Q3 2022 Honeywell International Inc Earnings Call
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Thank you for standing by and welcome to the Honeywell third quarter 2022 earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
Please be advised that today's call is being recorded.
I would now like to hand, the call over to Sean Egan, Vice President of Investor Relations. Please go ahead.
Thank you Ed.
Good morning, and welcome to Honeywell's third quarter 2022 earnings Conference call.
The call with me today are chairman and CEO , Darius and object senior.
Senior Vice President and Chief Financial Officer, Greg Lewis, President and Chief operating officer and looking for.
This call and webcast, including any non-GAAP reconciliations are available on our website at www Dot Honeywell Dot com.
Investor.
They will also use our website as a means of disclosing information, which may be of interest were material to our investors and for complying with disclosure obligations under regulation FD Accordingly investors should monitor our Investor Relations website. In addition to following our press releases.
Finally, public conference calls Webcasts and social media.
Note that elements of this presentation contain forward looking statements, which are based on our best view of the world and of our businesses as we see them today.
Element can change based on many factors, including changing economic and business conditions.
In that light.
We identify the principal risks and uncertainties that may affect our performance and our annual report on Form 10-K, and other SEC filings.
This morning, we will review our financial results for the third quarter of 2020 to share our guidance for the fourth quarter and full year 2022, and provide some preliminary thoughts on 2023 as always we'll leave time for your questions at the end with that I'll turn the call over to chairman and CEO Gary.
Thank you Sean and good morning, everyone, let's begin on slide two.
Outstanding discipline, and rigorous execution enable us to meet or exceed guidance for all third quarter metrics amid ongoing supply chain constraints and inflation headwinds.
Exceed the high end of our third quarter adjusted earnings per share guidance range by five cents, while navigating a challenging backdrop, we delivered organic sales growth of 9% year over year or 10%, excluding the impact the <unk>.
Wind down of operations in Russia led by strong double digit growth in our advanced materials commercial aerospace and building products businesses are testament to our ongoing resiliency and a rigorous operating principles, which we havent segment margin by 60 basis points year over year to 21, 8% exceeding the high end of.
Our guidance range by 60 basis points with margin expansion in all four segments. As we remain ahead of the inflation curve through continued commercial excellence.
Excluding the impact of our investments continue the margin expansion was 90 basis points year over year, our backlog continues to be strong up 9% year over year in the third quarter led by Arrow, TMT and HPT as our demand profile remains robust.
Orders were down 1% on a reported basis, but up 2% organically year over year with aerospace PMT orders up double digits signaling that these end markets continued to be resilient. Despite the risks of a broader economic recession.
Excluding the impact of lowering Tau graded orders, which we have talked about extensively orders in the remainder of the portfolio were up 8% reported or 11% organically year over year.
Our record level of 2020 to orders and backlog will support our growth trajectory through the fluid operating environment.
Cash was another bright spot $1 9 billion.
Free cash flow in the quarter more than double a year ago. A strong result that leaves us well positioned to deliver our full year free cash flow commitment.
In terms of capital, we deployed $1 2 billion to share repurchases dividends and capital expenditures, we leveraged the strength of our balance sheet to opportunistically purchase over 2 million shares throughout the quarter, reducing our average share count to 680 million shares.
Key to executing on our commitment to buy back at least $4 billion in share in 2022.
Looking forward I remain encouraged by the strength, we're seeing in many areas of our portfolio as we continue executing our rigorous and proven value creation framework underpinned by our accelerator operating system to drive outstanding shareholder value I'm proud of honeywell's ability to over deliver and.
Another quarter amidst a challenging macro backdrop.
Now, let's turn to slide three to discuss recent senior leadership positions.
In September we announced the dilution will day I will succeed the local core President and Chief Executive Officer of our performance materials and technologies segment, enabling remote transition full tied to his new role as chief operating officer for Honeywell.
Lucian joined Honeywell from Eastman Chemical company, where he led global strategy business operations and financial performance as executive Vice President.
You shouldn't began his career at Eastman is a chemist and held a variety of leadership roles at the company.
Diverse global experience.
Building business, both organically and Inorganically and deep knowledge of the chemical process industry to be invaluable for leading PMT, which is in a unique position to enhance sustainable technologies portfolio to help drive the energy transition. While also taking advantage of our strong position in traditional energy Mark.
<unk>.
We also announced a new addition to our board of directors in September Robin Watson was selected to join the board as an independent director and will serve on our audit Committee Robert Robyn currently as an advisory consultants for Wood group, where he was CEO from 2016 to 2022.
During his time as CEO Robin led the transformation of wood when oilfield.
Oilfield services company.
Integrated engineering and consultancy company spanning a variety of growing end markets and geographies with extensive industry experience, including in sustainable technologies, such as carbon capture and hydrogen.
Robyn perspective will be instrumental as we further advance honeywell's leadership in the energy transition and broader ESG transformation.
We're shocked and saddened to learn that our board member and friend George Paz passed away on Sunday October 23.
Has provided invaluable contributions to our company over the last 14 years as perspective, tenacity and friendship will be greatly missed.
Of course, our heartfelt and deepest condolences are with his family.
As part of his board service George was chair of our audit Committee.
Davis, our lead director will serve as interim chair of the audit Committee of the Honeywell Board until his successor is named.
Next let me turn to slide four to discuss our other exciting recent announcements.
Earlier this month, we announced a new innovative ethanol to jet fuel processing technology that allows producers to convert ethanol based feedstock.
Sustainable aviation fuel.
Aviation industry is challenged by limited supplies of traditional feedstocks and ethanol offers producers are widely available economically viable new feedstock, depending on the type of ethanol feedstock used.
Honeywell <unk> process can reduce greenhouse gas emissions by 80% on a total lifecycle basis compared to petroleum based fuels and.
