Q3 2023 Honeywell International Inc Earnings Call
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Thank you for standing by and welcome to the Honeywell third quarter 'twenty to 'twenty three 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 make them Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to Honeywell's third quarter 2023 earnings Conference call.
On the call with me today are Chief Executive Officer of Denmark for <unk>.
Senior Vice President and Chief Financial Officer, Greg Lewis.
This webcast and the presentation materials, including non-GAAP reconciliations are available on our Investor Relations website.
From time to time, we post new information that may be of interest or material to our investors on this website.
Our discussion today includes forward looking statements that are based on our best view of the world and of our businesses as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings.
This morning, we will review our financial results for the third quarter share our guidance for the fourth quarter and full year 2023, and provide some preliminary thoughts on 2024 as always we'll leave time for your questions at the end.
That I will turn the call over to our CEO I'm looking for.
Thank you Sean and good morning, everyone, let's begin on slide two.
We are saddened by recent events at medley, we are deeply upset by the loss of life.
Our number one priority continues to be safety and security of our employees and partners in the region and responding to their immediate needs.
Coming to the third quarter. It was another strong quarter one for Honeywell invest we delivered all of our financial commitments. We delivered adjusted earnings per share up $2 and 27, <unk> <unk> above the high end of our guidance range.
That was up 1% year over year or up 7%, excluding a 14 noncash pension headwind.
Disciplined execution of our rigorous operating principles in the face of ongoing macroeconomic challenges continue to serve us and our stakeholders.
Third quarter sales were up 2% year over year, driven by double digit growth in our commercial aviation defense and space and process solution.
Our aerospace business continues to be a bright spot in our portfolio driving meaningful commercial success.
Our already robust backlog grew to a new record of $31 $4 billion in third quarter up 8% year over year and 3% sequentially.
Trend in Aero and other long cycle businesses.
Orders grew double digit in the quarter due to tremendous demand generation in Aero.
Orders were up 30% year over year, Honeywell building technology, and safety and productivity solutions ended with quarter with flat year over year with book to Bill up around one an indication that we are seeing a short cycle end markets beginning to stabilize.
In dedicated was another positive indicator in the third quarter as we converted on a robust pipeline to drive double digit year over year artist growth and over 50% sequential orders growth <unk>.
PMT was down mid single digits on unfavorable comparisons to last year's peak in advanced materials orders.
Our segment margin expanded 80 basis point year over year, achieving the high end of our guidance range led by SPD up 110 basis points.
We continue to see business mix improvement due to strong growth in our higher margin aerospace business as well as ongoing gains from productivity.
Free cash flow was $1 6 billion and third quarter with over 100% cash conversion and 17% free cash flow margin in line with our expectation Greg will walk you through the free cash flow drivers in more detail in few minutes.
We remain committed to our capital deployment strategy and report our robust balance sheet to work in the third quarter by deploying $2 billion to dividend M&A growth Capex and share repurchases. We bought back five 3 million shares in the quarter, reducing our weighted average share count to 600.
Operator: Thank you for standing by and welcome to the Honeywell 3rd quarter 2023 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.
$67 million.
<unk> due to highly attractive valuation and our ongoing confidence in Honeywell performance.
Sean Meakim: I would now like to hand the call over to Sean Meakim, Vice President of Investor Relations. Please go ahead.
We remain on track with our commitment to deploy capital to higher return categories and generate compelling value for Honeywell shareholders.
Sean Meakim: Good morning and welcome to Honeywell's 3rd quarter 2023 earnings conference call.
As always we continue to execute on our proven value creation framework effectively managing through ongoing external difficulties and delivering on our commitments looking.
Sean Meakim: On the call is me today our Chief Executive Officer of Vimal Kapur and Senior Vice President and Chief Financial Officer of Greg Lewis. This webcast and the presentation materials including non-gap reconciliation are available on our Investor Relations website. From time to time we post new information that may be of interest or material to our investors on this website. Our discussion today includes four looking statements that are based on our best view of the world and of our businesses as we see them today and our subject to risks and uncertainties including the ones described in our SEC filings.
Looking forward, our consistent adherence to our rigorous operating principle.
And by our accelerated operating system.
<unk> strengthened our long cycle end markets and our technologically differentiated portfolio of solution should provide investors with comfort that we will remain highly resilient perform in all economic cycles and drive shareholder value for years to come.
Sean Meakim: This morning we will review our financial results for the 3rd quarter, share our guidance for the 4th quarter and 4th year 2023 and provide some preliminary thoughts on 2024. As always we'll leave time for your questions at the end.
Next let's turn to slide three to review some of our exciting recent win.
Before I hand, it off to Greg Let me briefly highlight some recent announcements that demonstrate our innovation across our portfolio.
Vimal Kapur: With that I'll turn the call over to our CEO Vimal Kapur. Thank you Sean and good morning everyone. Let's begin on slide 2.
In Aero, we recently won a key new customer in the air Transport space, That's an increase our Apu and avionics installed based on roughly 200, new aircraft over the next five years. This win helps demonstrate that strengthened our aerospace portfolio, regardless of the market conditions.
Vimal Kapur: First off we are saddened by recent events in mid-lead. We are deeply upset by the loss of innocent life. Our number one priority continues with safety and security of our employees and partners in the region and responding to their immediate needs. Coming to our 3rd quarter it was another strong quarter one for Honeywell in which we delivered all of our financial commitments. We delivered adjusted earnings per share of $2.27 2 cents above the high end of our guidance range.
In the energy space, we announced the partnership with SK E&S to deploy argue will be carbon capture technology at a natural gas power plant in Korea, our technology will help enable the capture of greater than 95% of the carbon dioxide produced in the plant. We remain excited about the win rates across our sustainable techs.
Vimal Kapur: That was up 1% year over year or up 7% excluding a 14 cent non-cash pension headwind. The discipline execution of our rigorous operating principles in the face of ongoing macroeconomic challenges continues to serve us and our stakeholders well. 3rd quarter says we're up 2% year over year driven by double digit growth in our commercial aviation, defense and space and process solutions. Our aerospace business continues to be a bright spot in our portfolio, driving meaningful commercial success.
Energy solution business as we help pave the way for the board Great energy transition.
Finally, our fourth for building software was recently implemented in one Bangkok, the city's largest integrated district.
This partnership with traders and DCT technology will foster an expanding adoption of our software offerings across business sectors as we support the achievement of sustainability goals.
Our core focus of the company continues to be on aerospace sustainability and automation.
Vimal Kapur: Our already robust backlog grew to a new record of 31.4 billion dollars in 3rd quarter up 8% year over year and 3% sequentially due to strengthen arrow and other long cycle businesses. Order grew double digit in the quarter due to tremendous demand generation and arrow where orders were up 30% year over year Honeywell building technology and safety and productivity solution ended with quarter with flat year over year orders with both to bail off around 1 and indication that we are seeing a short cycle end market beginning to stabilize.
Our recent wins are closely aligned with these initiatives and a proof that we continue to drive innovation across our portfolio.
Not only see profitable market outcome, but also positioned honeywell to address the world's toughest challenges.
Now, let me turn it over to Greg on slide four to discuss our third quarter results in more detail as well as provide our views on guidance.
Thank you <unk> and good morning, everyone.
As bill outlined we delivered another strong quarter and a dynamic macro environment.
Third quarter sales grew 2% organically led by double digit organic sales growth in commercial aviation defense and space and process solutions.
Vimal Kapur: Integrated was another positive indicator in the 3rd quarter as we converted on a robust pipeline to drive double digit year of years orders growth and over 50% sequential orders growth. PMT was down mid single digits on unfavorable comparisons to last year's peak in advanced materials orders. Our segment margin expanded 80 basis point year over year, achieving the high end of our guidance range led by HPD up 110 basis point. We continue to see business mix improvement due to strong growth in our higher margin aerospace business as well as ongoing gains from productivity.
Commercial success in aerospace, which drove 18% year over year growth in the third quarter was once again, a bright spot for Honeywell.
Our short cycle businesses continued to show signs of stabilizing sequentially.
Encouraging fundamentals persist across most of Pmt's end market, which led to another quarter of 3% year over year growth. Despite more challenging comps as we entered the second half.
As expected our long cycle warehouse automation business remains around trough levels.
Vimal Kapur: Free cash flow was 1.6 billion dollars in third quarter with over 100% cash conversion and 17% free cash flow margin in line with our expectation. Greg will walk you through the free cash flow drivers in more details in few minutes. We remain committed to our capital deployment strategy and we put our robust balance sheet to work in the third quarter by deploying two billion dollars to dividend, M&A, growth capex and share repurchases.
Which led to overall volume decline of 1% for the quarter. However.
However, excluding SBS volumes were up 6% across the portfolio.
Our backlog remains at a record level ending the third quarter at $31 4 billion up 8% year over year, driven by double digit orders growth across our long cycle businesses.
Sequential improvements in supply chain constraint that the past due backlog reductions in our short cycle businesses, while demand continues to outpace output and arrow, a bullish signal of the underlying robustness of that business.
Vimal Kapur: We bought back 5.3 million shares in the quarter reducing our weighted average share count to 667 million. It stepped up due to highly attractive valuation and our ongoing confidence in Honeywell's performance. We remain on track with our commitment to deploy capital to higher return categories and generate compelling value for Honeywell's shareholders. As always, we continue to execute on our proven value creation framework effectively managing through ongoing external difficulties and delivering on our commitment.
