Q3 2020 Honeywell International Inc Earnings Call
Good day, ladies and gentlemen, and welcome to Honeywells third quarter earnings Conference call. At this time, all participants have been placed in a listen only mode and the floor will be opened for your questions. Following the presentation. If you would like to ask a question at that time. Please press star one on your Touchtone phone if at any point your question.
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As a reminder, this conference call is being recorded I would.
Now want to introduce your host for today's conference Mark <unk>, Vice President of Investor Relations. Please go ahead Sir.
Thank you Peter.
Good morning, and welcome to <unk> third quarter 2020 earnings conference call on the call with me today are chairman and CEO, Gary Saddam Chuck <unk>, Senior Vice President and Chief Financial Officer, Greg Lewis.
Collyn webcast, including any non-GAAP reconciliations are available on our website at www Dot Honeywell dot com forward indicator.
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Isn't it.
Today, though.
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The principal risks and uncertainties that may affect our performance and our annual report on form 10-K and other filings.
This morning, we believe you Mark financial results for the third quarter of 2020 share our guidance for the fourth quarter and full year 2020.
Sure some preliminary thoughts on 2021 dynamic.
I was always let me talk to your question is that yes.
With that I'll turn the call over to chairman and CEO, Gary It's about <unk>.
Thank you Mark and good morning, everyone, let's begin on slide two.
The past few months, we celebrated June significant milestones first we celebrate their honeywell's 100, <unk> anniversary as a publicly traded company. We are proud of our walk in jeopardy, and long legacy of innovation.
1920, you have navigated the great Depression World War, two numerous <unk> political changes the great recession, the emergence of disruptive technology.
Every market we serve.
The reason that how do you all continues to thrive with all these years plain simple, it's been our ability to adapt to an ever changing world.
The long list of inventions from the last 100 years that our legacy innovation endorse today for example, we're transforming the way our customers you did with Honeywell for <unk>.
I'll be operating model, we're helping the world cool and recover from Brexit Colby banking pandemic report forms of healthy solutions.
In addition, we recently announced a breakthrough olerup quantum computing the introduction of the system model. Each one our next generation quantum computer which offers a proven quantum volume hundred Twelveeight guardius measured media industry.
We also announced major new users, including DHL, and mirth, which demonstrate the wider range of part of computing use cases.
The second milestone, we calibrate what's our returns to the Dow Jones industrial average.
Yes, if you doubt Jones indices announced in August.
Hi, <unk>.
As previously dollar coupon for making 25 to 2000. They are <unk> dollar 12 years later years of consistent performance in our ongoing transformation to the world's Premier software industrial.
We're proud and honored to we joined the group of companies that comprise the Dol.
Both of these milestones are the timely bonders of our long legacy of innovation and performance throughout our over 100 year history. We have continued to listen to the occasion to be challenges invented technologies. We're committed to continue our legacy of innovation to shape the future of the next century.
Let's turn to slide three to the New York third quarter results.
I'm very proud of our third quarter performance drove sequential improvements from the second quarter sales segment margin jumped to earnings per share, although the cold Tonight and then it continues to several of our businesses of end markets.
Did you have to come from second quarter loads were laser focused on demand generation.
Original execution cost management, not cold did you lay didnt need solutions.
We delivered adjusted EPS of $1.56 cents in the third quarter dumped 25 year over year are going to see structural improvement from adjusted EPS of $1.26 cents in the second quarter.
Were down 40% year over year.
Organic sales were down 40% better than the more than 50% organic sales decline expected in July and a four point sequential improvement from 18% organic sales declined in the second quarter.
Our cost what has delivered approximately $450 million of your your benefit in the third quarter.
These actions help us protect margin limiting our decremental margins in the third quarter, only 29% and improvement from 33% in the second quarter.
Net margin contracted 130 basis point also an improvement from the 280 basis point contraction in the second quarter driven by another quarter of margin expansion, both Honeywell building technology and sales productivity solutions.
Generally good governance $58 million or free cash flow down from $1.2 billion in the second quarter as we discussed in July we expected Etes cash flow dynamics, which was the result of working capital reductions in the second quarter.
Hi, you're repositioning cash outflows and capex growth investments in the third quarter.
In terms of capital you deployed approximately $1 billion of cash dividend growth Capex investments and share repurchases. Additionally, we announced our 11th consecutive dividend increase underscoring our commitment to return value to share owners, even during the current economic downturn.
Let's turn to slide four to discuss our recent corporate development activity.
I'm very excited about our recent announcement that we recently completed two acquisitions and establish deep partnerships to further drive innovation.
Strengthen our portfolio and invest in the future.
First we acquired Wacky research technology leader specializing in thermal energy and power management solutions.
Acquisitions, and our broad existing aerospace portfolio positioned about people in advanced capabilities in the fast growing power and thermal management market, which is critical to meet the growing needs for aircraft electrification.
Nandan cognos aerial vehicles and related systems.
We also acquired assets from privately held Ballard unmanned system does extend our presence into the hydrogen fuel cell market for unmanned aerial system and.
Am strengthens our urban air mobility product.
Ballard unmanned system designs and produces industry, leading store hydrogen proton exchanging member in fuel cells within the power on their error aerial systems or you are yes in.
In addition to the creation of the new business units, specifically dedicated to the U.S. really market earlier this year.
Michael This is yet another example of our commitment to invest in our way.
Right doing this you do nigro U.S. marker.
I'm also pleased that we announced a new partnership between Honeywell and Microsoft that will reshape industrial workforce.
Our board will integrate Microsoft dynamics field service to provide cloud based predictive solutions to build an owner.
And operator, Hello, good maintenance workload.
Strengthening business continuity and improving operational efficiency.
