Q3 2021 Honeywell International Inc Earnings Call
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Note that this presentation contains forward.
Statements that are based on our best view of the world and of our businesses as we see them today.
Those elements can change based on many factors, including changing economic and business conditions.
And we ask that you interpret them in that light.
We identified the principal risks and uncertainties that may affect our perform.
We're looking in our annual report on Form 10-Q.
And other SEC filings.
This morning, we will review our financial results for the third quarter of 2021.
Sure our guidance for the fourth quarter and full year 2021.
I'm sure some preliminary thoughts on 2022 facts.
As always we'll leave time for your questions is yes.
I'll turn the call over to chairman and CEO Jerry Norcia.
Thank you Regina and good morning, everyone, let's begin on slide two.
Our outstanding discipline and execution enabled us to deliver third quarter results that met or exceeded our financial guidance.
Increasingly challenging environment.
We achieved a high end of our third quarter adjusted earnings per share guidance range and.
He did the high end of our segment margin guidance by 60 basis points, despite significant headwinds from inflation and supply chain constraints, which tampered down.
Our topline growth potential.
<unk> organic sales were up 8% year over year, driven by double digit organic growth in safety and productivity solutions, the commercial aerospace aftermarket in advanced materials and <unk>.
Segment margin expanded 130 basis.
<unk> point to 21, 2% driven by strong actions that we took across the portfolio to address the headwinds, we'll face inflationary pressures and supply chain disruptions specifically.
Specifically.
<unk> to operate our strong productivity playbook, we took swift pricing actions that allowed us to stay ahead of inflation.
We drove a 4% increase year over year and on the top line yielded approximately 40 basis points of margin expansion net of inflation.
Adjusted earnings per share was $2 <unk> up 29% year over year, achieving the high.
Placement guidance range, we delivered a strong third quarter. Despite a volatile backdrop that include a hurricane or PMT factory corridor power blackouts in China, and the persistent and ongoing impacts of the supply chain more broad.
I am pleased for our disciplined execution, which enabled us to navigate.
And over the challenges in the macroeconomic environment and capitalize on the ongoing recovery in our end markets.
I continue to be encouraged by the strength, we're seeing in many areas of our portfolio.
Orders across Honeywell were up high single digits year over year organic excluding the impacts of Covid related.
Advocate that business, which has seen significant demand decline since the pandemic has been subsiding.
Orders across Honeywell were up double digits year over year.
Backlog was up 7% to $27 5 billion.
And up 9%, excluding the impact of Covid.
<unk> orders driven by strength in many of our segments and positioning us to deliver our next phase of the recovery as we head into 2022.
As always we continue to execute on our rigorous and proven value creation framework to drive outstanding shareholder value now, let's turn to slide three.
With math discuss some of our exciting recent announcements.
Last month, the United Airlines, and Honeywell announced the joint multimillion dollar investment Alder fuels.
During the biggest sustainable fuel agreement in aviation history.
Other fuels a clean tech company that is pioneering first of its kind technology.
Greetings from producing sustainable aviation fuel or SaaS at scale.
When used together across the lifecycle.
Other technologies, coupled with honeywell's eco finding process the ability to produce a carbon negative alternative to today's jet fuels.
As part of the agreement.
Knowledge is United is coming to purchase one 5 billion gallons of SaaS with produced United's requirements, which is one five times the size of the known purchase commitments.
All global Airlines combined.
This easily the largest publicly announced SaaS agreement in aviation history and demonstrating.
Our Honeywell technologies continue to bring to the oncoming global energy transition.
We also recently announced the acquisition of performance a provider of manufacturing execution system or Mes software for our pharmaceutical manufacturing and biotech industries.
During the acquisition builds on our strategy to create the world's leading integrated software platform for customers.
The life Sciences industry.
Are striving to achieve faster compliance improved reliability and better production throughput at the highest levels of quality.
That performance.
This software joined Honeywell is large and growing portfolio of automation solutions for the life Sciences industry, including Sparta systems quality management software and Honeywell experienced process knowledge system.
The combined offerings will address life sciences customer needs across.
Such a product lifecycle.
From automation project execution.
<unk> production to sustainable quality.
Lastly, we unveiled an all new aircraft cockpit system earlier this month called Honeywell anthem. The first in the industry build with an always on cloud connected experience.
Cros that improved slight efficiency operations safety and comfort.
Honeywell anthem offers unprecedented levels of connectivity and exciting an intuitive interface model after everyday smart devices, and a highly scalable and customizable design.
This next generation.
Experienced slight deck is powered by our flexible software platform that can be customized for virtually every type of aircrafts and flying vehicle <unk>.
Including the large passenger and cargo planes business Jets helicopters general.
Aviation aircrafts in the rapidly emerging platform.
Vance.
<unk> ability to vehicles in fact.
Unwell anthem has already been selected by vertical aerospace and lithium for the vertical takeoff and landing all electric aircraft.
If these announcements highlight we're continuously innovating and enhancing our portfolio of exciting new technologies.
Herbal aligned to our long term strategic objectives now, let me turn it over to Greg on slide four to discuss our third quarter results in more detail.
Thank you and good morning, everyone as Darius highlighted we executed with a typical level of rigor that you've come to expect from Honeywell and deliver on our commitments despite a challenging.
Allergist backdrop, our third quarter was strong with sales up 8% organically to $8 5 billion.
With margins, expanding 130 basis points to 21, 2%, resulting in 36% incremental margins and free cash flow of more than $900 million up 20% year on year.
Our third quarter performance.
<unk> demonstrates our ability to deliver for our shareholders in all environments now, let's take a minute to discuss how each of the segments contributed to that.
Starting with aerospace third quarter sales were up 2% organically as the ongoing recovery in flight hours drove another quarter of strong double digit commercial aerospace aftermarket growth.