And improving cost position and favorable business mix due to significant growth in our high margin aerospace business among others enabled us to expand segment margins by 80 basis points year over year to 22, 6% and achieved the high end of our guidance.
On cash we generated $1 $6 billion of free cash flow down 18% year over year due to timing of cash tax payments and higher net working capital a strong aerospace sales performance drove up our receivables balances year over year that we improved collections on our past due balances.
Vimal Kapur: Looking forward, our consistent adherence to our rigorous operating principles underpinned by our accelerated operating system continued strength in our long cycle end market and our technologically differentiated portfolio of solution should provide investors with comfort that we will remain highly resilient, perform in all economic cycles and drive share of their value for years to come.
Throughout this quarter, we accelerated our share buyback program more than doubling the amount of shares repurchased compared to the second quarter.
We feel great about the future of Honeywell and believe in our next leg of transformation and we'll continue to Opportunistically buy Honeywell shares at attractive valuations.
Vimal Kapur: Next, let's turn to slide three to review some of our exciting recent wins.
Now, let's spend a few minutes on the third quarter performance by business.
Vimal Kapur: Before I hand it off to Greg, let me briefly highlight some recent announcement that demonstrate our innovation across our portfolio. In arrow, we recently won a key new customer in the air transport space that will increase our APU and avionics install based on roughly 200 new aircraft over the next five years. This will help demonstrate the strength in our aerospace portfolio regardless of the market condition. In an early space, we announced a partnership with SKENS to deploy our UOP carbon capture technology at a natural gas power plant in Korea.
Aerospace sales for the third quarter were up 18% organically with double digit growth in both commercial aviation and defense and space the strongest growth quarter for arrow in over a decade.
Commercial aviation growth was led by strength in the air transport aftermarket where increased flight activity globally continues to drive demand.
Commercial original equipment also grew in the quarter on increased deliveries to both business and general aviation and air transport customers.
Defense and space sales inflicted in <unk> growing 18% organically and orders grew over 30% year over year for the second consecutive quarter as we see the impact of increased global focus on national security come through.
Vimal Kapur: Our technology will help enable the capture of greater than 95% of the carbon dioxide produced in the plant. We remain excited about the wind waves across our sustainable technology solution business as we help pave the way for the world's great energy transition.
While the aerospace supply chain remains constrained we are continuing to see modest sequential improvement, which enabled us to increase our output and convert our record backlog at the sales growth.
Vimal Kapur: Finally, our force for building software was recently implemented in one Bangkok, the city's largest integrated district. This partnership with Fraser's and TCC technology will foster an expanding adoption of our software offerings across business sectors as we support the achievement of sustainability goals. Our core focus as a company continues to be on aerospace sustainability and automation. Our recent wins are closely aligned to these initiatives and our proof that we continue to drive innovation across our portfolio. We not only see profitable market outcome but also position Honeywell to address the world's toughest challenges.
For example, this was the third consecutive quarter with a 20% year over year increase in original equipment and spare shipments.
While these gains and output are encouraging and leading the sales acceleration demand continues to outpace supply.
This is evidenced by our aerospace book to Bill of around one three in the third quarter.
Segment margins in Aero were flat year over year as increased volume leverage and commercial excellence offset cost inflation and mix pressure in our original equipment as expected.
Performance materials and technologies sales grew 3% organically in the third quarter led by Hps, which saw double digit growth for the fourth consecutive quarter.
Greg Lewis: Now let me turn it over to Greg on slide four to discuss our third quarter results in more detail as well as provide our views on guidance. Thank you, Vimal and good morning everyone. As Vimal outlined, we delivered another strong quarter in a dynamic macro environment. Third quarter sales grew 2% organically led by double digit organic sales growth and commercial aviation, defense and space and process solution. In the narrow space, which drove 18% year over year growth in the third quarter was once again a bright spot for Honeywell.
Process solutions sales grew 11% organically driven by continued strength in our projects business and lifecycle solutions and services and.
In <unk> sales.
Sales grew 6% organically led by gas processing solutions and petrochemicals catalyst shipments.
We continue to see robust demand in our sustainable technology solutions business within <unk> as orders grew triple digits for the third consecutive quarter and sales grew at strong double digit rates and.
Greg Lewis: Our short cycle businesses continue to show signs of stabilizing sequentially encouraging fundamentals persist across most of PMT's end market, which led to another quarter of 3% year over year growth despite more challenging comps as we entered the second half. As expected, our long cycle warehouse automation business remains around trop levels, which led to overall bond decline of 1% for the quarter. However, excluding SPS volumes were up 6% across the portfolio. Our backlog remains at a record level ending the third quarter at 31.4 billion dollars of 8% year over year driven by double digit orders growth across our long cycle businesses.
In advanced materials sales decreased 8% organically driven primarily due to the continued expected macro driven softness in our electronics chemicals and life science businesses and challenging year over year comps.
Sequentially segment margins expanded 40 basis points, while on a year on year basis segment margins contracted 50 basis points to 22, 1% as a result of lower volume and advanced materials.
Safety and productivity solutions sales decreased 25% organically in the quarter.
Primarily driven by lower volumes in warehouse and workflow solutions and productivity solutions and services.
The project portion of our <unk> business is around trough levels in the current low investment warehouse automation environment, but our pipeline remains robust and successful execution of our sales strategies resulted in double digit year over year growth and over 50% sequential growth in orders in the third quarter.
Greg Lewis: Sequential improvements in supply chain constraint led to past due backlog reductions in our short cycle businesses, while demand continues to outpace output in arrow, a bullish signal of the underlying robustness of that business. And improving cost position and favor business mix due to significant growth in our high margin aerospace business, among others, enabled us to expand segment margins by 80 basis points year over year to 22.6% and achieve the high end of our guidance.
Additionally, the aftermarket services portion of the business continues to deliver solid double digit sales growth.
And productivity solutions and services, we are working through the effects of distributor Destocking, but believe we are nearing the end of that cycle.
Greg Lewis: On cash, we generated 1.6 billion dollars of free cash flow now 18% year over year due to timing of cash tax payments and higher networking capital as strong aerospace sales performance drove up our receivables balances year over year, so we improved collections on our past due balance. Throughout this quarter, we accelerated our share buyback program more than doubling the amount of shares repurchased compared to the second quarter.
Sensing and safety technologies was also impacted by short cycle softness, but this business continues to remain relatively resilient.
Segment margin in Sps contracted 120 basis points to 14, 5% as a result of volume deleverage, partially offset by our continued operational improvements and commercial excellence.
Turning to Honeywell building technologies sales were flat year over year in the quarter.
Greg Lewis: We feel great about the future of Honeywell and believe in our next leg of transformation and will continue to opportunistically buy Honeywell shares at attractive valuations.
Our long cycle building solutions business continues to outpace our short cycle building products.
Building solutions grew 4% organically led by high single digit growth in building projects driven by strong execution, particularly in the energy projects.
Greg Lewis: Now let's spend a few minutes on the third quarter performance by business. Aerospace sales to the third quarter were 18% organically with double digit growth in both commercial aviation and defense and space. The strongest growth quarter for arrow and over a decade commercial aviation growth was led by strength in the air transport aftermarket where increased flight activity globally continues to drive the man. Commercial original equipment also grew in the quarter on increased deliveries to both business and general aviation and air transport customers.
Orders for building projects were also substantial in the quarter up nearly 20% year over year and resulting in a book to bill ratio of approximately one two.
On the product side sales decreased modestly as a result of relatively soft demand for security products.
Segment profit remained the bright spot for the business continuing to grow as a result of productivity actions and commercial excellence all in HPT segment margin expanded 110 basis points to 25, 2%.
Greg Lewis: Defense and space sales and selected in 3Q growing 18% organically and orders through over 30% year over year for the second consecutive quarter as we see the impact of increased global focus on national security come through. While the aerospace supply chain remains constrained, we are continuing to see modest sequential improvement which enabled us to increase our output and convert our record back I'll get the sales. Jerome. For example, this was the third consecutive quarter with a 20% year-over-year increase in original equipment and spare shithead.
Growth across the portfolio continues to be supported by accretive results in Honeywell connected enterprise, providing further evidence of Honeywell strong software franchise across our businesses.
Overall organic growth of approximately 20% in the third quarter was supported by strength in connected industrial connected buildings cyber security and connected aircrafts.
Orders growth above 20% in the quarter remains a powerful indicator of the continued robust demand for HPE offerings.
Greg Lewis: While these gains and output are encouraging and leading to sales acceleration, demand continues to outpace supply. This is evidenced by our aerospace book to bill of around 1.3 in the third quarter. Second, Martin Zanero, we're flat year-over-year as increased volume leverage and commercial excellence, offset cost inflation and mixed pressure in our original equipment as expected. Performance materials and technology sales grew 3% organically in the third quarter, led by HPS, which saw a double-digit growth for the fourth consecutive quarter.
In October we held the latest installment of Honeywell connect where we conducted 29 technology demonstrations to a group of 200 customers.
We launched three new products featured several product enhancements and showcase advanced intelligence solution, using AI and generative AI technology.
One highlight from the event was the introduction of a suite of cyber security solutions, including Honeywell Forge cyber security plus cyber insight and cyber watch supported by the acquisition of Sky Defense in August leading to new sales opportunities and as early as the fourth quarter.