Moving forward it works for more ways to bring innovation to customers by integrating Hello, Fortunately she's Microsoft as your services, such as reserves digital twin or reserve educate the buttons.
We also announced a partnership with murder, a global provider of critical digital infrastructure and continuity solutions to boot sustainability.
Getting into and operational performance for data center operations across the globe.
We look forward to collaborating with murder to walk with integrated solutions that make it easier for data center operators.
Still the mountains of data they pull from their equipment, they do actually it could be more efficient environmentally friendly operations.
The first offering from our partnership will be an intelligent power management solution. The features an energy resource management and supervisory control system in a single integrated platform.
In total.
Right.
Estimates in partnership to drive over $1.2 billion of sales over the next five years.
There's a lot of good progress and I'm pleased by the momentum in these areas now.
Now, let me turn it over to Greg on slide five to discuss our third quarter results in more detail as well as to provide our view of the fourth quarter.
Thank you Gary good morning, everyone.
Various highlighted we're very pleased with the third quarter, our operational execution drove significant sequential improvement from Q2, an improvement versus our expectations in July particularly revenue.
While third quarter sales declined by 14% organically due to the effects of the all depends on it was a four point improvement from the 18% organic sales decline in Q2, the sequential growth in all four segments.
Importantly, we delivered strong double digit organic sales growth in our defense and space warehouse automation, keeping businesses as well as the recurring software sales in each student.
Sales volumes and mix in aerospace in PMT equaled 130 basis points of year over year second larger contractual.
Once again expanded margins in HPC and Sps.
To drive a 140 basis point sequential margin expansion from the second quarter.
Cost reductions delivered approximately $450 million a year on year benefit in the quarter, which brought us the approximately $1.1 billion sales year to date we.
<unk> acid fast early and the prices that are now on track to deliver 1.5 $1.6 billion, a coffee doesn't want to play off from our previous estimate of 1.4 to one place that goal.
Adjusted earnings per share.
$1.56, that's down 25% year over year, but up 24% sequentially from adjusted EPS of $1.26 cents in the second quarter.
We reported $124 million and repositioning in the quarter from cost savings initiatives for 2014 and into 2021.
That because this is a little bit higher than the third quarter of last year driving a four cents headwind below the one and interest income was lower than the third quarter of last year driving a five cents headwind below the wall.
As expected our higher adjusted effective tax rate resulted in a five well with yet again, partially offset by four cents EPS benefit due to lower share count from our share repurchase program.
This quarter EPS as adjusted to exclude the impact of a non cash 350 million pre tax and after tax charge associated with the reduction in carrying value to present value of reimbursement, we cleavable viewpoint Garrett in relation to Garrett September 22020 chapter 11 bankruptcy filing.
Which we previously announced with the filing of our form 8-K.
A bridge from adjusted earnings per share in the third quarter of 19 to adjusted earnings per share in the third quarter of 2020 can be found in the appendix to this presentation.
We generally do $5 billion of free cash flow in the quarter down year over year as we discussed in some detail in our Q2 earnings call lower net income tire, we can get to the cash flow.
Higher gross capex investment, especially the cash resulting in adjusted free cash conversion of 68%.
We expect the repos Capex dynamics to continue into the fourth quarter as we continue to drive our state is programmed and investing in growth.
Also have the impact of an additional payroll cycle as we've shared previously.
We do expect sequential improvement if the cash flow despite that driven by working capital improvement mainly in inventory in the quarter.
And turning to capital deployment, we paid out $636 million in dividend and as Derek mentioned announced our 11th consecutive dividend increase.
It is deemed to have been a share purchases and invested $249 million in capital expenditures in the quarter up approximately $60 million in the prior year.
This included investments that we're making and 95 mass to support the COVID-19 that we thought the ethylene capacity in our warehouse automation business.
Overall, we continue to execute commercially and operationally, while investing for the future driving sequential improvement in sales segment margin and EPS setting ourselves up for the quarter The club.
Now, let's turn to slide six you can talk about our individual segment results.
Starting with aerospace sales were down 25% on organic basis as the ongoing reduction in flight hours as slowdown in original equipment build rates.
Like the commercial aftermarket and original equipment demand.
Oh and air Transport aftermarket business was down 5% organically compared to 56% in the second quarter.
Although there is a bit each an aftermarket was down 20% organically in the third quarter, which was a significant improvement from the approximate 50% decline we saw in Q2.
We continue to have strong demand the U.S. international the fed the states driving double digit organic growth in that segment for the quarter.
Segment margin contracted 250, 40 basis points year over year, driven by lower commercial sales volume of the business mix, partially offset by cost actions to improve productivity.
It is a 240 basis point sequential improvement from Q2 levels for aerospace.
And Honeywell building technologies sales were down 8% organically a significant improvement from the 17% organic decline in the second quarter.
The third quarter decline is primarily driven by lower demand for building that is is that the security and electrical products as softness in visitation due to delays in private and energy businesses. Some of which was the result of least dose mobility constraints, particularly in India and the middle East.
However, organic sales and all these businesses improved sequentially from the second quarter, creating positive momentum into Q4.
Orders for the base of each of the projects the enemy because both grew double digits organically in the third quarter.
Additionally, the better solution service backlog was up double digit year over year, driven by larger orders in the middle East in Asia.
We are experiencing significant across all momentum with our portfolio healthy bidding solution our sales.
Sales pipeline is over $600 million.
We have secured orders around the world from Charlotte So for.
It's pretty steady margin expanded list of laughter by 60 basis points in the quarter driven by commercial excellence that across asset to improve productivity, which offset the impact of lower sales volumes.
[noise] in performance materials technologies sales were down 16% over their databases, a slight improvement from downstairs.
Total.