In addition, we opened two separate capacity expansion for our solstice business. This quarter. You recently opened our first large scale manufacturing site for solstice are a near zero global warming potential medical propellant for use in the respiratory inhalers.
Air Technology is up to 99, 9% less GWG and propellant currently used in the inhaled respiratory medicine.
Astrazeneca is currently working to incorporate our <unk> air technology into their full inhaler portfolio pending regulatory approval.
Elsewhere in our solstice portfolio, we opened a plant in India.
Has begun manufacturing our solstice <unk> solution, which is uses and blowing agents for foam installation and our refrigeration liquid for chili's.
Finally last week, we published our first quarterly environmental sustainability Index, a global report showing sustainability decision makers sentiment on progress you're ahead plan and meeting 2030 goals.
Two thirds of the S&P 500 set emissions.
Emissions reductions targets or some time in the index sheds light on past progress and future expectations towards these goals for our long history of achievements of sustainability honeywell's unique position to provide this free public service. The initial survey found that approximately 97% of organ.
<unk>.
Increased current year budgets and at least one sustainability category and Honeywell remains committed to helping our customers achieve their sustainability goals now let me turn it over to BMO on slide five to discuss our third quarter operating performance in more detail. Thank you Darin and good morning, everyone as Dave highlighted we delivered.
Strong third quarter results. Despite the tough operating environment disciplined adherence to our best in class Honeywell value creation framework provided us with operational agility to meet or exceed our guided financial metrics.
Quarter sales grew by 9% organically or 10%, excluding the wind down of our operations in Russia. The performance was driven by double digit organic growth in SPD BMT in aerospace.
<unk> trend remains strong with backlog near record level Hollywood ongoing supply chain constraints continue to temper overall volume growth, we did see modest sequential improvement in volume, causing our past due backlog to decrease in SBS SVP and PMT as the benefit from our reengineering effort to qualify automated box and a proactive partnering with distributors.
And automated supplier to ensure priority sourcing.
Readiness effort and Arrow also enabled single digits sequential improvement in output.
We continue to reap benefits, our Honeywell digital transformation investments made over the past few years, we leveraged these tools to drive commercial and operational actions, which enabled us to stay ahead of inflation curve and help us expand segment margins by 60 basis points.
Over the year to 21, 8%.
We are also starting to see some benefit in inventory from our digital and process improvements in planning ingenuity.
Let me share a few comments on third quarter performance by business.
For the third quarter were up 10% organically year over year as commercial aviation sales grew double digit for the sixth consecutive quarter. Despite ongoing supply chain challenges. In fact, if we had had a past due backlog flat sequentially for the quarter, we put out delivered an additional 9% organic sales growth.
Commercial aftermarket demand remains robust with continued flight Arctic every leading to increased beer shipment and repair and overhaul sales both air transport aftermarket and business in general aviation aftermarket sales grew over 20% organically in the quarter.
Originally can print sales increased 30% year over year, including approximately 50% growth in our air transport original equipment driven by increased chipset deliveries to these customers defense volumes were down in the quarter, but we believe 2022 will be trough for this business as our elevated backlog position and unexpected increase in defense spending supported.
Covering in coming years annual segment margin expanded 40 basis points to 27, 5% as I can.
<unk> exited the effort more than offset cost.
Inflation.
But I think technology was our fastest growing business in the third quarter with 19% organic sales growth.
Our byproduct and building management system remains strong, resulting in 23% organic growth and building product portfolio. The third consecutive quarter of double digit growth in building solutions sales grew 13% as project volume increase despite ongoing parts shortages, while supply supply chain have not fully unlocked and significant material.
Constraint domain, we did see sequential improvement in volume for the third consecutive quarter assigned that supply chains are moving in the right direction backlog in our building projects and services business remains robust roughly flat to the second quarter and 7% above third quarter 2022 level orders were down 3% reported by growing 3% on organic basis.
With continued strength in U S and China somewhat diluted by softening in parts of Europe , and Asia. Our agile commercial actions were a net contributor to both topline and bottom line growth in the quarter and segment margin expanded 60 basis points to 24, 1%.
Performance materials and technologies grew 14% organically in the quarter, despite an approximately 3% headwind from Russia.
<unk> grew 33% organically, leading BNP for the third consecutive quarter as we continue to see favorable demand specifically in upper green product business.
<unk> increased 6% in the quarter, returning to growth and overcoming a 7% year over year headwind from loss of machine sales.
Growth in Europe led by it.
Led by gas processing, and refining catalyst demand and sustainable technology solutions also excel growing triple digits year over year process solution grew 6% organically on continued demand for lifecycle solution and services and Cardinal solutions.
Product system grew over 40% of our second consecutive quarter.
And continues to be earnings accretive.
<unk> grew double digit in the third quarter led by approximately 40% growth in RF and advanced materials and approximately 20% and you will be underpinned by strength in gastric I think artists segment margin expanded 40 basis points in the quarter to 22, 6% driven by commercial excellence offsetting cost inflation.
As expected safety and productivity solutions sales decreased 4% organically in the quarter, we saw double digit growth in advanced sensing and gas detection portion of our sensing and safety technologies business and productivity solution and services also grew organically in the quarter. However, this growth was offset by expected softness in warehouse automation and lower vol.
And personal protective equipment and.
Integrated will be a key area of focus for me as we continue to improve our operations and drive margin expansion in that business, our strategic pricing and productivity actions along with favorable business mix brought segment margins for Ses and its highest level since the fourth quarter of 2018, expanding 250 basis point year over year to $15.
7%.
Honeywell connected enterprises continues to underpin the growth we are seeing across our portfolio. Our recurring revenue grew over 10% in the quarter and SaaS growth was approximately 40% product somewhat once again standout within SCE growing over 40% in the quarter with cyber and connected building also seeing double digit organic growth.
Overall this was a great operational results for Honeywell and our SPD performance was a key driver for our third quarter adjusted earnings per share growth.