Greg Lewis: Process solutions sales grew 11% organically driven by continued strength in our projects business and life cycle solutions and services. In UOP, sales grew 6% organically, led by gas processing solutions and petrochemicals, catalyst shittiness. We continue to see robust demands in our sustainable technology solutions business within UOP as orders grew triple digits for the third consecutive quarter and sales grew at strong double-digit rates. In advanced materials, sales decreased 8% organically, driven primarily due to the continued expected macro-driven softness in our electronics, chemicals, and life-sized businesses and challenging year-over-year costs.
Overall this was a great result for Honeywell, our operational execution enabled us to grow third quarter earnings per share to $2 27.
Up 1% year over year on an adjusted basis.
Segment profit drove 15 sense of improvement in earnings per share the main driver of our EPS growth.
Excluding the 14th pension headwind EPS was $2 41 up.
Up 7% year over year.
Bridge for adjusted EPS from <unk> 22 to <unk> 23 can be found in the appendix of this presentation with all the details.
Finally, as <unk> mentioned earlier, we continue to leverage our healthy balance sheet to.
Greg Lewis: Sequentially, segment margins expanded 40 basis points. While in a year-on-year basis, segment margins contracted 50 basis points to 22.1% as a result of lower volumes in advanced materials. Safety and productivity solutions sales decreased 25% organically in the quarter, primarily driven by lower volumes in warehouse and workflow solutions and productivity solutions and services. The project's portion of our integrated business is around-traff levels in the current low investment, warehouse automation environment, but our pipeline remains robust and successful execution of our sales strategies resulted in double-digit year-over-year growth and over 50% sequential growth in orders in the third quarter.
$2 billion in the quarter, bringing the year to date total to $5 $7 billion as we execute on our capital deployment strategy.
So overall honeywell's operating playbook continues to deliver strong results and our best in class Honeywell value creation framework will enable us to drive compelling growth in earnings and cash for quarters to come.
Now, let's turn to slide five to discuss our fourth quarter and full year guidance.
At this stage in the year and given the incrementally more challenging macro backdrop with geopolitics and interest rate dynamics, we are narrowing our full year guidance ranges for sales and EPS, while increasing the midpoint of our segment margin expectations.
Greg Lewis: Additionally, the aftermarket services portion of the business continues to deliver solid double-digit sales growth. In productivity solutions and services, we are working through the effects of distributor destocking, but believe we are nearing the end of that cycle. Sensing and safety technologies was also impacted by short cycle softness, but this business continues to remain relatively resilient. Segment margin and SPS contracted 120 basis points to 14.5% as a result of volume delivery, partially offset by our continued operational improvements and commercial efforts.
Our demand profile remains healthy with record backlog and favorable orders performance, while we continue to monitor the timing of short cycle recovery, we are confident in our ability to deliver on our commitments.
For the fourth quarter, we anticipate sales to be between nine six and $9 9 billion.
Up 3% to 7% organically driven by continued strength in commercial aviation defense and space process solutions and <unk>.
We anticipate organic sales growth in Aero PMT and <unk> in the fourth quarter.
For the full year, we're raising the low end of our previous sales guidance by $100 million and lowering the high end by $200 million for a new range of $36 eight to $37 1 billion.
Greg Lewis: Turning to Honeywell building technologies, sales were flat year-over-year in the quarter. Our long cycle building solutions business continues to outpace our short cycle building products. Building solutions grew 4% organically, led by high single-digit growth in building projects, driven by strong execution, particularly in energy projects. Orders for building projects were also substantial in the quarter, up nearly 20% year-over-year and resulting in a book-to-build ratio of approximately 1.5%, on the product size sales decreased modestly as a result of relatively soft demand for security products.
Representing 4% to 5% organic growth for the year.
This reflects continued solid execution in our long cycle business, while we awaited demand acceleration in some of our short cycle businesses.
Turning to segment margins, we anticipate the fourth quarter to be between $22 nine and 23, 2%.
<unk> up 30 basis points year over year and up sequentially as we continue to benefit from improving business mix and our productivity actions.
Greg Lewis: Segment profit remained a bright spot for the business, continuing to grow as a result of productivity actions and commercial excellence. All-in, HBT's Segment Margin expanded 110 basis points to 25.2%. Growth across the portfolio continues to be supported by a creative result in Honeywell-connected enterprise, providing further evidence of Honeywell's strong software franchise across our businesses. Overall, organic growth of approximately 20% in the third quarter was supported by strength and connected industrial, connected buildings, cybersecurity, and connected aircraft.
For the full year. We are also raising the low end of our segment margin guidance by 10 basis points for a new range of $22.
The 22, 6%, representing 80 to 90 basis points of year over year expansion.
This improvement is driven by HPT, Sps and PMT, which are all expected to expand margin.
Now, let me walk you through the expectations for each segment in a little bit more detail.
Looking ahead for aerospace, we're very pleased with the continued improvements in the aerospace fly chain that are allowing us to capitalize on our record backlog and.
Greg Lewis: Ordered growth above 20% in the quarter remains a powerful indicator of the continued growth demand for HCE offerings. In October, we held the latest installment of Honeywell Connect, where we conducted 29 technology demonstrations to a group of 200 customers. We launched three new products, featured several product enhancements, and showcase advanced intelligence solutions using AI and gendered AI technology. One highlight from the event was the introduction of a suite of cybersecurity solutions, including Honeywell-forward cybersecurity plus, cyber insight, and cyber watch, supported by the acquisition of skate offense in August, leading to new sales opportunities in as early as the fourth quarter.
In <unk>, we anticipate another quarter of strong sales growth both year over year and sequentially in commercial aviation and defense and space.
In commercial aviation, we expect most of the sequential growth to come through increased original equipment volumes.
<unk> aftermarket will also deliver healthy year over year growth with demand driven by continued improvement in air transport flight hours.
In defence and space, we are coming off back to back quarters of 30% plus orders growth, which has bolstered our already sizable backlog and.
And we see another quarter of double digit growth in the year.
With our growth momentum from the third quarter carrying over into <unk>. We now expect aerospace sales to be up mid teens for the year.
With much of the incremental sales and this upgrade coming from increased original equipment shipments as we capture a greater installed base, we expect aero margins to be flat to modestly down for the year.
Greg Lewis: Overall, this was a great result for Honeywell. Our operational execution enabled us to grow third quarter earnings per share to $2.27, up 1% year over year on an adjusted basis. Second profit drew 15 cents of improvement in earnings per share, the main driver of our EPS growth. Excluding the 14-cent pension headwind, EPS was $2.41, up 7% year over year. A bridge for adjusted EPS from 3Q-22 to 3Q-23 can be found in the appendix of this presentation with all the details.
In performance materials and technologies, our strong execution and the encouraging outlook in our end markets will continue to drive favorable growth.
For the fourth quarter, we expect our typical solid finish to the year, leading to year over year and sequential sales growth.
Growth will be led by process solutions on strength in projects and aftermarket services.
Greg Lewis: Finally, as Vimile mentioned earlier, we continue to leverage our healthy balance sheet to point $2 billion in the quarter for a year-to-date total of $5.7 billion as we execute on our capital deployment strategy. So overall, Honeywell's operating playbook continues to deliver strong results and our best-in-class Honeywell value creation framework will enable us to drive compelling growth and earnings and cash for quarters to come.
Our growth outlook is supported by robust demand for petrochemical and refining catalysts.
The sustainability technology solutions business will continue to grow as we capitalize on legislation back demand.
For advanced materials, we expect continued demand for fluorine products a rebound in life Sciences end markets and an improvement in our electronics and chemicals business supportive of sequential growth.
Greg Lewis: Now, let's turn to slide five to discuss our fourth quarter and full-year guidance. At this stage in the year and given the incrementally more challenging macro backdrop with geopolitics and interest rate dynamics, we're narrowing our full-year guidance ranges for sales and EPS while increasing the midpoints of our segment margin expectations. Our demand profile remains healthy with record backlog and favorable orders performance. While we continue to monitor the timing of short cycle recovery, we are confident our ability to deliver on our commitment.
For the full year, we continue to expect high single digit sales growth in PMT.
Due to typical catalyst seasonality, we still expect meaningful sequential and year over year margin expansion in the fourth quarter, resulting in modest segment margin expansion for the year for PNC.
In safety and productivity solutions, our outlook continues to be impacted by the current low levels of investment in new warehouse capacity and distributor Destocking. However, the impact on our financials is declining creating stabilization and signs of potential return to growth in the coming quarters.
Greg Lewis: For the fourth quarter, we anticipate sales to be between $9.6 and $9.9 billion, up 3% to 7% organically driven by continued strength and commercial colladiation, defense and space, process solution, and UOP. We anticipate organic sales growth in Arrow, PMC, and HBT in the fourth quarter.
For the fourth quarter, we expect these effects to lead to sales at a roughly flat sequentially.
Gavin organically, but to a lesser degree than earlier in the year.
Orders will grow sequentially and year over year in the fourth quarter as we build on momentum from this quarter.
While new warehouse investment remains challenged customers continued to upgrade their existing infrastructure, which will lead to another quarter of double digit growth for the aftermarket services portion of our <unk> business.
Greg Lewis: For the full year, we're raising the low end of our previous sale guidance by $100 million and lowering the high end by $200 million for a new range of $36.8 to $37.1 billion, representing 4 to 5% organic growth for the year. Turning the second margin, we anticipate the fourth quarter to be between 22.9 and 23.2% flat to up 30 basis points year over year and up sequentially as we continue to benefit from improving business mix and our productivity actions.