[noise] process Asian sales were down 12% organically, a one point improvement from 13 to sort of get a declining 15, driven by delays in service and automation projects as customers conserve cash and volumes decline in smart energy at their locations.
And he will peak sales are down 36% organically steeper than the 25% organic point of view.
Driven by declines in gas profitability Buckman lower license sales.
If your catalyst shipments due to weakness in the energy end markets.
As expected told my team in oil price weakness continues to drive the late bookings in Hps ERP.
Although we still have not seen significant project cancellations and our backlog is approximately flat to the prior year.
Organic sales in advanced materials were down 4% in the third quarter, a 14% improvement from an 18% decline in Q2, driven by lower volumes in flooring products, partially offset by growth in profitability target audience of goods returned to growth in the third quarter as the auto end markets experienced a wrap.
Recover.
PMT segment margins contract, a 220 basis points in the quarter.
70 basis point sequential improvement as the impact of lower sales volumes and mix were partially offset by cost actions to improve productivity.
Finally is safety and productivity solutions sales were up 8% available seven.
Seven point improvement from the ones that set of data growth you had in Q2.
Although the department that sensitivity of the coal.
Double digit organic growth and intelligrated personal protective equipment, but anyway, a mid single digit growth and productivity solutions and services, which was driven by strong demand for scanning and mobility box order.
Orders in Sps, well double digits for the fourth consecutive quarter, driven by personal protective equipment, approximately 150% year over year continues to position us well for the fourth quarter and into 2014.
Yes backlog was approximately 100% year over year to a new record high.
By Triple digit growth in personal protective equipment at a time where did that fall.
Thanks, and then if they can see that we scale up capacity in the people. These days Sps segment margins expanded 50 basis points in the quarter driven by productivity actions and commercial excellence.
As new capacity comes up the way, we expect favorable contribution Sps segment margin.
So overall, we finished the third quarter with the kids business in the second quarter and all business is making progress.
The whole business in several businesses, including defense and calibrated and keeping him as he to prudent cost management and commercial excellence, we were able to limit our decremental margin to 29% overall four point improvement versus Threeq.
And expanded margins and two of our four segments.
Now, let's turn to page seven.
And discuss our outlook for Q4.
Throughout the pandemic and remain committed to providing shareholders with a quarterly outlook, that's commensurate with our level of visibility in the environment. We're in.
We we had enough at this stage in the fourth quarter 2023 of the full financial guidance for.
For the quarter. However, this guidance is predicated.
Having no material supply chain or end market disruption really ended the year.
We will independently we assess the macro environment January to determine the appropriate format of our 2021 financial outlook based on conditions at that time.
As we proceed through the fourth quarter.
After the monitoring the situation of many factors remain unpredictable, including COVID-19 infection rates, which we are seeing increasingly globally.
Particularly in the last two weeks.
As of now we expect organic sales in the fourth quarter in the range of down 11, so down 14% driven by continued headwinds in commercial aerospace the warping, partially offset by ongoing strength of the fence warehouse automation and p. cleaning and gradual recovery and the remaining portion of the portfolio.
We expect segment margin in the range of 30 downtime was about 30 basis points, resulting in steady margins in the range of 21.1% to 28.3% in the fourth quarter, which would be another hundred club gifts sequential improvement as we gain leverage off a reduced cost base and drive commercial productivity.
The net below the line impact, which is the difference between segment profit and they can be full path is expected to be between negative 50 million and positive $10 million in the fourth quarter, which includes capacity for an additional 50 to 100 million of repositioning the drive productivity into 2021.
We expect the effective tax rate to be approximately 19% in the fourth quarter and average share count to be approximately 710 million shares.
As a result, we expect NPS between $1.97 to one and $2 into sales down 2% to 4% year over year Jeff.
Now, let me provide a little color on the top line.
In aerospace, we expect ongoing growth independent space supported by stable government defense budgets and continued sequential improvement in business aviation aftermarket sales as flight hours improved.
While the global flight hours remain far below prepayment levels, and we don't expect air transport flight hours to improve materially impacting our air transport aftermarket sales.
Our commercial original equipment business will continue to be impacted by lower air transport OEM build rates and lower business jet demand due to the economic slowdown.
In building technologies, we expect sequential sales growth driven by improvements in fire security and building management systems, we expect to access the customers quite to improve in the fourth quarter driving a sequential improvement of long cycle building solution to project. Some orders are healthy bidding pipeline, which is called the other.
$600 million is maturing nicely and we expect to continue generating pipeline and orders in the fourth quarter.
And he had a team we expect ongoing challenges in more people and process solutions as customer Capex, and opex reduction and lower production and refining volumes continue.
Further we expect sequential sales growth in the products businesses and in process solutions and advanced material as Weve end markets, including automotive continue to strengthen.
Finally, an Sps, we expect another quarter of double digit growth in an elevated and personal protective equipment.
We continue to see record level demand for respiratory masks and other PPV.
Our personal protective equipment, and an elevated backlog remain up triple digits year over year.
And our total SPF backlog as a new all time high giving us confidence for the remainder of 2014 and into 21 for the business.
While macro conditions continued to put pressure on other left yet businesses, including citing an IP and got I'd say, we expect to see sequential improvement in the fourth quarter.
So given these fourth quarter dynamics for the full year, we expect organic growth in the range of down 12% to 13% and segment margin in the range of down 60 70 basis points.
Welcome to the segment margin in the range of 20.4% to 24.5% for the deal.
The adjusted net below the line impact is expected to be between negative 185, and $125 million for the full year we.
We expect the adjusted effective tax rate to be approximately 21% and the average share count to be approximately 711 million shares.
Result, full year adjusted earnings per share are expected to be between $7 and $7.05 down 14% year on year, yes.