Our adjusted EPS for the quarter grew 11% to $2 25, which exceeded the high end of our guidance range by <unk> <unk>.
On cash dynamics, we generated $1 9 billion of free cash flow in the quarter up 108% year over year increase was driven by a positive contribution from working capital due to strong collections and continued focus on matching our supply to our demand, which enabled us to reduce inventory for the first time in seven quarters, an encouraging example of the result.
Honeywell is capable of delivering despite the supply chain challenges and extended lead times, we have been battling in recent quarters.
The Honeywell playbook continues to deliver outstanding results and and these operating principles combined with our attractive end market exposure and differentiated portfolio of solution will allow us to maintain this resiliency for quarters to come let me turn it over to Greg to discuss third party third quarter earnings per share and more tapped and provide an update on our 2022.
Outlook.
Thank you <unk>, let's turn to slide six and we'll unpack our EPS story, a little bit further.
In the third quarter, we delivered GAAP earnings per share of $2 28, and adjusted EPS of $2 25, which was up 23 year over year. Despite a <unk> <unk> foreign exchange headwind as the dollar continued to strengthen throughout the quarter.
Increased segment profit driven by our strong commercial execution provided an 18th uplift year over year.
A lower effective tax rate 22, 1% this year versus 22, 9% last year provided a <unk> <unk> benefit, including a <unk> <unk> tailwind from a onetime discrete change in German tax law.
Share count reduction driven by progress towards our share repurchase commitment from our March Investor day drove a <unk> <unk> year over year tailwind to EPS.
We saw <unk> <unk> headwind from below the line items, primarily due to lower pension income.
GAAP EPS was <unk> <unk> higher than adjusted EPS due to a positive adjustments related to a wind down of our business in Russia.
So overall, we delivered another strong quarter with results at or above our expectations, demonstrating our ability to operate seamlessly through challenging economic conditions.
So now let's turn to slide seven we can talk about our fourth quarter and full year guidance.
While a number of challenges persist in the current operating environment, we're entering the fourth quarter with a very strong demand profile.
Since we provided our initial 2022 guidance in February we about supply chain constraints.
Encountered unprecedented inflation contended with geopolitical disruption and experienced rapidly rising interest rates at.
At each turn our rigorous operating principles have enabled us to continue to deliver.
As you saw from the <unk> bridge, the ongoing strengthening of the U S. Dollar has driven materially higher foreign currency impacts and it's been a significant headwind to our guidance, which we have consistently offset at the EPS level.
For our <unk> sales guidance, we expect to be in the range of $9 one to $9 4 billion.
Up 10% to 13% on an organic basis or up 11% to 14%, excluding a one point impact of lost Russian sales.
We now expect full year sales of 35, four to $35 7 billion.
Which represents a decrease of $100 million on the low end and $400 million on the high end from our prior guidance incorporating greater foreign currency impact.
However, we are raising the low end of our organic growth range now with 6% to 7% increase in the midpoint versus our prior guidance and narrowing the overall range.
Excluding a one point impact of lower Covid related mass demand and one point impact of loss Russian sales organic growth range would be 8% to 9%.
The difference between our reported and organic sales growth guidance of three points.
Entirely by foreign currency translation.
I mentioned to Dimensionalize. This further for the full year on a year over year basis, we expect $1 1 billion of sales headwinds from foreign currencies, which compared to our original guidance from February is approximately $750 million of incremental headwind a substantial challenge, which as I mentioned we have over.
<unk> on EPS.
Moving to our segment margin guidance, we expect the fourth quarter to be in the range of $22 eight to 23, 2%, resulting in year over year margin expansion of 140 to 180 basis points due to timing of high margin catalyst shipments in PMT.
Favorable business mix and productivity in Sps and increased volume leverage and HPT.
For full year 2022, we are upgrading our segment margin expansion expectations by 30 basis points on the low end and 10 basis points in the high end to a new range of 21, six to 21, 8% or 60 to 80 basis points of year over year expansion.
Our rigorous fixed cost management and disciplined price cost actions remain key elements of our operating playbook, helping us to drive margin expansion.
Excluding the 30 basis point, <unk> and full year headwinds from continuum, we expect margins to expand 170 to 210 basis points in <unk> and 90 to 100 basis points for the full year.
Now, let's take a moment to walk through fourth quarter and full year expectations by segment.
In Aero, we anticipate demand across our businesses to remain strong leading to sequential sales growth in the fourth quarter.
The growth trajectory will largely be determined by the rate of our supply chain recovery, which we anticipate will be modest.
Both commercial aftermarket and commercial OE should see another quarter of double digit sales growth year over year in <unk> as flight hours and build rates continue on their path to recovery.
In defence, we view the third quarter as an inflection point, leading to sequential improvement in <unk> to close the year as demand remained strong and modest improvements in the supply chain will allow us to deliver greater volumes.
Orders in defence and space are up approximately 5% year to date, including high single digit growth in the third quarter. So we built a very healthy backlog to support sales growth as we lap similarly supply impacted comparison periods.
Our full year expectations for aerospace are slightly improved on a stronger third quarter and we now expect full year organic sales to be up mid singles mid single to high single digits year over year with modest declines in segment margin as a result of OE mix headwind.
In building technologies, we expect continued sequential improvement in volume led to another quarter of double digit organic sales growth year over year.
Our backlog for building products remains well above normal pre pandemic levels supporting sales growth and supply capacity improve.
Modest improvements supply chain enabled a sequential drop in past due backlog in the third quarter and we expect the same in <unk>.
We anticipate strong growth in building projects for the fourth quarter as our projects business has grown sequentially each quarter. This year, an encouraging indicator of post pandemic recovery for.
Our overall HPT, we still expect double digit organic sales growth for the full year, an increased volume leverage should allow for continued sequential segment margin improvement in the fourth quarter and healthy expansion for 2022 overall.