For the full year, we now expect sales to be down approximately 20% as the Sps portfolio bounces along the bottom of the cycle.
However, the productivity actions and operational improvements we have made this year will still enable us to expand margins solidly for the year.
In building technologies, we were prudent with our posture at the start of the year as we faced unprecedented central bank tightening cycle and uncertain demand environment.
While the operating backdrop remains difficult we are encouraged by the sequential orders progression, we saw each month throughout <unk>, including double digit products orders growth in the month of September.
Greg Lewis: For the full year, we are also raising the low end of our segment margin guidance by 10 basis points for a new range of 22.5 to 22.6%, representing 80 to 90 basis points of year over year expansion. This improvement is driven by HBT, SPS, and PMT, which are all expected to expand margin.
For the fourth quarter, we expect modest sequential sales improvement from our <unk> and <unk> levels with growth continuing to be led by our long cycle building solutions business.
The supply chain is improving each quarter and we expect to make further progress on converting our past due backlog into sales.
We're also encouraged by the resiliency, we are seeing in verticals, such as airports government and education and expect institutional demand to provide support amid commercial softness.
Greg Lewis: Now let me walk you through the expectations for each segment and a little bit more detail. Looking ahead for aerospace, we're very pleased with the continued improvements in the aerospace supply chain that are allowing us to capitalize on our record backlog. In 4Q, we anticipate another quarter of strong sales growth over year over year and sequentially in commercial aviation and defense space. In commercial aviation, we expect most of the sequential growth to come through increased original equipment volumes, though commercial aftermarket will also deliver healthy year over year growth with demand driven by continued improvement in air transport flight hours.
We project <unk> sales to be up low single digits for the year with commercial and operational excellence, enabling HPT to be our largest margin expander in 2023.
Now moving on to our other key guidance metrics, we anticipate net below the line impact to be between negative $105 million to negative $155 million in the fourth quarter and between negative 525 and negative $575 million for the full year.
Greg Lewis: In defense and space, we are coming off back to back quarters of 30% plus orders growth, which is bolstered, our already sizable backlog. And we see another quarter of double digit growth to end the year. With our growth momentum from the third quarter carrying over into 4Q, we now expect aerospace sales to be up mid teens for the year. With much of the incremental sales and its upgrade coming from increased original equipment shipments, as we capture a greater install base, we expect arrow margins to be flat to modestly down for the year.
This guidance includes a range of repositioning between 45 and $85 million in the fourth quarter and between 260 and $300 million for the full year as we continue to invest in high return projects to support our future growth and productivity.
We expect the adjusted effective tax rate to be around 19% in the fourth quarter and around 21% for the full year unchanged from our previous guidance.
We anticipate average share count T around 664 million shares in the fourth quarter and around 669 million shares for the full year as we continued to reduce our share count through opportunistic buybacks.
Greg Lewis: In performance materials and technologies, our strong execution and the encouraging outlook in our end markets will continue to drive favorable growth. For the fourth quarter, we expect our typical solid finish to the year leading to year over year and sequential sales growth. Growth will be led by process solution on strength and projects and aftermarket services. In UOP, our growth outlook is supported by robust demand for petrochemical and refining catalyst. The sustainability technology solutions business will continue to grow as we capitalize on legislation back demand.
As a result of these inputs, we anticipate adjusted earnings per share to be between $2 53.
And $2 63 for the fourth quarter.
Flat to up 4% year over year.
Excluding pension headwinds fourth quarter, EPS growth would be up 6% to 10%.
For the full year, we're nearing both ends of our EPS guidance ranges by <unk> <unk>.
For a new range of $9 10.
Greg Lewis: For advanced materials, we expect continued demand for flooring products, our rebound in life sciences and markets, and an improvement in our electronics and chemicals business supportive of sequential growth. For the full year, we continue to expect high single digit sales growth and being. DC. Due to typical catalyst seasonality, we still expect meaningful sequential and year-over-year margin expansion in the fourth quarter, resulting in modest second margin expansion for the year for PMC.
To $9 20.
Up 4% to 5% year over year, holding the midpoint of our prior guidance.
Excluding pension headwind EPS growth would be up 10% to 11% for the year.
On cash we continue to expect to meet our original free cash flow guidance of $3 nine to $4 3 billion in 2023 or five one to $5 5 billion.
Excluding the net impact of the settlement.
Greg Lewis: In safety and productivity solutions, our outlook continues to be impacted by the current low levels of investment in new warehouse capacity and distributor destocking. However, the impact on our financials is declining, creating stabilization and signs of potential return to growth in the coming quarters. For the fourth quarter, we expect these effects to lead to sales that are roughly flat sequentially, down organically but to a lesser degree than earlier in the year.
Driven by stronger collections and inventory management.
Higher cash tax outlays in the third quarter will be offset by more favorable cash outlook in the fourth quarter, giving us confidence in our full year guidance.
So to summarize we're narrowing our full year guidance ranges for sales and EPS, while raising the mid point of our segment margin expectations based on our confidence and the ability to successfully deliver results in a fluid operating environment.
Greg Lewis: Fortes will grow sequentially and year-over-year in the fourth quarter as we build on momentum from this quarter. While new warehouse investment remains challenged, customers continue to upgrade their existing infrastructure, which will lead to another quarter of double-digit roads for the aftermarket services portion of our integrated business. For the full year, we now expect sales to be down approximately 20%, as the SPS portfolio bounces along the bottom of the cycle. However, the productivity actions and operational improvements we have made this year will still enable us to expand margins solidly for the year.
Before turning back to demo.
Let's turn to the next page and discuss our preliminary thoughts for 2024.
While next year's environment is shaping up to be just as volatile as the last few years, our proven track record of navigating an uncertain macro backdrop should give investors confidence in our ability to execute on our commitments.
We have a unique set of operating principles that enable us to move quickly and decisively to drive growth protect margins ensure liquidity and position ourselves well to deliver in any environment.
Our end market exposures remain favorable into 2024, particularly in aerospace and energy we expect.
Greg Lewis: In building technologies, we were prudent with our posture at the start of the year as we face unprecedented central bank tightening cycle and uncertain demand environments. While the operating backdrop remains difficult, we are encouraged by the sequential orders progression we saw each month throughout 3Q, including double-digit products orders growth in the month of September. For the fourth quarter, we expect modest sequential sales improvement from our 2Q and 3Q levels with growth continuing to be led by our long cycle building solution business.
Continued commercial aviation fleet growth and replenishment increased domestic and international defense investment.
Mid geopolitical uncertainty.
Heightened focus on automation due to labor scarcity and.
Increased energy demands and intensifying de carbonization goals accelerating the need for technology, enabling the energy transition and increased infrastructure spending.
Greg Lewis: The supply chain is improving each quarter, and we expect to make further progress on converting our passive backlog into sales. We're also encouraged by the resiliency we are seeing in verticals such as airports, government, and education, and expect institutional demands to provide support amid commercial softness. We project HBT sales to be up low single digits for the year with commercial and operational excellence enabling HBT to be our largest margin expander in 2023.
All of these compelling vertical tailwind as well as ongoing customer demand to help enabled digitalization give us confidence that all four of our reconstituted businesses will deliver growth next year.
The timing of an eventual recovery in short cycle is lesser than it will be a swing variable to our sales outcome.
We have a strong setup that will drive growth in sales margin and earnings in 2024 within our long term financial framework.
We expect organic growth to be led by our long cycle businesses due to record level demand and backlog in 2023.
Greg Lewis: Now moving on to our other key guidance metrics, we anticipate net below the line impact be between negative 105 million to negative 155 million dollars in the fourth quarter and between negative 525 and negative 575 million dollars for the full year. This guidance includes a range of reposition between 45 and 85 million dollars in the fourth quarter and between 260 and 300 million dollars for the full year as we continue to invest in high return projects to support our future growth and productivity.
Additionally, our focus on new product innovation is yielding benefits.
We believe extending our success in delivering new solutions to our existing vast installed base as well as the commercial efforts driving greater penetration of our current set of technologies to new markets.
Help enable robust organic growth.
That coupled with our ongoing leadership in high growth regions and the strength of our software franchise gives us confidence in the top line.
We also expect supply chain to continue to improve gradually in aero throughout next year.
Greg Lewis: We expect the adjusted effective tax rate to be around 19 percent in the fourth quarter and around 21 percent for the full year unchanged from our previous guidance. We anticipate average share count to be around 664 million shares in the fourth quarter and around 669 million shares for the full year as we continue to reduce our share count through opportunistic buy. Back. As a result of these inputs, we anticipate adjustments for share to be between $2.53 and $2.63 for the fourth quarter.
For overall Honeywell 2020 for margins will benefit from improving business mix.
Continued benefits from price cost and productivity actions, including our precision focus on reducing raw material costs as well as implementing AI into our development and production.
We will continue our investments in R&D and growth oriented capital expenditures and remain keenly focused on creating uniquely innovative differentiated recession proof technologies to address the world's toughest automation digitalization and sustainability challenges.
Greg Lewis: Flat to up 4% year over year. Excluding pension headwinds, fourth quarter EPS roads would be up 6% to 10%. For the full year, we're nearing both ends of our EPS guidance ranges by 5% for a new range of $9.10 to $9.20, a 4% to 5% year over year, holding the midpoint of our prior guide. Excluding pension headwind, EPS roads would be up 10% to 11% for the year. On cash, we continue to expect to be our original three cash flow guidance of $3.9 to $4.3 billion in 2023, or $5.1 to $5.5 billion, excluding the net impact of settlement, driven by stronger collections and inventory management. Higher cash tax outlays in the third quarter will be offset by more favorable cash outlook in the fourth quarter, giving us confidence in our full year guidance.
