to clarify on the payroll cycle. Greg you called out you know hundred Toomey noticed is that just the cash impact through it as well. So I think that's right April yep payroll, that's our payroll.
Right.
The cash earnings.
No that's cat, but just the biggest Catholic et cetera.
Fair enough pulled away the calendar falls that are we pay every two weeks on a Friday happens all the time exact same way happened to get that next year. The Friday can be right before the year end.
Understood. Thank you very much and then Oh. My main question is on the 2050 Bips of segment margin.
Expansion.
How does that look by by segments and did the sort of my question is should we expect Sps to be sort of a heavy contributed to that maybe I missed it it's a little bit less than any color on that and then kind of the subtext team is you know you won't see doing a lot of restructuring. This you up to $1 billion in your plan is that a little cash.
Cash and what kind of paybacks are you getting on that spend.
Yeah. So let me impact that first of all what we're not giving segment margin expansion guidance and individually.
Yeah, we should expect of course that S. P S.
Improve you know given given the degradation we saw in 2019, they've obviously got a lot more room to run.
Given given that depression, we had this year.
The other three businesses I think all have Apollo equal opportunity on margin improvement overall.
So that's that's the way I would think about.
Think about that from a segment perspective.
As it relates to the restructuring.
A high percentage of the restructuring that we have on the balance sheet is task oriented and we do expect that is going to actually get carried out over two and a half the three years' time.
And Gary mentioned, a heavy amount that will be in 2020, a and then in 2021 and a little bit of a tail off into 22.
But is it as it relates to the project you can pick up and really in sort of you know two categories. Those that are really tied to.
Call a site.
Consolidations those are above the cost of capital.
You know clearly.
The high single digit low double digit type returns.
Those that are more associated with call it back office productivity and and organizational redevelopment and so those are carrying far higher returns to them. So.
Yes, that's kind of what we are looking up.
Great. Thank you and one quick clarification on the share count reduction question. It doesn't feel like you got a whole lot dialed in for 2020 about a billion finds it by my calculations is that something about them.
Yeah. That's in the ballpark again, we are at a minimum going to buyback 1% of our shares for sure and then you know as we discussed it or if the year progressive and we're not seeing a lot of M&A activity.
And it looks like an attractive opportunity as we did here in 2019, we won't be afraid to go back into the marketing and scoop up some of our insurers.
Great. Thanks, guys.
That concludes today's question and answer session. At this time I'd like to turn the conference back to Mr., Dario Saddam check for any additional or closing remarks.
Oh, thank our shareholders for continued support a plenty well we remain focused on continued to outperform per share owners, our customers and our employees. We have delivered our commitment strong results each quarter and continue made great progress of our growth and transformation initiatives with a great portfolio will continue to execute.
Well I'm excited for 2020, and we expect another high performance here for Honeywell. Thank you all for listening and have a great weekend.
Thank you. This does conclude todays teleconference. Please disconnect your lines at this time and have a wonderful day.
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