Now, let's move to slide eight that he could talk about some of our preliminary thoughts as we look into 2020 wells.
[noise] 2020 has clearly been a challenging year and it continues to be very dynamic as we off the work on.
Many uncertainties persist as we look into 21, so lets highlight how we're thinking about that.
Our current clinic sales.
Is that a coterie of 19 vaccine received approval and becomes available.
In the early 2021, allowing the global economy, the wealthy reopen as the year progresses well.
We're also assuming fiscal stimulus remains supportive of the Apollo.
We're currently seeing a second wave of infections in several regions, including the U.S. and parts of Europe. So we'll need to watch how that situation develops.
We assume no significant shocks to the economy from post election, as circumstances, and a stable geopolitical environment, particularly as it relates to you guys try to trade relations.
If you mind, let's look at our key markets.
In aerospace as the pandemic the size in the global economy continues to recover we've seen passengers will begin flying again, we just a modest improvement in global flight hours that begins in the first half and accelerate slightly into the second half of the year.
Yes, we'll do that could lead to further to our commercial and aerospace businesses aftermarket demand grows.
We also expect stability in defense budget spending supporting continued growth and our defensive base business will likely at a reduced pace versus our 2020 growth rates.
And HDTV expect stability in non res construction with a greater emphasis on retrofits driving demand for building products and services, which should support continued demand for our healthy building solutions.
In PMT, assuming improved macroeconomic conditions will drive moderate increases in oil prices in the second half of the year, leading to improved business conditions, and refining petrochemical and process automation in European and process solutions as the year progresses.
[noise] Sps will be a robust growth segment from a strengthening warehouse automation and personal protective equipment as we execute delivery of our robust backlog.
We expect segment margins appear to battle, the challenge of higher mix any color wavelengths and the efficiency gains as our people in the Appalachian scale more efficiently.
From a total Honeywell perspective, we expect organic growth driven by year over year growth in all four segments.
Well double digit connected software growth in HCV.
We expect our streamlined fixed cost baseball 2020 cost actions to support a resumption in year over year margin expansion, while affording us the opportunity to invest in growth, particularly in R&D and connected enterprise commercialization and the continuation of our supply chain and Honeywell digital transformations.
We expect to take advantage of our significant balance sheet capacity for M&A and share repurchases as wall.
We expect to reduce share count by a minimum of 1% again in 2021, and we'll be resuming buybacks as early as four key to do so.
So overall, we've had some insight into our end markets and confidence in our continued operational execution, which will give us the ability to resume financial performance consistent with our prior framework by 2021.
More specific inputs once we close out the year with.
With that I'd like to turn the call back over to Gary.
Thank you Greg before we wrap up I'd like to take a minute on slide nine to discuss an important topic, our commitment to a sustainable future, which is one of the key elements of our overall utility story at Honeywell due to our robust environmental social and governance or Nichey framework enables our long term.
Success.
Despite the unprecedented challenges we face this year, our commitment to our SG principles has not wavered.
To the contrary I believe our perpetual drydocking strengthens the sustainability of our business and.
Hold the highest ethical standards has only fortified our reserves.
Our commitment to you is centered on the protection of our people and the environment achieving.
Achieving sustainable growth accelerated productivity and developing technologies to expand the sustainability capacity of our world.
As evident we established robust 10, 10 10 years goals to achieve by 2024, and we closely monitor progress against these goals.
Additionally, starting this year as part of our continued focus on sustainability reporting.
We are reporting in alignment with the Fas the NTC RFP brain work.
As you can see on the slide we have already worked extensively to reduce greenhouse gas emissions.
Improved energy efficiency, conserve water and proactively new store former operations or predecessor coffee starts to produce community assets.
Honeywell is uniquely positioned to shape, a safer and more sustainable future.
We continue to invest and develop technology to provide our customers with basketball and phishing solutions for safety energy and environmental needs.
In fact, we focus approximately 50% of our new product research and development on solutions that improve environmental and social outcomes for our customers.
Some of our challenge some of the challenges our technology to address include sustainable refrigerant aerosol sustainable building and building safety sustainable aviation and aviation safety sustainable electric power plant personnel personal safety sustainable freight and worker safety.
We have also recently created a new business in PMT call sustainable technology solutions to develop and commercialize new technologies to meet the growing demand for sustainable solutions, including plastics recycling energy storage in a renewable fuels.
These technologies to advance environmental sustainability.
Tribute to the expansion of our technology portfolio and accelerate long term growth now, let's wrap up on slide.
We continue to effectively manage through ongoing challenges of this global pandemic and social and economic environment with strong operational execution that is typical of Honeywell charging.
Driving a sequential improvement from the second quarter sales.
Segment margin and adjusted earnings per share.
Our diversified portfolio innovation culture, and significant balance sheet strength can do provide the unions and ample capacities. We continue to set ourselves up for the recovery and be up.
We delivered double digit growth, we thermal parts of the portfolio Imprudent defense and space Intelligrated personal protective equipment and a recurring software.
We're also continuing to invest in growth opportunities through M&A partnerships and high return Catholics, we're gaining traction or innovative solutions that address emerging customer needs.
We continue to align our cost base with the current environment and we are now on track to deliver 1.5 billion to $1.6 billion of cost savings in 2012.
I am proud of the improvements we drove in the third quarter, where are you actively managing to the current environment and positioning ourselves well for the recovery food cost action and growth investments. In addition, we remain committed to doing our part to ensure a sustainable future bars productive our people and.
Environment as well as the developing developing technology and improved towards sustainability.
That mark let's move to Q Annette. Thank you Doris various congressional now available to answer your question Steven Please open the line for QNX.
With pleasure Sir the floor is now open for questions. At this time, if you have a question or comment. Please press star one on your Touchtone phone yeah.