While we expect our spend on repositioning to be relatively stable year over year in 'twenty. Four we also anticipate modestly higher interest expense and lower pension income next year, both driven by the acceleration in yields across the bond market, we have seen since this summer.
That will lead to slightly higher net below the line expense.
We will provide more information about the year over year magnitude of these changes at year end when we snap the line on pension, but we anticipate there'll be more in line with normal historical changes not last year's outsized impacts.
As a reminder, pension income is a noncash item given our overfunded pension status and will ensure no incremental contributions are needed.
This is a great position to be in for our employees, both former and current and our shareholders.
We.
Our cash to grow in line or above earnings next year with improvement assisted by the absence of the onetime settlement from Derisking, our balance sheet earlier, this year, which had an outsized effect on our cash performance.
Greg Lewis: So to summarize, we're nearing our full year guidance ranges for sales and EPS, while raising the midpoint of our seventh margin expectations, based on our confidence and the ability to successfully deliver results in a fluid operating environment.
We're also embarking on a multi year unwind over the last two years of working capital buildup. We will continue benefiting from improved demand planning and optimized production and materials management using our enhanced end to end process and digitalization capabilities through accelerator.
Greg Lewis: Before turning back to Vimel, let's turn to the next page and discuss our preliminary thoughts for 2024. While next year's environment is shaping up to be just as volatile as the last few years, our proven track record of navigating an uncertain macro backdrop should give investors confidence in our ability to execute on our commitments. We have a unique set of operating principles that enable us to move quickly and decisively to drive growth, protect margins, ensure liquidity, and position ourselves well to deliver in any environment.
We see several compelling growth capital opportunities and expect to fund high return projects through disciplined capex spending in the coming years.
Our balance sheet strength will continue to give us meaningful capacity for M&A and we expect an ongoing favorable deal environment going into 2024, which supports our intention to accelerate capital deployment.
Greg Lewis: Our end market exposures remain favorable into 2024, particularly in aerospace and energy. We expect continued commercial aviation fleet growth and replenishment increase domestic and international defense investment amid geopolitical uncertainty, heightened focus on automation due to labor scarcity, increased energy demands and intensifying decarbonization goals accelerating the need for technologies enabling the energy transition and increased infrastructure spending. All of these compelling vertical tailwinds, as well as ongoing customer demand to help enable digitalization, give us confidence that all four of our reconstituted businesses will deliver growth next year.
Now I'm going to pass the call over to them all to say a few words about the announcement, we made earlier this month on our portfolio and strategic priorities over to you Bill.
Thanks, Greg two weeks ago, we announced the portfolio reorganization that aligns our business distinct compelling mega trends that are shaping the future of our industries and our planet.
These are automation the future of aviation and energy transition and all are underpinned by our robust capability in digitalization.
This realignment will enable us to have a simpler a clear strategic focus and clearly define honeywell's value proposition for our customers investors and employees.
Greg Lewis: The timing of an eventual recovery in short cycle is less certain and will be a swing variable to our sales outcome. We have a strong setup that will drive growth in sales, margins, and earnings in 2024 within our long-term financial framework. We expect organic growth to be led by our long cycle businesses due to record-level demand and backlog in 2023. Additionally, our focus on new product innovation is yielding benefits. We believe extending our success in delivering new solutions to our existing vast install base, as well as the commercial efforts driving greater penetration of our current set of technologies to new markets will help enable robust organic growth.
We are in automation aerospace and sustainably focused technology company.
We believe this change will empower our business leaders to better prioritize R&D effort.
Capital expenditures M&A pipeline go to market strategies and more it will also create a more focused framework for M&A, allowing us to pursue bolt on acquisition and select disposition that aligns to our teams and enhance our portfolio.
Overall, we have demonstrative the ability to operate under dynamic circumstances, including a global pandemic.
<unk> scaled supply chain disruption heightened inflation international trade disputes unprecedented central bank tightening and geopolitical tension.
Greg Lewis: That coupled with our ongoing leadership and high growth regions and the strength of our software franchise gives us confidence in the top one. We also expect supply chain to continue to improve gradually in aero throughout next year. For overall Honeywell, 2024 margins will benefit from improving business mix, continued benefits from price costs and productivity actions, including our precision focus on reducing raw material costs as well as implementing AI into our development and production.
Underpinned by the strength of our differentiated <unk> operating system. We are confident that we can deliver strong financial performance in 2024, we will provide more specific inputs in our annual outlook call. Once we close out the year now, let's turn on to the slide seven and I will close with some long term comments.
Let's take a minute to zoom out from the quarterly result.
As a reminder, my priorities as CEO, our first simplify the portfolio to better align with our key mega trend that I mentioned earlier.
Greg Lewis: We will continue our investments in R&D and growth oriented capital expenditures and remain keenly focused on creating uniquely innovative, differentiated, recession-proof technologies to address the world's toughest automation, digitalization and sustainability challenges. While we expect our spend on repositioning to be relatively stable year over year in 24, we also anticipate modestly higher interest expense and lower pension income next year. Both driven by the acceleration and yields across the bond market, we have seen since this summer.
Next I will drive accelerated organic growth by strengthening our innovation playbook growing our sustainability and digitalization offering and maintaining our leadership position in high growth region.
On top of those organic growth effort I will manage the portfolio by enhancing our M&A capability, including staying disciplined and executing on bolt on M&A aligned to these three mega trends.
I also plan to advance the accelerated operating system to create more value through business model optimization.
We continue to make progress on our long term growth algorithm that we discussed during our May investor day.
Greg Lewis: That will lead to slightly higher net below the line expense. We will provide more information about the year-over-year magnitude of these changes at year-end when we snap the line on pension, but we anticipate it will be more in line with normal historical changes, not last year's outside impact. As a reminder, pension income is a non-cash item, given our overfunded pension status, and we'll ensure no incremental contributions are needed. This is a great position to be in for employees, both former and current and our shareholders.
Our 2023 guidance represents another year of strong financial performance consistent with our framework following meaningful progress in 2017 through some very turbulent time.
We will continue to carefully track our progression towards achieving our targets and remain confident in our ability to accelerate growth expand gross margin to above 40% achieved 95% plus segment margins and generate free cash flow margins of mid teens plus.
Greg Lewis: We expect our cash to grow in line or above earnings next year with improvement assisted by the absence of the one-time settlement from derisking our balance sheet earlier this year, which had an outside effect on our cash performance.
I am thrilled to lead Honeywell into the next phase of our transformation and I'm optimistic about the tremendous opportunities. We are uncovering to capture value drive incremental sales growth expand margins and generate more cash and we will continue to update you as these efforts increasingly translate into enhanced financial.
Greg Lewis: We're also embarking on a multi-year online of the last two years of working capital build-up. We will continue benefiting from improved demand planning, and optimized production, and materials management using our enhanced end-to-end process and digitalization capabilities through Accelerator. We see several compelling growth capital opportunities and expect to fund high return projects through discipline, cafe expending in the coming years. Our balance sheet strength will continue to give us meaningful capacity for M&A and we expect an ongoing favorable deal environment going into 2024, which supports our intention to accelerate capital deployment.
<unk> performance.
Now, let's turn to slide eight for clothing part before we move into the Q&A.
We delivered on all commitments in third quarter.
We have and will continue to demonstrate resiliency, while managing to a dynamic macroeconomic and geopolitical backdrop overall demand generation remained strong, particularly in the long cycle businesses with orders up double digit year over year and record backlog levels will continue to support.
Strong results.
Vimal Kapur: Now, I'm going to pass the call over to Vimel to say a few words about the announcement we made earlier this month on our portfolio and strategic priorities. Over you, Vimel. Thanks, Rick.
While we navigate an external and an environment that remains challenging for the short cycle.
Our portfolio is aligned to thoughtful mega trends, including automation, the future of aviation and energy transition all underpinned by digitalization.
Vimal Kapur: Two weeks ago, we announced a portfolio reorganization that aligns our business with distinct compelling mega-trend that are shaping the future of our industries and our planet. These are automation, the future of aviation, and energy transition, and all are underpinned by our robust capability in digitalization. This realignment will enable us to have a simpler, clearer, tragic focus and clearly define Honeywell's value proposition for our customers, investors, and employees.
Our technologically differentiated portfolio of solutions and a world class on U S <unk> operating system.
Enable us to capitalize on these trends.
And drive the profitable growth, we outlined in our long term financial framework.
We're expecting a strong finish to 2023 and well positioned for further growth in 2024, we'll look forward to updating you on our progress as we execute on our commitment.
With that Sean let's move to Q&A.
Vimal Kapur: We are an automation, aerospace and sustainability focus technology company. The first framework for M&A, allowing us to pursue both on acquisition and select this position that aligns to our teams in enhanced our portfolio. Overall, we have demonstrated the ability to operate under dynamic circumstances, including a global pandemic, large-scale supply chain disruption, heightened inflation, international trade disputes, unprecedented central bank tightening and geopolitical tension. Underpinned by the strength of our differentiated accelerator operating system, we are confident that we can deliver strong financial performance in 2024.
As a reminder.
And Greg are now available to answer your questions. We ask you please be mindful of others in the queue by only asking one question.