In PMT the favorable outlook in our end markets supports a strong fourth quarter with sales up sequentially from third quarter and year over year in.
In process solutions, we expect growth to be supported by continued demand for thermal solutions and process control and <unk> increased refining catalyst reloads demand will support growth and provide margin benefits. However, the loss of Russia will continue to be a headwind in the fourth quarter.
Advanced materials will continue to outperform in the fourth quarter due to strong demand across the portfolio.
Thanks to a strong third quarter, we now expect sales for overall PMT to be up double digits for the year, an upgrade from our outlook last quarter of up high single digits, and we expect segment margin to expand both sequentially and year over year in the fourth quarter.
Looking ahead for Sps, we expect to see continued growth in the advanced sensing and gas detection portion of our sensing and safety technologies visit where demand indicators remain favorable and our backlog is robust.
Warehouse automation demand will remain soft in the fourth quarter as customers push new warehouse capacity and investments for the right that we continue to be encouraged by the bottom line benefits of our improvements in operational efficiency and our focus on higher margin aftermarket services.
Which we expect to continue growing double digits.
We still expect demand for warehouse automation to trough in 2023 at our long term outlook for the business remains positive.
Our short cycle productivity solutions and service businesses continued to deal with the impact of supply chain shortages and has seen some demand moderation, which may result in sequentially lower sales in <unk>, but we expect our differentiated technology to allow us to continue to outperform against our peers.
While we remain confident in the medium term growth rate in Sps short term headwinds persist and we still expect Sps sales to decline mid single digits. In 2022. However, we expect to see strong margin expansion, both sequentially and year over year in the fourth quarter as a result of shifting business mix and our continued operation.
Improvement.
Turning to our other core guided metrics for overall Honeywell net below the line impact which is the difference between segment profit and it can be for tax is expected to be in the range of negative approximately $60 million to a positive $14 million in the fourth quarter and negative 125 million to negative $50 million for the full year.
This guidance includes a range of repositioning between 86 and $136 million and <unk> at $375 million to $425 million for the year as we continue to fund attractive restructuring projects and properly positioned Honeywell for a good financial outcome in 2020.
We expect the adjusted effective tax rate to be approximately 19% in the fourth quarter and approximately 22% for the year and the average share count to be approximately 676 million shares in <unk> and approximately 683 million shares for the full year, reflecting our commitment to repurchase at least 4 billion.
Of Honeywell shares in 2022.
As a result of these inputs our adjusted EPS guidance range is between $2 46, and $2 56 for the fourth quarter up 18% to 22% year over year.
For full year EPS, we are upgrading the low end of our guidance range by <unk> 15.
To a new range of $8 72.
The $8 87 up 8% to 9%, reflecting the confidence in our ability to more than offset foreign exchange headwinds of 19 year over year in <unk> versus our initial guidance in February as well as absorbing ongoing macro economically.
We still expect to meet our original free cash flow guidance of four 7% to $5 $1 billion in 2022, or four 9% to $5 3 billion.
Muting the impact of <unk>.
So in total we are raising the midpoint of our full year 2022 organic sales growth.
Margin and adjusted EPS guidance ranges.
While absorbing headwinds of $1 $1 billion in sales and 15 and adjusted earnings per share versus our initial guidance from loss Russian sales and incremental FX.
A strong indicator of our ability to successfully deliver results in a fluid operating environment.
Details on our full year 2022 guidance progression and FX impacts can be found in the appendix of this presentation.
Before turning back to <unk>, let's turn to the next page and discuss our preliminary thoughts for 2023.
While the macro backdrop signals another year volatility, we believe our historical execution through multiple downturns demonstrates our ability to move quickly and decisively to protect margin drive growth ensure liquidity and position ourselves well to deliver in any environment.
Our rigorous operating principles and favorable end market exposure will help us remain resilient with commercial aerospace recovery continuing upcoming capital reinvestment in the energy sector and increased sustainability in infrastructure spending.
We have a strong setup that will drive growth in sales margin and earnings in 2023.
We expect organic growth in Aero, PMT, and HPT due to record level demand and backlog in 2022, and our long cycle businesses.
In fact, both of our largest businesses are seeing double digit orders and backlog growth, which will headline growth and profitability in 2023.
This will be offset by lower demand in warehouse automation volumes, which we believe will trough next year, we expect supply chain dynamics to improve gradually remain constrained versus pre pandemic levels with these dynamics in mind, let's look at each of our businesses.
In Aero, we expected demand picture to remain robust with increased flight hours, particularly a recovery in wide body and increased build rates among aircraft manufacturers, which will support growth in our commercial aviation businesses tempered only by the pace of supply chain Heroes. We also anticipate a return to growth in defense and space on increased defense budget.
An elevated backlog and an improving supply chain.
In HPT stimulus fueled investment in institutional markets as well as elevated backlog levels from this year's supply constraints should provide resiliency into 2023, regardless of the macro environment.
Many of our offerings are aligned to key secular themes, such as energy efficiency and de carbonization and we expect the verticals. We serve remained strong on balance throughout next year.
In PMT, we expect to continue to capitalize on the growth. We've seen in 2022 backlog built this year will drive growth in process solutions LNG capacity expansion and improved comps as Russia headwinds falloff will support growth in <unk> and improvement in semiconductor supply among customers and continued demand for <unk>.
Alex will enable advanced materials to have another strong year sustainable.
Sustainable technology solutions should also provide growth as the inflation reduction act supports new SaaS and carbon capture opportunities.
For safety and productivity solutions decreased investment in new warehouse capacity and potential recession impacts in our short cycle businesses will provide headwinds in 2023. However, we have a strong portfolio with differentiated solutions that will allow us to compete regardless of the macro environment.
Operational improvement actions that we've already begun implementing and shifting business mix will allow us to expand margins in 'twenty three even if revenues decline year over year.