As expected.
<unk> Air Transport aftermarket sales continued to gain momentum growing more than 10% sequentially from the second quarter and growing 40% year over year.
Commercial original equipment returned to growth in the quarter driven by strong demand for business Jets and the.
The growth in commercial aerospace was partially offset by defense and space, which was down 17.
10% in the quarter, primarily due to supply chain constraints, which limited our deliveries exclude.
Excluding those impacts defence and space would have been down mid single digits in the quarter, an improvement versus the first half run rate.
Aerospace segment margin expanded 390 basis points to 27, 1% driven by growth in our high margin aftermarket business.
Strong productivity from our lower cost base and pricing.
Building technologies sales were up 3% organically driven by broad based demand across the building products portfolio as well as continued growth in building solutions services.
Orders were up double digits year over year for the fourth straight quarter, driven by demand for fire products building management.
And some projects.
Backlog for building solution services was up over 35% year over year positioning the business for growth into 2022.
In addition, our healthy buildings portfolio maintained strong customer momentum with approximately $100 million of orders in the quarter, bringing year to date orders to $250 million.
<unk> segment margins expanded 190 basis points to 23, 5% driven by pricing and productivity, partially offset by inflation.
In PMT sales were up 9% organically led by 29% growth in <unk> and 14% growth in advanced materials.
<unk> sales growth.
Aided by higher petrochemical catalyst shipments and their backlog grew double digits year over year, which should drive growth well into 2022.
Process solutions sales were down 2% organically as the recovery in projects as lag, partially offset by high single digit growth in thermal solutions and lifecycle solutions and services.
Was from Hps orders were up 20% year over year, driven by broad based demand across the portfolio, providing confidence in our longer term outlook for the business.
<unk> segment margins expanded 260 basis points to 22, 2% in the quarter driven by pricing strong operating leverage and a healthy mix of ERP.
In safety and productivity solutions, despite battling supply chain and inflation challenges sales were up 21% organically driven by another quarter of double digit warehouse and workflow solutions growth productivity solutions and services growth and gas analysis.
Orders in these three businesses were also up double digits year over year.
Holding in a robust sps backlog up more than $4 billion.
Personal protective equipment sales declined year over year as mass demand declined meaningfully this was partially offset by growth in the hearing gloves in fall protection categories.
SPS segment margins contracted 70 basis points to 13 two.
We've.
Driven by unfavorable business mix, which combined with targeted investments and supply chain challenges and celebrated drove inefficiencies in manufacturing installation as the business has been scaling to outsized growth, which was 60% organically this quarter.
Finally growth across our portfolio was underpinned by continued progress.
$2 Honeywell connected enterprise, our connected building and cyber solutions delivered another quarter of double digit organic growth and third quarter recurring revenue growth was once again up <unk>.
Digits year over year.
So overall, we delivered strong organic sales growth drove a 130 basis points of improvement in segment margins.
Yes, and 60 basis points above the high end of our guidance despite the challenging environment.
For the quarter, we delivered GAAP earnings per share of $1 80.
And adjusted earnings per share of $2, <unk> up 29% year over year, achieving the high end of our guidance.
Bridge from three Q 'twenty adjusted EPS.
The <unk> 21, adjusted EPS can be found in the appendix of this presentation, which includes referenced to a $160 million noncash charge related to ongoing <unk> matters that are described in our Form 10-Q.
The majority of our year over year adjusted earnings growth 26 was driven by our strong segment.
That's an improvement.
Below the line items were 13 tailwind driven by lower repositioning and higher pension income.
A lower effective tax rate of 22, 9% and lower weighted average share count of 699 million shares drove a <unk> <unk> benefit respectively.
We generated nine.
$1 billion of free cash flow in the quarter, an increase as increased earnings.
Excuse me.
Hi.
As increased earnings.
Crease in working capital due to growth of the business and related supply chain challenges attempt that.
Down a bit finally, we strategically deployed $1 five going primarily to share repurchases dividends and capex in the third quarter, which significantly exceeded operating cash flow.
We paid $646 million in dividends deploy $208 million to capital expenditures and reduced $650 million of Honeywell shares.
Sure, reducing our weighted average share count to $699 million.
Total capital deployment was up 44% year over year.
And all of this was another strong quarter under difficult circumstances, we continue to manage through the multi speed recovery across our portfolio, making disciplined investments for the future and meeting or exceeding our commitments.
While proactively addressing macroeconomic challenges.
With that let's turn to slide five to discuss the impact of the supply chain constraints, we are facing and how Honeywell is adapting to address those challenges.
As we saw last quarter. The world continues to face persistent supply chain challenges as the sourcing environments will direct.
Fitments and electrical components continues to be tight logistics capacity remains strained and labor availability becomes more challenging all driving constraints and operating and inflationary pressures on our cost base.
Semiconductors remain an acute problem due to a structural disconnect between supply and demand driven by cancer canceled industrial and automated.
<unk>.
Automotive orders during COVID-19, as well as unplanned growth of <unk> personal computing and consumer electronics. We've also started feeling pressure in aerospace as the supply chain broadly ramps up more slowly than needed leading to parts challenges due to deteriorating supplier deliveries.
While we have been mitigating the overall.
Automated by proactively partnering with distributors and alternative suppliers. The challenge has accelerated in the last quarter constraining growth in some of our businesses.
The most affected businesses in our portfolio, our Sps aerospace in HPT.
We provide guidance ranges for our quarterly and annual outlook in order to incorporate an adequate level of risk.
For things just such as this as we see these dynamics in the last few quarters.
We are managing this situation aggressively on a daily basis Senate deploy the full strength of our reengineering efforts to qualify alternative parts, which has mitigated some risk on our productivity solutions and services advanced sensing and fire business we.