At any point. Your question has been answered you may remove yourself from the queue by pressing star too we ask that when you pose. Your question you. Please pick up your handset and we will begin with our first question from Scott Davis with Smelliest research.
Please go ahead.
Good morning, guys.
Morning.
The presentation.
Obviously.
Really good decrementals.
I just wanted to focus a little bit on the future and one of the real tools you have I, thank god terrorists and Gregory or is your balance sheet.
No.
What I mean, perhaps just update us a little bit on M&A and then what's your appetite to getting more aggressive in purchases here share repurchases just given I think a disconnect between your stock price and perhaps you upside reality.
Yeah.
In short I think the story isn't any different I mean, we're very pleased that were able to complete a couple of recent acquisitions. It shouldn't although they're not enormous they are meaningful and as you can see the impact in the longer term for our business is actually quite significant it's a billion dollar plus and I think where you always tested with these kinds of acquisitions.
Some place that all the May initially appear small they're really building for the future and a new store very much in that category. I will also tell you that our pipeline is very robust at the moment, probably better shoes that it's been a long time.
You know M&A environment getting better you know there's.
There's some real practical challenges to be M&A, because you know, especially for international M&A I mean to conduct due diligence is quite a challenge I mean, you know to quarantine can place in travel and as you can imagine much of the due diligence team comes from corporate so they're not necessarily local so that's creating some challenges, but we're working through that and we'll look.
You get some things done our domestic as well as international So I think we're going to continue to do that you know as you've heard through our presentation today will lead committing to a 1% share account reduction at least for the upcoming year. So it's sort of you know.
Getting back to business and the business is improving millwood drove nice I think sequential progress from Q2.
We're going to drive again strong progress into Q4, our decrementals are now going to get down into the low twentys.
I think that that's I think that that's a very good performance given the cars and Dell and I think we're going to do what we always do would you deliver for today, but also Google for the future I think those two.
Acquisitions, we made earlier this month are indicative of that.
Okay. That's helpful. And then quantum is something that you guys are talking about for the last year steps a little over my head.
How do you get paid for that what what do you envision the pricing model as you know is there any way to kind of identify a reality.
Hey, I'm around that or you know an opportunity they will start to think about.
Yes, I mean, I think you know the sort of growth the business models pricing value models are still evolving as you can imagine I mean, they can vary anything from you know recover some part of the value that you create by solving the problem, which frankly is the model we will prefer all those a little more challenging due to implement the two you know leasing time and those kind of struck.
Here's an early on.
Warner experiment, we're going to try at least you know I think the thing that's exciting about our quantum effort is to build the first thing is you saw yesterday, we're making very strong progress in terms of technology and we believe we have the world's most.
Most advanced quantum computer the second part and I think that business, maybe even more important we are gaining more and more customers because we.
People are willing to.
To pay for the service as you know so you can sort of make all sorts of claims, but if you can't secure customers and revenue, which were now starting to do I think thats a pretty good customers during that we have something real and differentiated and continued to gain momentum on a commercial sorry.
Okay. Good luck guys. Thank you I'll pass on that thanks.
And we will take our next question is from Steve Tusa with JP Morgan. Please go ahead.
Hey, guys good morning.
Hi, good morning.
I think.
Looking at the sub segment data that Youre aftermarket.
Aerospace commercial aftermarket was up 18% something like that sequentially can you just.
Maybe confirm that and then also just talk about how you know.
You may be a leverage to the flight hours I mean, you seem to be kind of a you know a bouncing off the bottom sooner than.
Some of these other guys kind of leading off the bottom if you will.
Well I guess I think Steve was down and the HCR aftermarket by again mid 50, 55%, which is similar to what I thought I heard from one of the peer groups.
Earlier earlier this week.
And again consistent with record keeping where were down 56%. So so yes nominally its off a little bit as a messenger.
But thats kind of on a year on year basis, but it's pretty consistent with what we thought to that.
Obviously the upside.
The DTA was nice is that would that went from down 50, though although down 28. So we thought the lights sequential improvement on that deviates gate.
Yeah, I mean, I think you know [laughter].
So whether they're coming from business Jets are aircraft I think revenue still matter, but but it was up your total commercial aftermarket was up 18% or something like that to actual credit investors that that's all I've got there.
Well when it comes to the commercial aftermarket the large stuff how does that to flight hours versus you know, perhaps stuff, that's a little more kind of inventory.
And you know kind of durable goods type or related stuff.
Yes, so far we haven't seen any divergences between our MSP growth, which as you know that's the power by the hour that directly side and more of our.
Shop business austerity et cetera, those right now are moving and very similar.
Our trajectory, thus far a year on year growth. So they are not diverged in any meaningful way so far.
Got it so you guys should kind of lead out of this in Bizjets continue to trend and you know you're kind of tracking flight hours in your in your large commercial aftermarket stuff.
Yes.
I mean really.
The growth in flight hours is obviously the type.
Tied very closely to confidence, which which waxes and wanes.
Almost on a month by month basis based on the circumstances on the ground. So on but yes at this moment, so thats, where we expect it to move pretty closely the movement in flight hours of that that's a little bit of why were it's hard to really predict what thats going to go at the moment just to maybe correct, Steve I mean.
We're expecting sort of very very modest improvement in.
Q4, and then continued improvement on a sequential basis, but that those presumed some medical solution.
Starting to get rolled out early in 2021, which frankly I don't think it's completely realistic based on what I've been reading and I think it gives our aerospace business actually a really nice long runway for the next two to three years as things ramp up so.
Given all of the adjusted cost base.
I think this is actually a pretty positive thing and I do want to note one thing about the cost goes.
You know, we've been going through something called Honeywell digital automation and so on this.