Operator, please open the line for Q&A.
As a reminder to ask a question you will need to press star one one on your telephone.
To remove yourself from the question queue plus star one again.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Julian Mitchell of Barclays.
Hi, good morning.
Maybe good morning, Joe.
Good morning, maybe just wanted to start off with a question on the fourth quarter.
Margin outlook, so I think youre looking at about <unk>.
40 bps of margin uplift sequentially, 30% operating leverage sequentially.
Vimal Kapur: We will provide more specific input in our annual outlook all, once we close out the year.
Vimal Kapur: Now, let's turn on to the slide 7 and I will close this some long-term comments. On top of those organic growth efforts, I will manage the portfolio of enhancing our M&A capability, including saying discipline and executing on bolt on M&A aligned to these three mega trends. I also plan to advance the accelerator operating system to create more value through business model optimizations. We continue to make progress on our long-term growth algorithm that we discussed during our main yesterday.
It looks like PMT, perhaps is the segment, where we're expecting a very big margin uplift.
So just wondered if you could go into a little bit more detail around that.
The margins have been down year on year old year. There. So just maybe help us understand whats really changing a lot.
In the fourth quarter to get that.
Moving and then just as a very quick follow up.
HPT.
Cross currents.
Hey, you got a low base as we think about 'twenty full but the interest rate environment is negative so just confidence in hpt's growth stability looking out. Thank you.
Hey, Julien so I'll take the first one and ill pitch it to venmo for number two so overall, we've had a great year and margin expansion for Honeywell.
We're looking to finish the year.
Vimal Kapur: Our 2023 guidance represents another year of strong financial performance consistent with our framework following meaningful progress since 2017 through some very turbulent time. We'll continue to carefully track our progression towards achieving our targets and remain confident in our ability to accelerate growth, expand growth margin to above 40%. Achieve 25% plus segment margin and generate free cash flow margins of mid-teens plus. I'm sure to lead Honeywell into the next phase of our transformation and I'm optimistic about the tremendous opportunities we are uncovering to capture value. Drive incremental sales growth, expand margins and generate more cash and we'll continue to update you as these efforts increasingly transcend into enhanced financial performance.
At the high end of our guidance range that <unk> seen so I think we've continued to demonstrate our ability to drive margin expansion in any environment and as we look into Q4 as you said, we see a nice sequential improvement from Q3 to Q4.
And some healthy margin expansion there as well in PMT, we talk about it often.
The margin tends to be somewhat lumpy from any one quarter to the next big part of that of course is is where catalyst shipments.
Shipments windup in during the course of the year in which end market and so as we go into Q4 for PMT.
A pretty healthy.
Mix for sure and we're seeing also some recovery from some of the challenges that we've had earlier in the year.
With operations and am so that's really the underlying.
Vimal Kapur: Now let's turn to the slide 8 for closing parts before we move into the Q&A. We delivered on all commitments in third quarter. We have and will continue to demonstrate resiliency while managing through a dynamic macro economic and geopolitical backdrop. Overall, demand generation remains strong, particularly in the long cycles businesses with orders up double digit year over year and record backlog levels will continue to support strong results. While we navigate an external environment that remains challenging for the short cycle.
NOI theme for Q4, but we think the teams have done a great job in PMT is on track also to have a very nice year overall with high single digit top line growth and some modest margin expansion. So we're pretty pleased with where we are going with that and maybe some I'll hand. It to you on the HPT with Julian on Expedia, I would say I'll spend a minute to kind of force.
Go back to what our business model list before I kind of answer your question I think there are three parts of our SPD business model first it is 60% product, 40% solution and within the party business solution more than half is after market, so, but very mix, it's a short cycle oriented business.
Vimal Kapur: Paul. Our portfolio is aligned to powerful mega-trend, including automation, the future of aviation, and energy transition, all underpinned by digitalization. Our technologically differentiated portfolio of solutions and our word-class Honeywell accelerator operating system will enable us to capitalize on these trends and drive the profitable growth we outlined in our long-term financial framework. We're expecting a strong finish to 2023 and well-positioned for the growth in 2024. We look forward updating you on the progress as we execute on our commitment.
Sean Meakim: With that, Sean, let's go to Q&A. As a reminder, Vimal and Greg are now available to answer your questions. We ask you, please be mindful of others in the queue by only asking one question.
The second point is the products. We have they are critical to the buildings and Thats why they are higher margin and that explains our constant margin improvement in the segment and finally, an explosion in building. This combination of real estate, but also infrastructure and all of that put together explains all of those sub $20 22 will be.
Grow.
Double digit and this year will grow low single digits.
To your question of 2024.
Remain confident.
<unk> group on our guidance.
Our backlog is growing in our solution business and of course, the swing factor remains here the short cycle position.
Great. Thank you.
Okay.
Operator: Operator, please open the line for Q&A. As a reminder to ask a question, you will need to press star 1-1 on your telephone. To remove yourself from the question queue, press star 1-1 again. Please stand by while we compile the Q&A roster.
Julian Mitchell: Our first question comes from the line of Julian Mitchell of Barclays. Hi, good morning. Maybe just wanted to start off with a question on the fourth quarter margin outlook. I think you're looking at about 40 bits of margin uplift, sequentially, 30% operating leverage, sequentially. It looks like PMT perhaps is the segment where you're expecting a very big margin uplift. I just wondered if you could go into a little bit more detail around that.
Can we have the next question please.
Greg Lewis: The margins have been down year-on-year or year there to just maybe help us understand what's really changing a lot in the fourth quarter to get that moving, and then just as a very quick follow-up, HBT, cross-currents this year you've got a low base as we think about 24, but the interest rate environment is negative, so just confident in HBT's growth ability looking out. Thank you. Hey Julian, so I'll take the first one, and I'll pitch it to them for number two.
Our next question comes from the line of Steve Tusa of Jpmorgan.
Hey, guys good morning.
Hey, good morning, Steve.
So some cross currents here at Sps I mean, it's now down to.
Like 10% of your of your profits.
Things seem to be bottoming there, but.
Does the timing of those shipments can that business grow next year or should we be kind of prepared for another down year. There maybe if you could just like base out the expectations are for Sps.
Sure Steve.
Alright, spss coming out of the bullwhip effect of Covid.
And clearly that is reflected in our Q3 numbers, but as we mentioned in our earlier conversation. The Sps order in Q3, we had a book to Bill of one and we see similar trends continuing in Q4, which means we are in a recovery cycle in this business moving forward, starting Q4, and we'll see that in 2024.
Greg Lewis: So overall, we've had a great year in margin expansion for Honeywell, and again we're looking to finish the year at the high end of our guidance range as you've seen. So I think we've continued to demonstrate our ability to drive margin expansion in any environment. As we look into Q4, as you said, we see a nice sequential improvement from Q3 to Q4 and some healthy margin expansion there as well. In PMT, we talk about it often, the margin tends to be somewhat lumpy from any one quarter to the next.
Margin expansion will certainly help there because the volumes growth will help and margin expansion, we have rebased <unk> cost base aligned to the new revenue scale. So overall, we should see a recovery from this point onwards.
Okay. So that's a growth business with some nice leverage next year, so what youre, saying.
I think Steve the overall topline growth could be flattish next year, but as <unk> said with particularly as the short cycle accelerates. There is theres a lot of leverage in those short cycle businesses in particular so.
Greg Lewis: A big part of that of course is where Catalyst shipments wind up in during the course of the year and in which end market. And so as we go into Q4 for PMT, we have a pretty healthy UOP mix for sure, and we're seeing also some recovery from some of the challenges that we've had earlier in the year with operations in AM. So that's really the underlying theme for Q4, but we think the teams have done a great job and PMT is on track. Also, to have a very nice year overall with high single digit top line growth and some modest margin expansion.
So we absolutely will do that I expect to see that come through and again on the <unk> side.
The aftermarket growing far greater than the project business, we should see some nice mix in that in that business as well so.
Timing of that acceleration as we've said overall still.
That is something that we're waiting to see happen, but we've flattened out bottomed out the orders rates. So.
Should be coming anytime now and when it does a lot of leverage comes along with it.
Vimal Kapur: So we're pretty pleased with where we are going with that and maybe them all hand it to you on the HPT one. So Julian on HPT I would say, I'll spend a minute to kind of first go back to what our business model is before I kind of answer your question. I think it is 60% product, 40% solution and within 40% solution more than half is after market. So the very mix is a short cycle oriented business.
Vimal Kapur: The second point is the products we have, they are critical to the buildings and that's why they are higher margin and that explains our constant margin improvement in the segment. And finally, our exposure and building this combination of real estate but also infrastructure and all that put together explains our results of 2022, where we grow double digits and this year we'll grow low single digits. To your question of 2024, we remain confident that HPT will grow for our guidance. You know, our backlog is growing in our solution business and of course the swing factor remains here the short cycle position. Thank you. Great. Thank you.
Thank you.
Our next question.
Comes from Scott Davis Melius research.
Hey, good good good good morning, guys Gregg good morning, Scott.
Operator: Let me have the next question, please.
Hey.
The world is kind of changing and volatile China's seems like it's taken another step down but.
Can you guys walk us around the world.
What youre seeing from a geographic mix perspective.
So a little bit of color on how things may be changed through the quarter or into <unk>.
From that front as well and that that will be my question I'll pass it on after that thanks.