We created <unk>.
Tiger teams using advanced digital tools to track shortages and deploy a number of actions to liberate supply in the market.
We also continue to mitigate inflation in materials freight and labor in our operations through targeted regular pricing actions.
Longer term, we are developing dual sourced platform strategies and executing long term supply agreement.
With some of our key suppliers.
This coupled with strengthening direct engagement with the semiconductor Oems and foundries will improve our ability to secure increased volumes in the future.
We do expect this environment to persist into the fourth quarter and the first half of 'twenty. Two we'll continue to adapt as we manage through this period with that.
Let's turn to slide six to talk about our expectations for the fourth quarter.
As we enter the fourth quarter and given the ongoing challenges I mentioned, we expect sales to be in the range of eight 5% to $8 9 billion.
<unk>, 4% to flat on an organic basis, which includes the impact of the COVID-19.
<unk> driven net sales decline.
<unk> this impact organic sales would be down two to up to organically.
We would also normally see a seasonal step up from the third to the fourth quarter, which this year will be somewhat dampened by the unique calendar impact of having more days in the third quarter than we do in <unk>.
In aerospace.
Aerospace, we expect our commercial business to continue to improve as business aviation and air Transport flight hours continue to accelerate driving continued sequential and year over year growth in the commercial aftermarket sales.
<unk> of the air Transport acceleration will continue to vary regionally with domestic travel recovering faster than international.
National commercial original equipment build rates will also continue to progress gradually.
Defense and space sales will be down due to lower demand from U S. Dod programs, driven by moderating U S defense spend and soft international defense volumes.
We will continue to manage through the constraints as the aerospace supply.
Base ramps up but we are expecting to miss out on potentially hundreds of millions of dollars worth of shipments due to these continued challenges in Q4.
We now expect organic sales growth to be down mid single digits for the year in aerospace.
In building technologies, we expect continued strong demand across the portfolio as the world continues to reopen and.
Iot solutions take hold driving sales and orders growth in the fourth quarter.
We will face ongoing pressures from the supply chain constraints, but continue to work our mitigation actions as we anticipate mid single digit sales growth for the year.
In PMT, we see continued strength in the short cycle Hps businesses. So this will be <unk>.
Sustained at a slower recovery and projects are strong orders growth in the third quarter will support our growth acceleration into 'twenty two.
We're pleased with our robust <unk> performance and expect continued growth into the fourth quarter and into 'twenty two supported by the strong backlog, which is up double digits year over year.
Tempered glass, we expect continued healthy demand for products across the advanced materials portfolio.
We expect PMT organic sales to be up low single digits for the year.
In safety and productivity solutions, we expect another quarter of robust growth in our warehouse and workflow solutions and productivity solutions and services businesses.
And our productivity solutions.
Was the business, we just had an outstanding year.
Backlog remains up triple digits year over year, which combined with our <unk> backlog that is over $2 4 billion gives us confidence in these businesses for the remainder of 'twenty, one and into 'twenty two.
<unk> has accelerated as expected as the world recovers from the pen.
And serving though we will partially offset this softness with strengths in other areas of PPE portfolio.
Finally, we expect to see strengthen our short cycled gas analysis and advanced sensor businesses driven by double digit orders growth in the third quarter.
We will continue to manage through this challenging supply environment, which will impact our growth potential, but we will record.
<unk> double digit growth for the year.
Now, let me turn to our expectation for our other core guided metrics.
Our fourth quarter segment margins, we expect to be in the range of 21, 2% to 21, 7% up 10% to 60 basis points year over year.
We expect margins to continue to benefit from pricing actions ahead.
Strong <unk> <unk>.
<unk> leverage and ongoing productivity from our streamlined streamlined cost base. Despite the headwinds from unfavorable business mix in a calibrated and efficiency challenges due to the supply chain environment.
Fourth quarter net below the line impact, which is the difference between segment profit and income tax income before tax is expected.
Head of into the range of negative $10 million to negative $95 million.
With a range of repositioning between approximately $140 million and $215 million as we continue to fund ongoing restructuring market.
We expect the effective tax rate to be approximately 20% and average share count to be approximately 698.
Sure.
As a result, we expect fourth quarter.
Adjusted earnings per share between $2, <unk> and $2 13.
Down 2% to up 3% year over year.
Given these fourth quarter expectations full year organic sales growth will be in the range of 4% to 5%.
Good to be in the range, we provided last quarter to $34 two to $34 $6 billion.
We are once again, raising the low end of our segment margin guidance by 10 basis points for the year to a new range of 29 to 21, 1% representing expansion of 50 to 70 basis points for the year.
We expect.
Margin expansion in Aero HPT and PMT as we carefully invest back into the business, while managing the multi speed recovery across the portfolio.
Our fixed cost management remains a focus and we are tracking favorably to the permanent reduction of $1 billion of fixed costs from our 2020 cost actions.
We expect our net below the.
Narrowing impact to be in the range of $40 million to $125 million.
Including capacity for $400 million to $475 million of repositioning.
Our full year effective tax rate will be approximately 22% and weighted average share count will be approximately $701 million for the year over delivering on our minimum one.
The line reduction in shares.
This will take adjusted earnings per share to a range of $8 to $8 10.
Up 13% to 14% year over year.
This maintained the high end of our previous guidance and raised the low end by <unk> <unk>.
Despite these challenges we are maintaining the same.
Per cycle outlook for the year in the range of five 3% to $5 6 billion.
Now, let's turn to page seven and review our guidance progression throughout the year.
Since we provided our initial 2021 guidance in January we have navigated through several uncertainties the ongoing global pandemic supply chain.
Challenges unprecedented raw material inflation and labor market challenges at each turn our rigorous operating principles have enabled us to continue to demonstrate our resilience.