This is not just kind of a stupid rip out of cost just to reduce or much of what we've done is we've just accelerate some of our initiatives that we're going to go do anyway. So I think that some of this is sustaining our granted it's going to be offset somewhat by investment, but I, but I think important to note that this is a bit of an acceleration.
The initiatives that we were doing anyway.
Got it and then just one last quick one on HBP.
Watching it but it does tech forum presentations over the last couple of weeks.
It seems like there's a lot of the activity that building managers are trying to.
No kind of figure out how to approach S.G. and obviously Q for Cove it and.
You guys seem to be kind of at the center of that obviously some of the H. bad guys are making a bigger deal out of it and it wouldn't necessarily translate you know today into revenues, how big is kind of the <unk>.
Is the quotation activity. There is the you know can you quantify and away what maybe the front log of discussions are around customers coming to you and you know what the phones lighting up as people are asking you about you know how to kind of manage all this and just kind of curious as to how if activity has picked up there at all.
Yeah, I mean, I think you know think about an open pipeline and a half a billion dollar range.
In terms of some of our healthy buildings offerings, you know bookings in the kind of double digit million range mid double digit you know with the potential to approach tripled to 100 million plus hopefully by the end of the year. So you're not accelerating its something that everybody needs I mean, most at least in the us and.
Some other parts of the world people are not back working in the workplace yet.
But when they do come back they do want to come back to a healthier environment and I think we're kind of hitting the spot there and.
Time to implement those solutions is now not effort people come back. So we're seeing good activity and we're very encouraged by the early progress.
About 500 million did you say.
[noise] pipeline pipeline, Steve well.
Okay great. Thanks. Thanks, Thanks appreciate it.
Hey, guys.
And we will take our next question from Nicole Deblase with Deutsche Bank. Please go ahead.
Yeah. Thanks, good morning, guys.
Good morning, good morning.
So I just wanted to focus first I'll, let up at all on free cash totaled.
Totally understand that you guys have made the commentary about chips you being the high point every year, but I mean, I guess I was surprised that inventory was actually up a little bit.
Yes, so it's an opportunity to improve inventory as you move into four kill it and then just 2021.
Yes, thats exactly the way this plays out and what we discuss you mentioned in July. So we knew that we were going to get pressure from.
The selling costs associated with all the people that we're doing for that with almost $200 million.
Year over year, all will increase and we talked about the capital, which again even in this environment will continue to invest in Capex, particularly involved.
Any and all of that and follow with and then yes, we talked about inventory is really the the thing is that all makes some make some moves on we then we got a long cycle business in aerospace which has.
Overall, a pretty sizeable cost of inventory there we're working through that now we expect the fourth quarter to start seeing that come down.
So that is exactly the playbook that we're running and and as I mentioned in my comments, but we do expect cash flow to get better sequentially.
From the third to the fourth quarter, but we also again welcome thing we talked about even the mall, they're beginning the year, we're going to have all extra payroll cycle and December with the length of the year, which as you recall $150 million.
Roundabout all no pressure. So so yes those are the dynamics, we and then as we get into next year, we continue to working capital and cash is always a big focus for the company and we continue to make improvements in those areas and while digital awful is all is one of the asset sales that will help in that yeah, Nicole just to add.
We'll take them. One is Q3 was at or slightly even above where we expected. So there's no surprise here given the cash on the restructuring and the incremental investment in growth capital. So that's that's a key 0.2nd point is.
As you get into Q4, although we've had some headwinds from this extra pay cycles, we do expect our conversion to be over 100% kind of get back that on track. So you know and we indicated that Q3 could be challenged because we knew we were facing this extra headwinds in terms of cash for I think good reasons I mean, one is invested.
And then making the business more efficient than the second investment was in growth capital. So really not a surprise at all to US we ended our cats, probably a little bit even up we're where we expected and last comment on inventory as we as you can imagine for a long cycle business like aerospace.
As we kind of started tuning down our outlooks early in Q2 that takes a little bit of time to kind of get through the system and we expect to see more benefit in terms of inventory reductions as we head into Q4 and beyond.
Got it thanks, Craig and area, that's really helpful color.
And my second question I, just wanted to ask one more on M&A currently a very hot topic for you guys I guess, what I believe.
Pandemic.
Anything from kind of changes and.
What's going on my end markets any outlooks.
Hi, how do your M&A priorities changed at all with respect to the area of the portfolio, where you'd be interested in making deals and I guess, maybe you on our progress as it does add space become more attractive opportunities that given what's what's going on in that market.
Yeah, I mean, you know obviously on the on your last point I mean, obviously some of the aerospace assets are probably a different value points that we have is a while so from that perspective it is appealing.
We have our priorities dramatically change I would say, it's probably too early to tell because I'm not really ready to declare as to what the post cold where the world will look like and I think we need to see a little bit of what that will look like but you know I mean.
In terms of our levels of interest I mean, they really vary across all our businesses, including HCM and you know we envision a.
Scenario were grown or augment the bolt ons for all five of them.
Of our businesses so.
Once it's changed dramatically obviously, the aerospace segment is a bit more approachable from a valuation perspective.
Thanks Todd.
Yes.
We will take our next question from Andy Kaplowitz with Citigroup. Please go ahead.
Hey, good morning, guys.
Good morning.
Bearish or Greg achieving a 20 to 2022, 23% decremental margin Q4 would be another significant improvement from Q3 is detrimental. So could you talk about where you expect to see the most improvement it seems like it may be narrow coming in from Q3, and then for all of Honeywell, what's that telling you about the carryover of permanent.
Cost reduction that you've talked about before that 67% of the 1.55 billion into 21 and it does it gives you confidence in terms of recording Decrementals that can be above that detrimentals you reported at the bottom of the cycle.