For over a Honeywell 2023 margins will benefit from the continued volume recovery on a streamlined cost base anticipated pricing tailwind flight hour improvement in Aero and mix shift in Sps towards higher margin businesses. We will continue our investments in R&D and growth oriented capex as we remain keenly focused on creating unique.
Innovative differentiated recession proved technology to address the world's toughest process technology digital transformation and sustainability challenges.
We expect our spend on repositioning to begin to normalize lower however that EPS benefit will be more than offset by significantly lower noncash pension income and a rising interest rate environment, which likely result in a higher discount rate and lower asset base next year. This.
This accounting headwind is a noncash item as our over our overfunded pension status will ensure no incremental contributions are needed, which is a great position to be in for our employees, both former and current and our shareholders.
We have significant balance sheet capacity for meaningful M&A and expect a favorable deal environment going into 'twenty, three which supports our commitment to accelerate capital deployment.
Overall, the resiliency of our end markets and demonstrated ability to operate under dynamic circumstances gives us the confidence that we can deliver a strong financial performance in 'twenty three including overall sales growth margin expansion adjusted EPS and free cash flow growth. Despite the environment will provide more specific inputs and.
Our annual outlook call. Once we closed the year with that I'd like to turn the call back over to <unk> to discuss our dedication to environmental excellence.
Thank you, Greg, let's turn to slide nine to talk more about the aspirational approach, we're taking to our ESG commitments.
<unk> is more than just an initiative Honeywell it is a common thread the Kaiser businesses together and helps us shape the future of the company.
At a corporate level, we have set aggressive targets to reduce our impact and protect the environment.
<unk>, our scope, one and scope two emissions by over 90% since 2004.
Committed to set a target for scope three emissions the science based targets initiatives, we pledged to be carbon neutral in our facilities and operations by 2035.
Our world class manufacturing sites go above and beyond our own strict requires with 17 sites achieving ISO.
50001, the global energy management standard for establishing implementing maintaining and improving energy management.
In this segment.
<unk> portfolio of ESG solutions help our customers lower their environmental impacts as well with driving the next evolution of energy towards sustainable aviation fuel.
Through traditional renewable feedstocks, using Europe equal finding process technology, and now with ethanol feedstock using our new <unk> process technology.
Reducing emissions at manufacturing sites and improving worker safety with gas cloud imaging technology that can quickly identified leaks, we're supporting the circular economy through our Honeywell aerospace trading business, which takes retired planes recycles used parts, reducing landfill volumes and providing quality <unk>.
<unk> parts to customers, we're improving occupant wellbeing and energy efficiency office buildings for innovative indoor air quality offerings, you can find out more information about honeywell's environmental impact reduction and innovations in ESG technologies for our recently published 2022.
ESG report, which is available on our Honeywell Investor Relations website.
Now, let's turn to slide 10 for some closing thoughts before we move into Q&A.
We are executing on our value creation framework, the rigor and you can expect from Honeywell <unk>.
Net or exceeded our third quarter guidance for all metrics. Despite ongoing strong difficulties and we raised the midpoint of our full year organic sales and adjusted earnings per share guidance as well as increased our segment margin range fully absorbing a fuse of higher than previously anticipated negative impacts including FX.
I am encouraged by the strength, we're seeing in many areas of our portfolio and I remain steadfast regarding by our ability to deliver differentiated results in 2023 and through the cycle.
Thank you to my Honeywell colleagues for your unwavering drive to deliver in this challenging environment.
Thanks, Sean let's move to Q&A.
Thank you Darius.
I asked them on Greg are now available to answer your questions. We ask that you. Please be mindful of others in the queue I only asking one question Liz.
<unk>. Please open the line for Q&A.
Our first question comes from the line of Steve Tusa.
J P Morgan.
Steve Your line is now open.
Hi, good morning.
Morning.
D J just on aerospace what is the outlook for margins in the second maybe in the fourth quarter and then into next year.
A pretty strong result, despite OE picking up in defense hasn't really turned yet so maybe just a little more color on aerospace margins as you head into next year from that perspective.
Yes, I think our view on margins is pretty consistent I think we will.
Fourth quarter will look similar could be could be up.
And a 20 basis points could be down 10, or 20 basis points something like that in the quarter.
As we continue to unlock the supply chain.
It's a bit early to be providing guidance for for next year, but.
I would expect we're going to continue to be.
Managing through the growth that we're seeing in OE, we have it we have an investment portfolio. As you know we talked a lot about the R&D investments, we're making in the business.
Arrow is not the biggest grower of our margin expansion as we've talked about and I think that's going to remain.
Pretty consistent into next year or two.
<unk> always done a great job expanding margins in a very difficult environment and frankly, they have the toughest pricing environment either annually.
A lot of puts and takes I mean, the mix will get tougher.
Some credits that we have to issue.
So the OE growth is not obviously, a favorable mix scenario up to offset that.
The smiles traveled in the aftermarket business.
Don't expect as robust air miles next year as we did this year. However, that's offset by the fact that.
We do expect more wide body miles next year and as you know.
<unk>.
Aftermarket opportunity of wide bodies to narrow bodies roughly three to one so all in all we expect a solid year. The backlog is at all time record.
No.
I think arrow has positioned for a great year in 2003.
Great and then on SPS next year, you mentioned substantial margin expansion, but how do you kind of put that in the context of our long term target. Thanks.
Yes.
I think it's.
I think it's too early we're certainly not changing our long term target.
If anything next year will be helpful to get them to our long term target.
I think we've signaled some of the softness and warehouse automation.
I do think 'twenty three will be the bottom and the business will grow from that point forward and good margin expansion in 'twenty three exactly what it's going to be.
<unk>.
Difficult to tell at this point, but we're certainly not changed at all.
Thanks.
Thank you.
Our next question comes from Jeffrey Sprague with vertical research Jeffrey Your line is now open.
Hey, Thanks, good morning, everyone.
Maybe two questions for me I will just wrap into one.
First just on the.