And our latest update we have adjusted our sales outlook purely due to the constraints, we are battling in supply chain, which dampened <unk> and our fourth quarter sales potential.
Cash we continue to have a robust backlog of demand.
Despite these changes to topline expectations, we have not only maintained the high end of our segment margin and adjusted EPS guidance, but we have further increased the low end of both ranges and maintained our previous free cash flow guidance.
These are excellent proof points of our ability to execute in all economic cycles.
Total.
I am encouraged by the strength, we're seeing in key areas of the portfolio as we head into 'twenty, two, particularly driven by strong orders growth and backlog position as well as aggressive supply chain tax et cetera, mitigating risks, enabling us to deliver on our long term commitments.
Now, let's move to slide eight where we can talk about some of the preliminary thoughts we have in 2014.
Total.
With the commercial aerospace recovery in view upcoming capital reinvestment in the energy sector nonresidential construction spending returning to 2019 levels and the exponential growth. We continue to see in E. Commerce, we have a strong setup for 2022.
We expect organic growth in all four segments.
By strong portfolio wide demand and backlog underpinned by year to date orders growth of 17% in HPT, 14% and Aero, 10% of PMT and 6% in Sps or 8% and Sps if we exclude the COVID-19 mass business.
This coupled with the strategies, we have in place that are focused on driving.
<unk> innovative differentiated technologies to address the world's increasing demand for digital transformation process technology and sustainable solutions gives me confidence in our future.
However, we do expect growth in the first half of 'twenty two to be constrained due to continued challenges from labor force uncertainty supply availability and logistics.
<unk>.
Inflation will continue to be a factor under these circumstances, there where our pricing rigor as reflected in our margin rates will help us we do expect changes to corporate tax legislation. So the exact impact of that is as of yet unknown with these dynamics in mind, let's look at our key markets and.
In aerospace, we expect strong growth in our.
Channel Aerospace business ongoing improvement in global flight hours will drive growth in our commercial aerospace aftermarket.
We also expect original equipment build rates, which have lagged the flight hour recovery to ramp up in 'twenty, two and defence and space, We expect flat to low single digit growth year over year as U S and international defense budget spending stabilizes.
And our supply challenges.
In <unk>, we expect nonresidential construction growth and an ongoing return to public spaces to drive demand for building products services and projects. We also expect continued demand for our portfolio of healthy building solutions as well as tailwind from U S infrastructure plan.
We expect a large backlog to draw for.
Commercial at the end of 2021.
And PMT were assuming improved macroeconomic conditions and higher stable oil prices oil prices will improve growth in Europe.
And also help recover automation projects in HPE Fs, we expect continued strength in advanced materials, driven by demand in the auto construction and healthcare.
As well.
For safety and productivity solutions, we expect strong demand in our productivity solutions and services gas analysis and advanced sensor business we.
We also.
Execute on our robust backlog of major projects in our warehouse and workflow solutions businesses.
However, we will face constraints to growth.
Growth and supply chain challenges continue in the first half of 'twenty two.
Mass demand will remain at a lower second half exit rates as the world recovers from dependent.
For overall Honeywell, we expect margin expansion to be driven by aftermarket recovery in aerospace accelerating catalyst shipments in Europe.
And improving mix in.
Yes.
Our strong productivity and pricing actions, which should carry through to next year and provide potential upside will enable key investments to support medium term topline growth, including a step up in R&D and our digital initiatives. We look forward to completing the combination of Honeywell quantum solutions with Cambridge quantum computing.
<unk>, which is a very big strategic step forward for us, but will be a minor drag on our margins.
We have significant balance sheet capacity for M&A and share repurchases and we expect to reduce our share count by a minimum of 1% again in 2022.
Overall, we have some insight into our end markets and a lot of confidence in our continued operational.
Houston, which will give us the ability to deliver another strong financial performance and continued to execute our strategy to be the premier software industrial will provide more specific inputs. Once we close out the year, so with that I'd like to turn the call back over to Derek.
Thank you Greg before we wrap up I'd like to.
Take a minute on slide nine to discuss an important topics unrivaled culture of inclusion and diversity.
Our commitment to inclusion and diversity enables better decision, making helps build competitive advantages.
Further long term success.
<unk> and diversity is one of our foundation.
<unk> principles and Honeywell expects all employees to exemplify these principles.
We continue to build out our initiatives to promote racial equality and inclusion and diversity, including employing mandatory unconscious bias training for our global workforce established.
Being a global R&D steering committee co sponsored by me and fortifying Honeywell's IMD governance structure by embedding IMD consoles into each business group.
We also established 2021 goals for each of my direct reports that include an annual objective of driving.
Diversity when his or her organization.
Yeah.
These initiatives have yielded results women and people of color represent a higher percentage of the workforce at Honeywell compared to our peers. In addition, the presentation of women.
Colored Honeywell is increased.
Each year since 2018, which is a testament to our ongoing commitment to hiring developing and retaining diverse talent.
Now, let's wrap up on slide 10.
We delivered on our third quarter commitments, despite a challenging backdrop as always we remain laser.
We're focused on executing our strategic objectives and investing in growth opportunities that position our business well for the next phase of recovery.
We're executing on our proven value creation framework. The rigor you can expect from Honeywell.
We'll continue to consistently drive shareholder value.
Reena.
Now, let's move to Q&A.
Thank you Darius.
Gary Greg and Torsten are now available to answer your question.
Yes. Thank you please be mindful of others in the queue by only ask one question.
Please open the lines for Q&A.
Thank you arena the floor is now open for questions.
If you have a question please click on the racing icon at the bottom of your sunscreen Wonder.
One year call to ask a question. Please make sure you're on mute your microphone.
We will now take our first question from Steve Tusa from Jpmorgan.
Steve over to you.
Okay.