Yeah, I mean, you know in terms of Decrementals I mean, I think we're we're expecting doses across the business because as you can imagine a lot of our cost reduction occurred you know Q2 and during Q3. So you didn't see the full benefit of those actions until the quarter ended and that obviously it rolls through into Q quarter core So you know.
We have a lot of confidence in those decrementals dropping into the low twentys from that 29 that you saw this year that's that's.
I think we acted quickly decisively and made those adjustments are cost plus which is I think is really going to pay off not just 2020, but 2021 and 20 joined as do is we really position the company well for the future while still investing for the future, which I think is important because.
We've added 21.
So I think that the store story is but we're very confident 81 other thing Ayatollah add before I turn it over to Greg here as you know, we're bringing up a lot of capacity in our SBS business. We brought on a lot of capacity in Q3 were bringing more on in Q4 it both.
The expansion of capacity as well as really maximizing the efficiency of their capacity as you can imagine when you first bring capacity on board. It is not an ideal efficiency the first or second mark It takes a little bit of time, but.
But the good news here is that as you get into 2021 and not only will you get substantial expansion Sps capacity, we're also going to be much more efficient property by.
He's not processing backlog that.
We have an already starting to see that even in this month, but we're still in the capacity expansion I'll turn it over to get more color, yes, Andy and the simple way I wish I could aggregate there we're going to get all the way to get that improvement across the board but.
But the simplest way to think about it is we're going to get good leverage and before we were keeping our fixed cost base a fairly.
Fairly close to flat sequentially on the quarter to the fourth quarter, we will start to see some unit cost increase of travel return to some degree and so on and off but with with a sequential improvement of all the revenue that we will see from the third to the fourth quarter, you're going to see I think you know.
Leverage across the portfolio and then as it relates to your question I'll point from what I think our position is still the same that won five to one six cost reduction.
We are delivering on.
We think 60% to 70% of that persist into 2021, which means we're going to see bump in the neighborhood of call. It half a billion dollars of a headwind.
In a year on year to 21.
See the temporary nature of some of those costs and so all very much consistent with what we have laid out in the last two calls are and we're very we're very confident in our execution around.
Those plans it actually.
Very helpful. And then there's obviously it seems like you continue to face some pressure in PMT and specifically your P. you said in your P. something or year over year decline. In Q3 are you seeing any signs of improving yet within your p. and hps and get a good backlog at hps coming into the downturn.
I think you mentioned flattish backlog for this quarter are you seeing any signs of projects going forward again with NHS and what are customers, telling you about the prospects for recovery in 2021.
Yes, a couple of points first one is the I think the part of the upkeep, particularly challenges our gas processing business. Because you know as you know the number of reserve.
Rigs and so on that that's way down year over year in gas processing is down year over year. The other thing to keep in mind is that as the a lot of our customers for much of the oil and gas customers are they announced their capex and opex cuts for the year.
They are not likely to reverse those in 20 Twond I mean, so we really don't expect to see an uptick.
This year.
We expect an uptick next year as some of those budgets get normalized and as you know you know when you can't not invest in your infrastructure for too long, you're actually going to have a course the other way we are demands going to dramatically each right. So we need to do unit incremental improvement and obviously there is an alignment to.
Overall economic conditions here that that's so is the war returns back to a little bit more of the normal. We're also should see that pick up in PBC. The thing that I that I am very encouraged by that we have not seen project cancellations weve seen slide outs and push outs.
But we have not seen cancellations frankly, you know what.
And I was wanting to do business in 15 and 16.
So probably more cancellations back then than we are now so I think that thats very encouraging him and I'm I'm bullish on PMT for 2021 and beyond.
Appreciate it guys.
Thank you.
And we will take our next question from Jeff Sprague with vertical research. Please go ahead.
Thank you good morning, everyone.
Wednesday.
Good morning.
Just two from me or I guess for Greg just to clarify.
The comment about the headwind next year on the turn of costs and I understand that's consistent with what you said, but I think the day for the first time, we are getting the comment quote unquote strong incremental margins.
2021, I just want to clarify over strong incremental margins net of that headwind is that the message.
The message is that we're going to return to margin expansion and I would say that is that is including that incremental headwind I think the way we positioned ourselves from a fixed.
Cost standpoint, John.
As you know, we're we're setting ourselves up for the ability to grow margins and invest back in the business next year and I think Thats you know Gary highlighted earlier, but we're not we're not going to try to have a blow out 21 and leave it all on the table. We've got some very important in our transformation initiatives that we want to make sure we're continuing to invest.
Since then we've got some important investments to make in our breakthrough initiatives.
Quantum form and.
And HCV.
Federal so we.
We do expect to return to overall margin expansion framework.
Even that of that call. It half a billion dollars yeah, just to add to that Jeff just echoing greg's everything that's exactly right. I mean, we will drive margin expansion next year. That's there's no question about that how much is still a little bit of a TBD and if that includes by the way the impact of those headwinds we are accounting for that but but we also have to.
Invest in our future and I think you know, particularly some areas R&D, specifically Errol H.C.E. Honeywell digital those are areas, where you definitely want to invest in and you know we're not through our planning cycle, but you know what we're going to try to do is offer a very compelling return for our investors, while investing for the future and that's always.
The balance we're going to have and we're going to do bolt and we're pretty confident it's going to be very compelling year for our investors also youre running best for the future.
Well that makes sense and.
Maybe somewhat related you mentioned I think Greg.
Going through this difficult environment as a you know a window to accelerate restructuring and some other things that may be where on the shelf that you would have done later.
Given that you know.
Should we expect kind of a more.
More vulnerable or kind of restructuring we are trying to.
From a kind of the you know kind of historical brute force type or restructuring.