Okay. Thanks, Scott I would say you are absolutely right Scott that is sort of aviation how things are working in the world at this point.
Let me start with China, we are going to have high single digit growth in China. This year.
Primarily supported by growth in Aero, but also in some other businesses too.
We see China to be a similar trend mid single digit to high single digit in 2024, we have enough backlog and strengthen arrow to support that in other parts of the world I would say.
<unk> a lot of strength in Asia in particular, India, and ASEAN countries and Middle East also given our strong position in energy.
<unk>, that's pretty well.
And then Europe.
<unk> probably.
I'll see the impact of high interest rate and challenging environment. So probably we are expecting the same here. So it's a good balance of positive or negative, but one thing I'd like to add there is as we see our.
Backlog, which grew by 8%. We also see good artist position forecasted for quarter, four it's going to position us pretty well for 2024 ahead in spite of the challenging condition, because we do expect our long cycle businesses are going to have to drive in our.
Steve Tusa: Next question comes from the line of Steve Tusa, of JP Morgan. Hey guys, good morning. Thanks, my name is Steve. So some cross-currents here at SPS, I mean it's now down to, you know, like 10% of your profits. Things seem to be bottoming there, but the timing of those shipments, can that business grow next year or should be kind of prepared for another down year there? Maybe if you could just like face out the expectations there for SPS. You're safe. It's all right.
The forecasted range of revenue growth for 2024.
Thank you guys.
Thank you.
Our next question.
Comes from the line.
<unk> co.
Wolfe research.
Nigel Coe your line is open. Please proceed.
Yes, sorry about that I had my mute button answer about that.
Vimal Kapur: SPS is coming out of the bullfabric act effect off COVID and clearly that reflects on our Q3 numbers. But as we mentioned in our earlier conversation, the SPS order is in Q3. We had a book to bail up one and we see similar trends continuing in Q4, which means we are under recovery cycle in this business moving forward starting Q4 and we'll see that in 2024. Margin expansion will certainly help there because the volume growth will help in margin expansion.
For the question.
So Greg I don't want to put.
Words in your mouth, but.
Think.
Do you see in <unk> for us.
So within the long term framework of 47 six basis points of AUM.
Is that sort of what you meant based on what you see today man stands a lot of macro uncertainty out there and.
And if I could just clarify that.
Free cash flow growing in line with earnings whatever that may be should we add back the one time as this year as the base and then grow from there because obviously $1 $2 billion is a big number.
Vimal Kapur: We have rebase and a cost base aligned to the new revenue scale. So overall, we should see recovery from this front onwards. Okay, so that's a growth business with a nice leverage next year. So what you're saying? I think the overall top line growth could be flatish next year, but as Bimmel said, with particularly as the short cycle accelerates, there's a lot of leverage in those short cycle businesses in particular. So we absolutely will do that, you know, expect to see that come through.
Any thoughts on the pension headwind will be helpful as well.
Sure sure, yes, so again, it's way too early for guidance of course, we'll do that specifically.
90 days or so when when we announce our full year earnings. So the comments, we've been giving is that we see things within that long term framework. That's that's a reasonably good.
Barometer for how we're seeing things at the moment, but again 90 days from now we'll know a lot more in terms of the free cash flow you're exactly right. We have $1 $2 billion of settlements. That's obviously not going to happen again next year. So that's immediate add back to the base and then from there we expect to see free cash.
Vimal Kapur: And again, on the integrated side, you know, with the aftermarket growing, you know, far greater than the project business, we should see some nice mix in that, in that business as well. So, you know, the timing of that acceleration, you know, as you said overall, still, you know, that is something that we're, you know, waiting to see happen. But we've flattened out bottomed out the orders rate. So, you know, it should be coming anytime now. And when it does, a lot of leverage comes along with it. Thank you.
Cash grow in line or maybe better with earnings that maybe maybe around that is really a matter of we expect to start seeing the <unk>.
Liquidation of our working capital, but we also have a very robust.
Set of growth projects on capital and so we're going to be going through our budgeting process here over the course of the fourth quarter and we may have some good things to put forth from a capex standpoint next year. So.
Scott Davis: Our next question comes from Scott Davis, Amelia's research. Hey, good, good, good, good, good morning, guys. Good morning, Greg. Good morning, Scott. Hey, the world is kind of changing and volatile. China seems like it's taken another step down, but can you guys walk us around the world and what you're seeing from a geographic mix perspective and it's a little bit of color on how things may be changed through the quarter or into 4Q from that front as well.
But we feel really good about the progress that we're making and in cash flow again this quarter very nice cash flow number one.
100% conversion, 17% cash margin. So we've made some nice progress.
Another kind of good anecdotal point, we've started to see arrow bring their days of supply down in inventory. So while the number in the aggregate it's gone up there obviously growing the business in the high teens.
But we are starting to see the efficiency and inventory show up so that's really how we're thinking about it at this stage for next year, but we'll we'll know a lot more in 90 days and be a bit more precise than that.
Scott Davis: That'll be my question. I'll pass it on after that. Thanks. Okay. Thanks, Scott. I would say you're absolutely right. Scott, there is a lot of variation and how things are working in the world at this point.
On pension.
Vimal Kapur: Let me start with China. We are going to have a high single digit growth in China this year, primarily supported by growth in Aero, but also in some other businesses too. We see China to be a similar trend, mid single digit to high single digit in 2024. We have enough backlog and strength in Aero to support that in other parts of the world. I would say we see a lot of strength in Asia in particular, India and ASEAN countries and Middle East also given us strong position in energy positions.
Could it could be 50, or 100 million worse, we'll see rates move around a lot as you know.
And as I mentioned in my comments, we snap the line at the end of the year.
But it's it's.
It's trending to be lower income next year, but obviously nowhere near the kind of shock that we had.
In 2023 change.
Thank you. Our next question comes from the line of Andrew <unk> of Bank of America.
Yes, good morning.
Vimal Kapur: That's pretty well. And then Europe and Europe and US probably we all see the impact of our interest rate and challenging environment. So probably we are experiencing the same here. So it's a good balance of positive and negative, but one thing I'd like to add there is as we see our backlog which grew by the end of the year. By 8% we also see good orders position forecasted for quarter four. It's going to position us pretty well for 2024 ahead in part of the challenging condition because we do expect our long cycle businesses are going to have to drive in our, you know, the forecasted range of revenue growth for 2024. Thank you guys. Thank you.
Good morning quarter, yes.
Just a question on.
Advanced materials I think it was a little bit weaker than we expected I think you said softness in electronics come from lifestyle drove the declines I think last quarter, you highlighted electronics and chemicals.
Just.
And I want to understand what the changes are because I think before you were saying that electronic materials should improve in second half just right I know, it's a high margin business, just what has changed and how does that business look into.
And then maybe what kind of an upcoming haven't come next year. Thanks, so much.
Yes, Thanks, Andrew.
I would say.
In the.
The fluorine products the business has solid citizens being extremely Val continues to grow as its applications keeps growing its geographic spread keeps growing so that's very positive electronic materials have definitely bottomed out we have.
Nigel Coe: Our next question comes from the line of Nigel Coe of Wolf Research. Nigel Coe your line is open, please proceed. Yes, sorry about that. Thanks for the question. Greg, I want to put, you know, kind of working mouth, but I think I heard, you know, do you see in 2024 as a sort of within the long term framework of four to seven, you know, 50 base points of OM? Is that sort of what you meant based on what you see today?
We are being sick lending of recovery from the key fab manufacturer and part of that is seen in Q4, not as good as we'd like it to see but we are seeing signals of recovery in the electronics side and there are parts of chemicals, which are weak which is affected in our overall revenue.
And like any other short cycle.
We expect it to recover aligned with economic conditions, there, but I must say that.
Four of our conviction in the business is very strong we had outstanding years in 2021, and 2022 and this year should be seen in comps to the past two years.
Nigel Coe: I mean, I understand a lot of macro and senior there. And if I could just clarify, you know, the free cash flow growing in line with earnings, whatever that may be. Should we add back the one time as this year as the base and then grow from there? Because obviously, you know, 1.2 billion dollars is a big number. And any thoughts on the pension head would be helpful as well. Sure, sure.
Okay.
Greg Lewis: Yes, so again, it's, it's way too early for guidance. Of course, we'll do that specifically, you know, in 90 days or so when, when we announced our full year earnings. So, you know, the comments we've been giving is that we see things within that, you know, long term framework that's, that's a reasonably good, you know, barometer for how we're seeing things at the moment, but again, 90 days from now, we'll know a lot more.
Our next question comes from the line of Sheila <unk> of Jefferies.
Hey, good morning, everyone. Thank you.
Thanks Julien.
Hi, I wanted to ask about Erith, both please and specifically the pension space great growth in the quarter up 18%. What are you seeing from a bookings perspective, there the sustainability of demand with everything going on and how does that factor into Aero margin mix. Thank you.
Greg Lewis: In terms of the free cash flow, you're exactly right. You know, we have 1.2 billion dollars of settlement. That's obviously not going to happen again, you know, next year. So that's a immediate add back to the base. And then from there, we expect to see, you know, free cash grow in line or maybe better with earnings. The maybe the maybe around that is really a matter of, we expect to start seeing the liquidation of our working capital, but we also have a very robust set of growth projects on capital.
Sure.
Hey, Thanks, Sheila Avi.
I think our one of our highest headline of our Q3 has been arrow and within Aero defense and space, our bookings continued to be strong.