Hey, Good morning can you hear me okay.
Yes.
Great just on the organic growth guidance for for next year would you expect first half to be to actually grow or are you looking at it being kind of more like the fourth quarter.
And then I mean, you talked about all four segments growing I guess.
It does that mean like.
Decelerate from this year because of the first half like maybe just give us a bit of guideposts on kind of what the messaging is on on first half versus all of next year on this front.
So the short answer to your question, Steve Just said, yeah, we do expect.
First off the growth you know I think how much it's gonna be a little bit dependent upon some of the supply chain challenges that we pointed out that we're seeing in Q4, you know frankly, we see it this way which is in semiconductors, we actually see some positive tailwind as we head into the first half next year. So that's good I don't think theres going to be completely alleviated.
But it's going to get that.
When it comes to some of the other components, particularly for aerospace and some of the tier two tier three suppliers, particularly castings forgings things of that nature.
Not sure we are in that improvement cycle does it really just kind of popped up in Q3 and a more space. So we're a little more cautious there, but the short answer.
We do expect growth in the first half of 2022, you know what I will say is that we have.
We'll have some headwinds in Sps due to sort of what I call. It COVID-19 related masks, but I think those are going to be particularly acute in Q1.
Next year there.
As evidenced here in Q4 of 'twenty, one and to a lesser extent Q2 of 2022, and then kind of going to we're going to get back to the normal run rate. So.
You can see I mean.
But the year 'twenty two setting it up terrific I mean, we're up double digit.
Orders growth in each of our SPG is one.
Exception Sps is sort of call it mid single digits, but if you exclude the impact of the Covid mass, we would be up double digit as well. So you only constraint that we ceased to some extent the supply chain.
At least in semiconductors, we think that Q4 is the peak of those channels because that's the way we see it.
Now I will say this lastly, which is so dynamic environment.
Of course, some puts and takes here in Q3 that were probably board takes them.
It's been positive so we're going to monitor this closely as Q4 and Thats why we have such a wide guidance range for the fourth quarter and a $400 million of revenue.
So that range is wider than we're typically doing and it's exactly for those things.
So just terrific mean reaccelerate acceleration from 'twenty one that's why that's just my follow up thanks.
Thanks.
Well I think it's skewed I all I can say is we expect growth in the first half and when do.
Together with you in January February to give you our outlook, we will have a better view, but we certainly expect growth.
<unk>.
The backlog supports that.
And our story Hasnt changed from really the end of Q2 earnings report I think the setup for Honeywell for 'twenty two 'twenty three is terrific theres nothing.
We get there that makes you want to change my mind, yes, we're going to have to deal with some supply chain challenges here, they're real they're probably understated in the market.
Think that frankly, it's only recently that they didn't realize how severe they are but we'd incorporate that in our guide for Q4.
Here, you know and I think we're working diligently to try to resolve them and we've been at this for 12 weeks now and it's not just one way it's not just pushing suppliers harder. It's also doing redesign alternative products.
<unk> different ways to generate revenue. So I think we've got a pretty pretty good playbook.
Understates, the challenges are real and fairly substantial.
Yes.
Yeah.
Our next question comes from Julian Mitchell from Barclays Julian over to you.
Thanks, very much yes, good morning, so maybe.
But I would question would focus on the revenue outlook in the aerospace.
I think the guidance for this year has come down three quarters in a row now in that division.
So just wanted to try and understand your level of confidence in when the defense and space piece will return to growth again.
Maybe mind it sort of early next year or towards the end of the year.
And also any updated thoughts on commercial Aero aftermarket and how you think your own revenues will lag will move in line with the recovery in traffic because of spare parts and so forth.
Okay. So do you.
Only.
These points are defense and space as you. So we've kind of had a frankly a bit of a disappointing double digit there.
<unk> for Q3, but remember that had we not sort of had some of these supply chain challenge, which really became very evident in Q3, because think about these as Q3 Q4 suppliers which are.
A couple of our which reduced capacity during the pandemic.
Now, we're getting a lot of demand not just from us, but probably some of the other aerospace players it's going to take some time to work through that but we would have been down mid single digits in Q3 had that not happened.
We have unfortunately more past due than we want defense and space.
Small went up substantially in Q3, and we got to work our way through that what I will tell you about defence and space.
If you look at our.
Bookings are where we are at this cycle.
Early Q4 versus where we were at the same period of last year that gives us some.
Well quite a bit of confidence that we're looking at flat to low single digits of that could get even better I don't know that they're going to get a lot worse.
We are seeing here is if you recall if you go back to 2020, we had very strong orders and revenue in 2020 and defense space and you see the effects of some level of usage.
Destocking by some of those defense and space customers and distributors. So we're optimistic about normalization that in 'twenty, two and based on what we see today and this is important to say today and that's the change we see flattish to low single digit growth.
Let's now switch.
Usage and talk about commercial aftermarket.
We see that continuing to improve it you saw that strong growth in in.
In Q3, we think it's going to continue to get better we're still nowhere near the 2019 levels, but it continues to get better as you know November eight we're going to open up the border.
Orders and more international traffic is going to step up so it's more international comes back as Covid Abates, which we think were going to happen here in Q4 and Q1 next year, we see continued growth in our.
Aftermarket coupled coupled with stronger growth in OE Oakland.
Air transport as well as PGA. So the setup for aerospace we think for 'twenty. Two is quite good Greg I don't know if you've been now I think you got it.
Great. Thank you. Thank you.
Our next question comes from Scott Davis from Melius Research Scott over to you.
Hey, good morning, guys.
Right.
So hopefully you can hear me okay.
Terry could you can you quantify where you think supply chain cost you in revenues in the quarter do you have a claim to that end.
Yeah, and if you have a sense of that there is you have a sense of of.