With that but what we saw in 2020 here.
Yeah, I Couldnt give you weeks, but can you repeat that because I didn't quite get it back we're kinda mr. Jeff.
Yes.
Just on the you know kind of.
Fluctuating.
The cost base itself kind of the normal kind of flow through yeah. I got you Yeah, I mean, yeah I mean, yeah. Thank you.
Yes, I think you know we're going to return to more normalized levels. When they hit you have disclosed obviously, we pulled some things in that we're probably going to be later.
Rationalize our cost structure, because frankly, we had I mean, you know we were facing notably in Q2, and we did we did do that so I think you know as we look in 2021 and 22.2 I mean, we're going to return to a little bit more of a normalized.
Jeff as you know.
This never was totally exits our playbook I mean in good times and bad we'll always look for opportunities to be much more efficient. So you know yet it's not going to be at the same levels as this year, but we still are executing our artists. The transformation, we're still executing on your digital that's going to Hadley yeah. So.
So we're going to continue to do.
To pay off in terms of.
Productivity inefficiency so so.
Hopefully that helps.
That does thank you.
Thank you we will take our.
So at certain levels.
We will take our next question from John Walsh with Credit Suisse. Please go ahead.
Hi, good morning, everyone.
Hi, good morning.
Hi.
I guess just wanted to follow back to the to the margin question here in <unk>.
Q4, and just make sure I understood the underlying comments, but if we look at where you've spent most of the restructuring dollars. This year, it's been in aerospace and TMT.
And if we look at Q3, that's where you had the largest kinds of deltas from a from a pick up.
Is that still where you would think just see a lot of the improvement in Q4, particularly in those two segments.
Certainly again as I said.
Yes, they've done an absolutely I mean, I think when you look at it those are the ones.
Where we spent the most threefold for obvious reasons that are the most challenge of all of the businesses in the portfolio. So.
Yes, I would expect that that's where you're going to see.
Some healthy all improvements, but but as I mentioned, we're going to see it across the board.
Got you and then maybe just a finer point on I'm thinking about cash next year you size that.
Payroll.
I don't know if you've spoken about capex plans yet in the 21.
But you know should we think of next year as kind of maybe those net and it's just the income growth in working capital blocking and tackling or are there any other things to be aware of in the headwinds and the tailwinds column for next year, particularly thinking about capex.
Yeah. So so we're still obviously in our planning phases for 21.
If you think about Capex. This year, we're probably going to wind up spending a lot about what we thought we were going through in the early part of the year before cavaday, even hit because our reductions in some of the discretionary areas. We back filled with the growth capital that was important for US to go said he had his next year wouldn't surprise me if we spend capital at about the same.
No they are plus or minus a bit but again, that's all subject to us completing our planning.
But I wouldn't I wouldn't expect that as we sit here today to see that as materially different.
You know mover in the context of a.
$5 billion to $6 billion cash flow generation generator that we usually are.
And so for those M&A as I mentioned working capital, we're always going to be you know driving our working capital progress and we would expect to continue to do that into 21, So well update you in 90 days with more specifics around some of the finer points around that as we complete our planning.
And and completely yet.
Great. Thanks for the additional color.
Yes, even let's just take one last caller.
Absolutely Sir we will take our final question from Deane Dray with RBC capital markets. Please go ahead.
Thank you good morning, everyone.
Morning, David.
Right. That's our last slide on the sustainable focus yes, cheap one of the points that occurred to me that 50% of your new product.
Introduction investments.
Yes, just a classification and I was curious whether is that 50% target or is it an outcome and what are the economics.
No no that's not a that's not a target that's where we are today I think that that is not aspiration. All that's currently where we are and I now want to point out that something that is really really important which is you know we talked a little bit about on my script boost the formation of a whole new business unit the sustainability business.
Yeah, we've been PMT, what's really going to help a lot of our customers.
Really make the transition to sort of the new energy future Sunday and I think you know nobody is going to transition this amount a month or a year or two but what we've done and what we're doing is really creating a whole new sustainability infrastructure in PMT and really all our business units.
Create.
Our business structure, which is going to be much more sustainable London over the needs of the plot planets sales since our in general I think it might be even the most needed in PMT were a lot of our customers are really looking at you know what the future of energy it looks like and we want to be part of the solution to create that bridge.
Great and just last question and to the extent you can comment on it was hoping you could put this whole garett situation in context. This is such a small piece of the of your cash flow with a small piece of the capitalization, but it does get some headlines.
I was hoping you might comment.
Sure No I think if you will your comments right in terms of the overall value and so on in terms of Honeywell I mean, this is sort of not not that relevant you know I think you probably saw some of this.
We.
Frankly, there was an offer out there which is compare on for Gary you know we have been.
Confident we're going to secure a majority of that cash flow.
There is a superior offer on the table with the.
All of the partners we have out there.
I believe there's a lot of merit in the litigation that Gary just trying to put forward and.
We have a level of confidence of preserving those future cash flows and a lot of goods will still kind of.
The emotion here for the next few months, but there's a lot of confidence what we're doing there and.
I'm going to recover majority of that.
Two.
Appreciate that thank you.
Thank you good.
I am pleased with the improvements we achieved the third quarter compared to a challenging second quarter, we're growing in areas not as impacted by the current pandemic, we're gaining momentum to build new growth opportunities by providing innovative solutions for customer needs. We will remain focused on can.
Turning to perform for our share owners, our customers and our employees in any environment, we are well positioned for the recovery or balanced portfolio track record of execution and a strong balance sheet.
Thank you for lets move due to be safe and healthy.
Yes.
<unk>.
Thank you. This does conclude today's teleconference. Please disconnect. Your line at the time and have a wonderful day.
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