On the comment about deal environment improving does.
Does that sort of a general comment given.
Just maybe bid ask spreads.
<unk> 2023 that maybe offset some of that EPS had one youre dealing with thank you.
Let me maybe kind of start with the first one the folks from those <unk> and the second one.
On the first one.
Short answer is a little bit of both but we do think the valuations are becoming much more appealing.
Which is driving an improved pipeline, which is driving more activity.
I think reality does have to set in.
Because obviously everybody wants to value their business, whether it was 12 months ago not what it is today so.
We were kind of fighting some tailwind and headwind.
I think the environment is going to dramatically change. The next three to six months in terms of valuation.
So that's why we think in 'twenty two it could be still a very appealing environment.
Trying to and we are in.
Proving our pipeline.
And and I can tell you that were out there, but we also have to acquire properties at the right value, particularly given today's environment uncertainty.
The second one.
And I'll turn it over to Greg I mean, yes.
Yes.
The pension headwinds will be substantially higher than they are this year.
Other or not do more in restructuring as a TBD item frankly.
But I just want to emphasize something we have an over funded pension plan.
We don't anticipate any cash contributions of matter.
<unk>.
And this is a bit of kind about nothing item.
So.
I just want to put in the right context, yes, yes, no that's right and the.
The pension headwind is as large I mean, it could be approaching 70.
As you probably know doesn't get finalized until the end of the year and will snap the line on interest rates at that point in discount rates and we'll know what the overall pension asset.
Has done during the course of the year.
But it's going to be meaningful, but its again noncash and as Eric mentioned, we think we'll probably.
Come down a little bit of repo, but not nearly enough to offset to the order of magnitude.
The noncash pension income will put atmel and one last comment here, Jeff as you noticed in our outline for Q4 and the year were going to be at the upper end of our repo number that we provided.
For guidance, which means really.
Preparing the business.
Four.
Sort of.
A little bit rougher.
Environment in some of our businesses not all because as Eric.
Maryland.
I think they are well positioned to do okay, and we've got some challenges that we talked about in Sps. So we're basically doing a lot of that kind of work ahead of time and we're pulling in a lot of our restructuring activity to 2022, Q4 will be a robust quarter and thats all meant to position the business for a strong 2012.
Great. Thank you.
Thank you.
Our next question comes from Julian Mitchell with Barclays. Julien Your line is now open.
Hi, good morning.
Sorry, and maybe just a two part question as well firstly just on orders I think you had said they were up low single digits in Q3, so a decent slowdown from Q2 any regional business to call out.
Driving that and then the second piece would just be.
2023 preliminary thoughts.
Margins are up 100 bps this year ex continuum for the year as a whole it doesn't look on slide 23 like that sorry on slide eight is a big continuum headwinds in 2023.
With eating supply chains, and some top line growth do you think a similar sort of margin performance could be repeated next year.
I think I'll answer your second one first which is it's really too.
To tell Julian I think we're going to work through that I think all I can tell you is work on expand margins with.
Thats you can count on how much.
Unfortunately, probably better to wait till the end of January early February whenever we issuer.
Q4 results.
<unk> for 23.
Former question I, just would like to point out a couple of things.
If you exclude the impact of.
And calibrated.
And in <unk>. It was a very big bookings quarter of last year.
High single digit growth for bookings, so just keep that in mind, so I'm actually pretty happy with the outcome.
That's a strong outcome.
It's still up low single digits inclusive of Impella works.
That's a good outcome as I look at sort of the regions and so on.
As you would've expected.
China was a little bit softer.
In Q3.
Or some spots in Europe on a bookings that were softer, particularly in the HCC not a big shock.
Those were a couple of soft spots.
On the flip side of North America with strong Middle East was strong.
That was kind of a balanced mix some puts and takes really nothing dramatically different than our expectations.
Warehouse automation, we expect it to be down it was we expected North America to be strong and was we expected some soft spots in Europe .
Or so.
All in all are generally pleased with it.
Not just the revenue outcome, but really the orders are coming as well.
Great. Thank you. Thank you John .
Thank you.
Yes.
Our next question comes from Scott Davis with Melius Research Scott. Your line is now open.
Thanks, operator, good morning, guys.
Hey, I just saw your Q It said price was up 11%.
Literally twice the group average.
Is there anything in your portfolio kind of thinking that could be skewing that a little bit high on the higher side.
Maybe.
For some of that I am trying to think like the project businesses I would think are hard to get that type of a price. So maybe just a little bit color on where you have the most price or the lease price and maybe some of the puts and pulls there yes.
Yes.
<unk> highlighted I think the most difficult spot for us has been in aerospace for sure.
And we actually we've done better than you probably would expect in a long cycle business is going and repricing the backlog because we have seen inflation. There. So we have had some good success in our project businesses.
Going back and getting price the products businesses are definitely.
The bigger driver of all of that.
As you would imagine and so.
I would say PMT HPT Sps are all having very strong pricing power in the product and the products businesses in particular.
And I would just add that the algorithm going forward is probably going to be a bit different I mean, as we look into 'twenty three we're probably not going to enjoy this much of us.
Gains from price and we'll probably keep them.
Probably yes.
Before stories to be relatively strong but.
But the algorithm kind of changes in 'twenty three.
Q4 will probably gain some very very modest volume leverage that's what we're calling out in much more volume leverage next year, and probably a little bit less from price so to kind of how we make the year and how we grow margin expansion or 'twenty threes can be different.
Yes.
The supply chain has been frustrating, but it is slowly improving I mean, we dropped our past due backlog in HPT Sps PMT granted narrowed a bit of a tougher problem, but even if you look at <unk>. If you look at our output in Q3 was actually up slightly versus Q2, nor.
Emily I'm kind of taking a look at the averages over the last five years Q3 output is about 4% to 5% lower in Q2. So there is some incremental.
If it's coming through in the supply chain and we expect that to continue.