Can you delineate between like a lost sale and a delayed sale.
It has kind of gone forever versus just pushed them to.
Or whatever.
Yeah, I know that I can think about the impact in.
In Q3 of about 300 million plus or minus and.
And think about.
Embedded in our Q4 outlook of an impact at three to 500.
Now in terms of lost forever versus push it's not last forever. I mean, you know as I talked about some of our Fortunately silver pass throughs going up and that went up.
Two to 300 million just in Q3, so it's not loss, we've got to be able to get our supply chain to function more to more effectively and efficiently and that's exactly.
Exactly what torsten and his team are working on.
But it's we don't envision that is lost no customers still need those products and frankly I think when this earning cycle ends I don't think we're going to be that unique in terms of some of the bottlenecks that we're seeing.
Okay. Thank you.
Okay. Thank you.
Our next question comes from Nicole the blades.
Which bank Nicole over to you.
Okay. Good morning.
No.
Maybe you could talk a little bit about how you're thinking about driving <unk> margin expansion. Despite at the mid point of <unk>.
Good luck guys.
The reason I ask is just how how are you driving cross cutting in an environment, where I know things are tough, but youre also up against a very strong backlog with the potential for growth to really bounce back in 2022, so kind of how do you balance that against cutting costs for for the short term issues that you're facing.
<unk>, yes.
First of all Nicole I don't.
Cost cutting is now what we're doing we're actually investing this year, particularly in businesses like <unk>, which are growing at a clip probably no other business has seen before.
And you put the biggest levers here and I think one of the best operational stories.
Paying for Honeywell that you see here in Q3, as our pricing discipline I mean, we think we gain in terms of <unk>.
Price cost 40 to 50 basis points of margin expansion and Thats, what youre seeing come through in our margins.
I think that was a terrific commercial execution by the team and.
They did.
These jobs. So this is not so much a function of.
Sort of cost cutting this is more of a function of commercial execution.
Yes.
I would agree I mean, if you think about it.
Nicole last year, obviously, we were in a in a substantial cost cutting mode and are repositioning pipeline and the projects around that reflect.
Great.
This year, we always say that we continue the productivity playbook fixed cost power one create operating leverage by growing sales of holdings fixed.
Fixed cost flat as just the mantra of the way we work and so there at this point, we're not we're not doing massive cost cutting we are being smart about where.
We're putting it back.
We are using the things that we spoke about.
Last year in terms of automation in our digital capabilities to help us deliver I mean I'll be honest this.
The supply chain work that we're doing that thorsten and the team are doing are very much enabled by our Honeywell digital tools.
Tools and capabilities and some of the.
Though in my visibility that he's put into his own capabilities and supply chain to manage so this isn't about cutting cost its about managing them properly and we are investing back in the business as Darius mentioned.
But we're going to be doing it diligently.
So I feel pretty good about the margin rate expansion.
You would see the implied margin rate expansion is a little bit lower than what our guide was previously simply because the sales numbers are down so we'll have a little bit less operating leverage.
From an opportunity standpoint, but still very healthy margin expansion in Q4, yes, and just to add to that and this is an important point you know Honeywell digital kind of his two.
Number one is it helps us to operate the business better and Torsten and his team have done a great job instrumented exactly how do we <unk>. Some of these bottlenecks that we're seeing I mean, it's not perfection, it's not that we're going to completely avoid them, but I think we're doing a nice job and second of all which is continue to drive productivity.
As Greg pointed out through automation automation is a big lever for us and one that frankly were using aggressively both in sort of our.
Manufacturing facilities, but also in the offices and.
It's been it's been enabling us to drive productivity.
Thanks for the clarification guys Super helpful.
Thank you.
Our next question comes from Jeff Sprague from vertical research Jess over to you. Thank.
Thank you good morning, everyone.
Hey, good morning, sort of a related question Darius and Greg one of the other seems out of earnings season. So far is.
Kind of a double edged sword element.
Clog in other words things not priced in the backlog for the current inflationary market given that you've run with relatively large backlog. So just wondering if you could.
Address the profitability in your backlog do you have inflation protection.
And any particular headwinds we should think about is that is that backlog.
Battenberg.
That's a very good question Jeff.
Sorry about that one.
And Youre right.
Aged backlog, you've got to be very very careful because if you don't go back and revisit your backlog and reprice it.
And youre going to have a problem and I can tell you that's a very active.
Log costs were doing because as.
As you can imagine I mean, what would be just to put some figures.
Steel is up 198% year over year, nickel, 25% copper, 4% to 6% aluminum 66%.
These are fairly substantial increases so what we've been doing.
Extra some more or less all of our businesses and particularly long cycle ones.
Trying to go back and re price some of our backlog can you kind of almost have to do that because.
And that's even mentioned labor inflation, which will also see so it's part of our playbook part of our exercise an exact group and trying to cure.
<unk>.
Okay. Thank you very much. Our next question comes from Josh Aqua Winski from Morgan Stanley, Josh Good morning, and over to you.
Hey, good morning, everybody.
So I guess, one question for Darius and Torsten since our since he's on the line as well.
Is that 500 million.
Supply chain that you guys talked about the 2019 analyst day looking I mean, you're probably looking at the composition of that a little differently today, just given how much has changed and then just a smaller follow up.
How do we think about the cadence of ERP catalyst shipments from here those look pretty solid in the quarter. Yeah. Let me start that Youll keep question I'll turn it over.
The other piece.
Bookings remain very very strong you saw that both in revenue and booking rates here in Q3, So we're optimistic and keep in mind, you know, which really gets US excited also and I've talked about this before.
HTS follows <unk> by a 12 to 18 month cycle.
Torso.
<unk> leads H P. S followings, and so that sort of gives you. Another good indicator that we should see a nice impact on an H P is 12 to 18 months from now we've done this analysis before and Thats. The typical lead cycles. So not only is good news.
And let's face, let's face it I mean, we all read the same articles the world needs more energy.
Some of it is going to come from renewables, but frankly some of them, it's going to have to come from of hydrocarbons as well. So we think that overall the world right now is energy short.
There is going to get reinvestment cycle.
I've been renewables some extra petrocaribe, so I'll turn it over to force Yeah, I mean, the $500 million.
Split primarily between our short type of business, especially in Sps in HPT and the long cycle business and an aerospace. So that's what we are seeing first saw.
Dramatic impact on the short cycle business, but now in Q3.
Well you saw that suffice for them to start kicking in also the long second the aerospace business, but the majority of sites.
Primarily in the semiconductor related business.
Okay. Thanks, a lot guys.
Thank you. Thank you very much. Our next question comes from Deane Dray from RBC capital.
Hey, Deane good morning.
Yeah.
We'll come back with these.
Our next question comes from Andrew <unk> from Bank of America.
Andrew.
Mark Yes can you hear me okay.
Good morning. Good morning, just a question a follow up question a on China. When do you guys, yes, you're trying to re accelerating and another question is if I look at H B S and Europe, China has been a huge market huge source of growth.
And what we've been reading as you know because of these energy constraints in China, China is reassessing, some sort of a more commoditize the energy intensive industries like textiles, but more importantly chemicals.
We've read about some chemical large chemical projects being cancelled or what does it mean for sort of H B S in European.
In China going forward. Thank you.
Yeah, well first of all we actually just to give you a data point from from Q3 are our growth in China continues to be robust we were up high single digits in Q3, and we actually don't see that abating. So our position in China continues to be very good.
Our.
Where's Rick as you need to be.
As you know there is probably a focus in China right now to actually generate more energy, particularly to support.
The industry right now that's happening in Q4, so we actually think that's going to create a very favorable investment environment and business opportunities.
Our orders in the other business opportunity for Us, which we're very excited about is our focus in China on sustainability.
And when we think about some of the <unk> solutions and our sustainability technology solutions business, that's going to create a giant opportunity first in China and frankly, one we're very excited about.
We think that theres going to be kind of a.
Twofold opportunity here, I think theres going be a reinvestment cycle, what I call a little bit more of the traditional energy, but it really isn't.
And accelerated and more pronounced investment cycle in renewables and as you know we have a really strong position in China, and we think we'll get bureaus.
Major player in that sustainability plan.
Our next question comes from Andy Kaplowitz from Citigroup Andy.
Good morning, guys.
Gary it's many of the multi industry peers, but you have been relatively acquisitive over the last six months, we know Honeywell vernacular.
Also but the level of activity is getting maybe a little lower in given the size of your company. So is this just a function is still a valuation being pretty high and I know that guys who spoke about this before is spoken last quarter I think just about being more aggressive with the balance sheet. So what does that mean do you see a step up for Honeywell in M&A related activity over.
Next year, Yeah, I mean I think.
M&A is sort of is that still the desired way to deploy capital.
We have done as part of this year, although it didn't require cash we think the CQC Honeywell quantum solutions is a very important and meaningful transaction yeah. Its a merger.
Merger or not.
<unk> capital several us it is a transaction that is critical for US. We just did performance grants are smaller it's a smaller acquisition, but it is a critically important when you see a little bit of a pattern right Sparta life Sciences performance for <unk> life Sciences, we like that segment.
And we're going to continue to look yes.
With this level of this kind of interest rate environment that we have today.
The M&A market is is overheated.
You know it it is what it is but I've said it so we're not going to stay on the sidelines forever I mean, yes versus any historical.
Metric the multiples are high.
And I don't love it but the market is what the market is it doesn't mean, we're going to stay on the sidelines forever and wait for it to turn I mean, it's been this way.
If interest rates go up I do think it will probably cool off a little bit so which may allow us to keep it more active but we are.
We're active we're looking at numerous deals and it was nothing is 100% of the role of M&A, but we're hopeful we're going to be able to get something done and certainly want to deploy our capital that way, but it has to be the right business. It has to fit our technology orientation as to get the right value for us.
And although nothing is cheap these days.
And we're thrilled with what we're doing with smart I think thats been.
Looking back at this it's been about six months plus since we've acquired that company.
It's going to be a winner I'm very confident.
Appreciate it guys.
<unk>.
Our next question comes from.
Peter Arment from Baird Peter.
Yes can you hear me, yes, yes.
Hey, good morning, guys. So Greg maybe you could just talk a little bit about how you're viewing Sps kind of margins the outlook going there.
You talk a little bit about kind of improved.
Mix and execution, but obviously you're up against.
Some some headwinds there in that business, you talked a little bit about supply chain and also just the tpa business declining how should we think about just kind of the outlook improving margins in SBS.
Yeah well.
As you know.
Fast growing business in STS and calibrated it is margin dilutive we've been talking about that.
And that business grew 60% this quarter.
Any business growing at that kind of pace is going to have some challenges, but you coupled.
That kind of level of growth, which pulls on things like electronics.
He'll metal.
In the supply chain challenges we have.
Some efficiency challenges, particularly since it's there's a strong correlation between third party buy our own manufacturing and installation and Windows things don't work together well there were some challenges I can tell you we're investing heavily in that business to really prepare.
Or it to be up $456 billion business, which is the path that it's on there is an investment play there is a deficiency blayne, so having said that a lot of our other businesses such as AFC such as.
PSS and an absolutely terrific quarter.
So it's been a great success story for us.
With its.
Winning in the marketplace.
So we think that this sort of margin challenged abate overtime.
Particularly as we made some of the process improvements and investments in Calgary.
I would I would just echo that I mean, we've always talked about this as create.