So our algorithm for value creation will be different next year.
It's a great color. Thank you. Good luck guys I appreciate I'll pass it onto the next guy Thanks Kai.
Our next question comes from Andrew Owen. Thanks of America, Andrew Your line is now open.
Good morning, Andrew Good morning, Andrew.
Just my question on Defence and space.
Just relative to peers, just seems to be a weaker and just how should we model.
The best correlation.
This business is there a specific platform.
Program.
How to model it versus the budget because I think it has been.
The peers.
Two from my question is whats happening with the R&D tax credit tightening there was talk that you could get some cash back.
Where did that end up thank you.
Yes, So let me kind of unpack both of us.
Fortunately there is no simple rubric that I can give you for defense and space because we are right, Jeff, yes, because we're such a broad scenario and I think.
If you look at.
Programs like hypersonic $2 55.
Are some of the helicopter engine programs those are obviously all good for us.
You got it you got to remember there is this obviously wasn't our best quarter in terms of defence and space, but we do think this is the bottom our backlog went up and went up substantially our orders were up high single digits in defence and space and we actually think that this is the trough and we expect growth in defense and space for 'twenty.
Three if you want some early color on that so we've kind of seen we've seen a bit of a.
Turning the corner in terms of defence and space are back long cycle backlog was up double digits this quarter. So.
We're kind of optimistic in terms of.
What's going to happen in defense and space going forward.
Obviously been a disappointment this year.
But we really believe this is the bottom.
On.
R&D tax credits.
Until we see them, we're not going to call. It as you know we've been probably the only or at least one of the very few companies that took that out of our cash outlook.
Initial consensus.
In January .
That hurt us to the tune of $400 million.
We start with that.
And.
Proven to be right, so far not what's going to happen in the lame duck session in November and December .
That's frankly, anybody's guess and anybody that thinks that it's going to get through.
I don't know.
So we think it's a coin flip it could go either way, we certainly hope it does but if it does our cash outlook for 'twenty two is going to look a lot better. So that's kind of where we are.
Thanks, so much.
Thank you.
Our next question comes from Nigel Coe with Wolfe Research. Your line is now open.
Thanks, Good morning, everyone. Thanks for the question.
Hi.
So I'll keep it to one question, maybe just to clarify the 7% pricing very very strong.
<unk> materials have been a disproportionate driver of that just wanted to just curious on that but.
On Sps next year, I think we all understand the dynamics.
You called out probably the solutions that we go into fourth quarter, how do we think about warehouse probably weak spending environment in 'twenty three.
With the supply chain sort of pent up demand as we go into 'twenty three for the PFS portion of that.
Yes.
So let me start with the rising in advanced theory, absolutely we got.
<unk> pricing, because we have a differentiated product line.
And that proves our focus on new product and differentiated position where across the board in PMT. Our pricing has been strong also in other segments too. So the PMT pricing growth is not only advanced materials story is spreads across process solutions and <unk> segments also.
SPF pushing there.
So for a CFO I mean, I think the PSS portion it's been softer.
<unk>.
We are lapping some very very difficult comps.
And sort of record volumes and orders in Q3 last year.
Nothing unexpected it probably a little bit better than the.
The market.
And it's sort of dialed into our.
Algorithm going forward I will tell you is that our backlog is still relatively strong I mean granted liberated some of that.
But our backlog is still at an elevated position. The other thing I would tell which was also a good sign is that sort of the channel inventory days of supply in North America actually dropped in Q3, which is always a good sign.
So all in all.
It wasn't the most robust robust quarter there but.
But not different than our expectations.
That's great color. Thank you.
Sure.
Our next question comes from Joe Ritchie with Goldman Sachs. Joe Your line is now open.
Hey, Thank you good morning, guys, Hey, Jeff.
Hey, Gary you guys have talked about two.
<unk> 2000, $24 billion to $27 billion potential capital deployment opportunities.
I'd be curious to hear is it kind of thinking through that the M&A environment.
Size of deals that youre looking at or could be looking at for the portfolio and then secondly, you did talk about <unk> as you know.
A potential like.
Our strategy to offload that that piece of your business sometime over an 18 month period I'm just curious whether the environment is going to change things at all.
Given the volatility that we've seen with with that stock action.
Let me maybe start with the second question because that one.
Yes.
The short answer is David.
The market is not particularly receptive to two plays like continuum right now so.
Then when we will do something there.
Really depends on the condition of the stock market I mean look the stock market is not having a great year, we all know that.
But.
That's not going to stay that way forever. So I don't know that I would necessarily backhaul some kind of an 18 month timeframe when we might see something different we will continue so.
Because I do think the market is going to get better I mean.
We're in a tough environment.
Belief.
The market six months ahead of the economy, we expect the market to get better going forward and.
Planned frequency Hasnt changed so I guess the short story.
Think within an 18 month time frame from now it will take that Thats very much doable in terms of doing something different with <unk>.
That business so.
So I hope that answers that question.
What was your other question.
Yes, just the other question just on size of the deals that you are welcome.
I would just say that probably the sweet spot for us continues to be sort of in that.
1% to $5 billion.
Purchase price we're not.
Got it through it I mean, one of the things that and I mentioned this on the prior earnings call.
I, probably would stay away from sort of the tiny deals.
Something is very very very strategic because it takes up a lot of energy.
Sure.
So I think we're going to be probably inching up in terms of the size of the deal.
I would never say that mega deals are possible, but that's probably not likely.
Makes sense. Thank you thank.
Thank you.
Our next question comes from Nicole to place with Deutsche Bank. Your line is open.
Yes, thanks, good morning, guys.
Good morning.
Just one follow up on pricing and then I'll ask my other question just kind of going back to Scott.
John how strong your pricing has been I guess, it's been an unprecedented environment, obviously and is there a risk that pricing in some categories, but have to decline.
Deflation continues our moderation in commodity prices continues.
And then secondly, what's the pass back to free cash conversion of 100% plus I suspect that this will probably take some time because it's taken some time for inventories about thank you.
Yes, so in terms of the risk that pricing declines I mean across sub massive portfolio like we have I'm sure there'll be spots, where that may be true and what we keep looking at is our elasticity of demand.
Sure that we're not destroying demand so.
But broadly speaking we do expect positive pricing next year, just that inflation is not going down it's moderating it's still at an elevated level. It's just kind of leveled off to some degree.
So that's what I would say, it's not a risk that pricing declines broadly speaking, but I'm sure there'll be pockets, where that may be true in terms of free cash flow back to a 100% we talked about that ratio frankly is not a very helpful. One.
We think more about it as free cash flow margin and we've talked about our mid teen kind of a range and we're confident that we're going to be able to deliver around that.
So.
The 100% free cash flow I mean, it's probably going to be some time before we get there but.
But that's not really our objective we're really looking at a healthy mid teens free cash flow margin is the right.
Amateur for us as a company.
And I think you see it in our outlook for next year, we expect to grow free cash flow next year.
Absolutely.
Sort of.
Roughly in line with EPS, excluding the impact of.
The pension, which is going to be a major headwind so.
And I think if you look at our performance this year.
We are still retaining our original free cash flow.
Quite substantial headwinds, but I think that this isn't really important points that I'd like to just emphasize because I think we were one of the few if not the only company out there that hasn't actually taking the free cash flow numbers out through the year.
And we faced some substantial headwinds this year.
If you think about if.
If you think about just since our consensus since our outlook call in January got about 50 intensive ETF between Russia and impact of FX on EPS.
<unk>.
On a year over year basis about a one over $1 billion.
Revenue headwinds.
No.
The year over year basis, EPS impact between Russia, and FX was closer to 30.
So I think what we really need to be talking about how much we're actually raising our outlook for the year I think we're maintaining that I don't know that thats widely understood and I think it is differentiated.
Got it thanks guys.
Thank you.
Our next question comes from Sheila <unk> with Jefferies.
Your line is now open.
Hi, good morning, guys. Thank.
Thank you for the time.
Darius I wanted to ask you about.
And then well.
Knee jerk reaction and oil prices with news around price cost conversion oil and OPEC production cuts.
You may be talk about what the volatility in oil prices and foreign patent near term order activity in PMT and as you think about the longer term potential for the business across LNG battery technology and the sustainability portfolio.
Yes.
Our business.
You mentioned during Investor day, and other events that we are much less linked to upstream we are much more linked to downstream segment and BNP. So the volatility in oil price does determine customer decision on how they want to spend capital based on returns they will get.
What we have seen there is that investments are slowly getting better.
Clearly fee investments getting better on the sustainability side of the portfolio, we continue to roll more and more offerings in that segment. So thats. However, see linkage onto the oil price speaking more broadly of the PMT portfolio look ahead, we remain confident of a good growth year for PMT in 2023.
That is supported by.
The capital growth to a certain degree sustainability investment, but also if we're going to carry a stronger backlog our process solution and as a long cycle business that will convert in 2023. So what are we.
We remain quite optimistic on the PMT performance over the next year.
Okay. Thank you.
Yes.
Our next question comes from Josh Poker Winski with Morgan Stanley Josh Your line is now open.
Hi, guys. Thanks for fitting me in here.
Just a question on backlog and Darius you touched on it a few times in terms of this working down of past due but if I look on slide eight it does look like there was a tiny sequential downtick I'm just wondering that as supply chain free up here are you seeing any sort of air pocket, where folks are realigning lead times to what they need.
<unk> versus needing to go out much farther than any comment on kind of a maybe core backlog versus some of this past due stuff would be helpful. Yeah, I mean, you're right I mean, if there was a tiny tick downwards in our past due backlog it went down in PMT H D T.
<unk> and Sps, but went up was offset in Aero and we are seeing some improvement in the supply chain in those three segments, but unfortunately, when you combine the robust order rate scenario and put some substantial issues in aero supply chain.
Aero went up.
And it was up substantially so.
I think lead times are still long theyre getting better.
Especially in FTE.
<unk>.
And frankly.
The big unlock for Arrow as we look to 'twenty three is actually labor and non labor for Honeywell, because we have we're actually have labor, but from some of the tier three tier four suppliers and if there is if there is a recessionary environment in 'twenty three.
That actually the net helpful for the aerospace industry in terms of flavors. So that's.
Hopefully that helps.
Got it thanks, Okay. Thank you.
Liz we have time for one more question.
Our last question will come from Deane Dray with RBC capital markets. Your line is now open.
Thank you good morning, everyone. Thanks for fitting me in just for BMO I wanted to first congrats congratulate you on the new role.
And it sounds like your initial focus is going to be on Impella graded.
Could you share with us what's your approaches in other areas of the firm that you'll be focusing on.
Yes, so I think specifically in integrated as we mentioned that we are seeing a reduction in volumes. There. So we're really focused on how to make the business processes more robust in this cycle.
So we're taking a lot of actions on our process maturity digitization in the business.
So that we come out stronger and a margin rate expansion in 2023 and the times to come.
On your broader question, yes, im looking at opportunities across Honeywell, how we can drive our long term commitments on organic growth and margin expansion and booking with all my SPG colleagues on Honeywell connected enterprises, and we are committed to run our operations better. So that we can deliver our long term commitments on earnings.
Great. Thank you best of luck. Thank you.
Thank you.
I would now like to talk for listening.
Check for closing remarks.
Thank you.
I want to thank our shareholders for your ongoing support we delivered a strong third quarter results and continued to navigate effectively through multiple uncertainties of the typical level of operational rigor and agility, you've come to expect from Honeywell, enabling us to drive superior shareholder returns. Thank you all for listening and please stay safe and healthy.
This concludes today's conference call.
Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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