Yeah.
No.
And market for ourselves for to follow later with service and software that's still our expectation.
As Darius mentioned when the when the material availability doesn't match up with the installation labor it becomes challenging and that's really what we're building.
What we're facing.
Right now we'll get through it.
But.
This availability of material.
Throughout the supply chain creates some big challenges when you're when you're seeing this type of growth.
The color thanks.
Alright, our next question comes from Deane Dray from RBC.
<unk> markets are you there.
Yes. Thank you good morning, everyone.
Eddie.
Hey, sorry, I was juggling multiple calls this morning. So thanks for letting me get back in I wanted to circle back on a topic that Josh raised and just the idea of you.
<unk>, leading H P S and it just begs the question about.
The oil and gas industry Capex cycle, it's really been slow to recover here, but now with the spike in oil prices, what's your expectation on release of new projects.
Even.
As simple as MRO has still been lagging as well, but what's your what's your outlook there. Please.
Okay.
Think this is becoming fairly obvious and we all read the same articles and see what's going on which is there's going to have to be a reinvestment cycle.
As much as we all.
We want sustainable and renewable technologies to take over sort of energy needs tomorrow, it's probably going to be a little bit of a longer term.
And it's very clear to me.
That theres going to be a reinvestment cycle, we're seeing a good reinvestment cycle, what I call some of the shorter project refurbishment.
Focus.
50 installed base, but.
We're strong believers theres going to be a fairly strong reinvestment cycle in 'twenty, two and 'twenty three I think that's necessary. So so so we're bullish on that segment and certainly the price of oil price of gas.
Or that kind of assessment.
With gas oil I mean, they're very very attractive levels, what we need now is some level of stability.
So that's good but let me give you a couple of other specific data points.
Our renewable fuel orders this past quarter were up 86%.
I mean, I think we forget sometimes.
That we just characterize <unk> as oil and gas it is not just oil and gas it has an incredibly strong.
Screened fuels portfolio, which is winning in the marketplace and paid <unk>, 86% growth.
Also sundar energy storage controls orders were up 60.
4%.
This past quarter and our HTS. So those are just a couple of data points for you that we are very excited about the energy future. We have a portfolio thats going to plan it having said that.
There is going to have to be a reinvestment cycle and sort of.
What I call the all energy infrastructure.
That's real helpful. Thank you.
Alright. Our next question comes from Joe Ritchie from Goldman Sachs.
Hi, Thanks, Good morning, everyone. Good morning, Joe.
When I take a look at your your performance just from a growth standpoint, and what we're seeing from.
Our backlog orders perspective, HPT is probably the one where we're seeing the biggest disconnect and.
And so I'm curious if you can maybe just provide a little bit more color on whether it's specific components labor what specific regions or really 16 can be a supply issue supply constraint issues and when we would expect some of that to alleviate.
DVA for.
For the growth really pick up.
This is one of the places where the electronics shortages are very acute.
And so.
The fire business in particular.
Use it some very specific semiconductors, which have had been extremely short I think.
Doug right in and supply chain team has.
<unk> done a very good job of trying to free up capacity from other distribution points. They've also been doing we talked a little bit about the reengineering work they've done a lot of reengineering to try to.
Include different chipsets into some of their into some of their platforms.
So this one is really pretty acutely tied to the whole.
Capacity expansion thats going on in the fab industry. So I think we're going to feel this.
We talked about the fourth quarter and into the first half of the year. This is one of the businesses I think we're going to feel that probably more than others.
But it will come to an end.
I think it's a very it's not it's not 1000 parts.
Measured in like 10 tens of parts here.
Okay. Thank you.
Our last question comes from Sheila <unk> from Jefferies Sheila over to you.
Good morning, Gary.
Got it thanks for fitting me in.
Good morning, Greg. Good morning, guys. You guys noted it to an earlier question came in defense was down mid single digits extra supply chain issue, maybe could you parse a little bit about how much of that mid single digit decline came from <unk> O&M budget declining versus international programs.
And somewhat related to that margins are still growing pretty nicely. Despite the supply chain issues and the growth in the quarter in Aero <unk> defense materially lower or with our and our price in the segment.
Yes, maybe I'll take the last one first so you can think about.
The operating leverage that we're getting across the portfolio pretty heavy.
In aerospace in particular, I mean that was the.
We talked about our cost reduction programs last year in Aero.
At the top of that list TMT second in terms of.
The level of fixed cost takeout. So so part of what Youre seeing from aerospace in terms of the almost 400 basis point improvement is is a big operator.
Operating leverage.
That they're getting even though it's only 2% revenue growth.
In terms of the split between U S. D O D. In international I think what we're seeing is is similar to what we spoke about before I mean the.
U S D O D and international bolt down.
From a demand perspective.
Give as we're going through that.
Calibration, if you will.
On.
On some of the pre buying that had been done.
Last year, and we do see the the supply chain.
Issues that we're having are really in a lot of the mechanical spaces. So I expect that we'll start seeing that improve.
Prove as the supply chain in the aerospace supply chain complex.
Ramps up.
Into the fourth quarter into the early part of next year out and of course, if you want to make a few comments on that yeah. I mean this is.
You've seen this in 18 19, and eventually able to grow this by 18.
80% year over year and this will kick in the next couple of quarters.
Great. Thank.
Thank you.
That concludes today's question and answer session. At this time I would like to turn the conference back to various <unk> for any additional closings there is already.
I want to thank our shareholders for your ongoing support we delivered strong third quarter results and continued to navigate effectively through uncertainty, while gaining traction in key strategic growth vectors and positioning ourselves to capitalize on improving end markets. Thank you all for listening and please stay safe and healthy.
Thank you.
Thank you. This does conclude today's conference call. You may disconnect at this time have a wonderful day.
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Thanks.