Q3 was a strong booking quarter, so Q2, and thats driven by not only the U S. Domestic bookings, but also international defense markets opening up and we clearly see reflecting that in our booking rates.
Revenue growth is driven by supply chain actions, which are now being seen in defense also and we expect.
Greg Lewis: And so we're going to be going through our budgeting process here over the course of the fourth quarter. And we may have some good things to, you know, put forth from a capital standpoint next year. But we feel really good about the progress that we're making in in cash flow. Again, this quarter, very nice cash flow number, 100% conversion, 17% cash margin. So it made some nice progress. One other, you know, kind of good anecdotal point.
The continued growth in the defense segment in quarter, four and 2020, Florida had too. So punch line is that defense is going to become a contributing factor in the continued annual growth given the overall geopolitical political conditions in the world.
Hey, Jim This is Sean.
On.
On aerospace margins as it relates to defense and space, it's not a material drag on our margins so that growth is going to be.
Greg Lewis: We've started to see arrow bring their days of supply down in inventory. So while the number and the average gone up, they're obviously growing the business in the high team. But we are starting to see the efficiency and inventory show up. So, you know, that's really how we're thinking about it at the stage for next year, but we'll know a lot more in 90 days and be a bit more precise. And then, you know, on pension, you know, could it could be 50 or 100 million worst, you know, we'll see rates move around a lot as you know.
Not materially different than the overall margin rates. So we find that to be at growth being quite nice to segment profit growth.
Thank you. Our next question comes from Jeff Sprague of vertical research.
Hey, Thank you good morning, everyone.
John and Jeff.
Good morning.
Greg Lewis: And as I mentioned in my comments, we snap the line at the end of the year, but it's trending to be, you know, lowering come next year, but obviously nowhere near the kind of shock that we had in the 2023 change. Thank you.
And not to get too tied up in arcane pension accounting.
But did you guys change something.
Intention to mitigate the impact of interest rate changes certainly nice to hear the headwind is that modest but.
Andrew Obin: Our next question comes from the line of Andrew Obin, of Bank of America. I guess, good morning. Good morning.
My rough math with us maybe suggested a bit more.
And then maybe just to add another part than when you touched on advanced materials, a little bit in a previous.
Vimal Kapur: Yeah, just a question on advanced materials. I think it was a little bit weaker than we expected. I think you said softness and electronics came from lifestyle growth to declines. I think last quarter you highlighted electronics and chemicals. Just, you know, one understand what the changes are because I think before you were saying that electronic materials should improve in second half. Just, right, I know it's a high margin business. Just what has changed and how does the business look into year and then maybe what kind of momentum you have into next year.
Answer, but can you give us a little bit of color on.
How you see the four <unk> to $4 54 be transition unfolding what's happening.
<unk> prices and availability.
Where you stand competitively as these Oems are making the shift thank you.
So maybe I'll hit the pension one first so no Jeff we havent changed anything in our accounting, we will do our normal mark to market.
In the fourth quarter as we've done for many years now.
And again, what I mentioned $50 million to $100 million is a range, we'll see how the final numbers pan out with discount rates.
Vimal Kapur: Thanks so much. Yeah, thanks, Andrew. Look, I would say in, in, in the, the fluorine products, the business, the softest is doing extremely well. Continue to grow as this application keeps growing. It's geographic spread keeps growing. So that's, that's very positive. Electronic materials have definitely bottomed out. We have, we have seen signaling of recovery from the crease fat manufacturer and part of that is seen in Q4 not as good as you like it to see.
Returns on assets for for the asset basis themselves so nothing different.
We will give you a more precise answer after the turn of the year when we snap the line there.
<unk> advanced material I would say its.
It's pretty fascinating to see how this changeover is happening between salt sales for Dan and 454, we are working with all key Oems for several years. This is not a new dimension for US we have been on it for last several years and we see the switch of what's happening from 14% to 454 in the times ahead, and we have secured our position.
Vimal Kapur: But we are seeing signals of recovery in the electronic side and there are parts of chemicals which are weak, which is reflected in our overall revenue. And like any other short cycle, we expected to recover aligned with economic conditions there, but, but I must say that our, our conviction in the business is very strong. We had outstanding years in 2021 and 2022. And this year should be seen in comes to, you know, the past two years.
The key Oems, So I would say for US is I would call it like business as usual because this is something which is part of our business and we were ahead of the game here to look ahead and think about is simplification and on us and we are well covered on that.
Thank you. Our next question comes from the line of Nicole delays of Deutsche Bank.
Yeah. Thanks, good morning, guys.
Hey, Nicole good morning.
Sheila Kahyaoglu: Next question comes from the line of Sheila Kayalu of Jeffries.
Can we double click a little bit on what you guys are seeing with respect to channel inventory reductions within HBC and Sps where are we in that inventory destocking process and do you think we will enter 2024 and a pretty clean position with respect to channel inventories.
Vimal Kapur: Hey, good morning, everyone. Thank you. Hi, I want to ask about space, please, and specifically defense and space, a great growth in the quarter of 18%. What are you seeing from a booking perspective there, the sustainability of demand with everything going on, and how does defense factor into arrow margin next. Thank you. Thanks, Sheila. I mean, I think our one of our headline of our Q3 is in arrow and within arrow that fence and space are bookings continue to be strong.
Because we have a I would say.
Gentlemen, inventory is reflected in our orders right.
Our orders rate for both buildings in SBS for had a book to Bill of one last quarter and a similar trends emphasis being so far in October which tells me that we are on a path of a slight recovery.
Vimal Kapur: Q3 was a strong booking quarter. So was Q2 and that's driven by not only the US domestic bookings, but also international defense markets opening up and we clearly see reflecting that in our booking rates. The revenue growth is driven by supply chain actions, which are now being seen in defense also, and we expect, you know, the continued growth in the defense segment in quarter four and 2024 ahead too. So punchline is that defense is going to become a contributing factor in the continued error growth given the overall geopolitical condition in the world.
And.
That is that's the indirect measure for me on channels are looking at stocking back again from the cycle. So.
And we expect short cycle to slightly recover progressively every month moving forward, but not as fast as we'd like it to be at this point.
Thank you. Our next question comes from the line of Deane Dray of RBC capital markets.
Thank you and good morning, everyone.
Vimal Kapur: Thank you, Sheila. I understand on on aerospace margins, as relates to defense space, it's not a material drag on our margins. So that growth is going to be, you know, not materially different than the overall margin rate. So we find that to be that growth be quite nice to segment.
Greg Lewis: Craig. Thank you.
You called out cost inflation headwinds could you size that and what kind of pricing actions have you taken and then on the verticals Airport government and education.
How has government stimulus has that started to come through and are you benefiting there. Thanks.
Yeah, Hey, Deane, we don't disclose our individual segments.
Jeff Sprague: Our next question comes from Jeff Sprague of Vertical Research. Hey, thank you. Good morning, everyone. Good morning. Hey, not to get too tight up and arcane pension accounting. But did you guys change something? You know, in pension to mitigate, you know, the impact, the interest rate changes, certainly nice to hear the headwind is, you know, that modest, but my rough math would have maybe suggested a bit more. And then maybe just to add another part, Vimal, you touched on advanced materials a little bit in a previous answer, but can you give us a little bit of color on how you see the 410A to 454B transition unfolding, what's happening to, you know, 410A prices and availability and, you know, where you stand competitively as these LEMs are making the shift. Thank you.
Price price cost.
But if you recall I mean, we've we've mentioned that we're going to retain our price cost positivity and we've done that inside of HPT.
Throughout the course of the year. So you see the numbers for total Honeywell.
I think we're within our within our zone that we had guided from a pricing perspective, its probably going to be 4% for the year across the total portfolio I'll, maybe I'll pass it to them on the on the other side.
We do get.
I'd say benefit of different government stimulus programs.
The recent one being around I would say <unk> semiconductor activity in U S.
The proposal activity there is strong and.
Hopefully, we'll win enough to see the benefit of that in the times ahead or am I must also point that we.
We also see heightened infrastructure activity outside the U S, particularly in high growth regions. One of the strengths of SPD businesses very strong footprint in high growth regions, China, ASEAN Middle East, India et cetera, and there the activity on infrastructure build out is pretty strong which is going to help us in.
Greg Lewis: So maybe I'll hit the pension one first. So no, you know, Jeff, we haven't changed anything in our accounting. You know, we'll do our normal market market in the fourth quarter as we've done, you know, for many years now. And again, you know, what I mentioned, you know, $50 to $100 million is a range. We'll see how the final numbers, you know, pan out with discount rates and, you know, returns on assets for the asset basis themselves. So nothing different. And, you know, we'll give you a more precise answer after the turn of the year when we snap the one.
Building out our backlog specifically in long cycle.
So that's how we see those dimensions and the business.
Thank you.
Our next question comes from Joe Ritchie of Goldman Sachs.
Hi, Thanks, good morning, everyone.
Hey, Joe Good morning, Joe.
Vimal Kapur: Jeff, on advanced material, I would say pretty fascinating to see how this change over is happening between solstice 410A and 454. We are working with all key OEMs for several years. This is not a new dimension for us. We have been on it for last several years. And we see the switch over happening from 410 to 454 in the times ahead. And we have secured our position with the key OEM. So I would say for us is, I would call it like business as usual, because this is something which is part of our business. And we were ahead of the game here to look ahead and think about its implication on us. And we are well covered on that.
Hey, guys. My one question is just on orders so nice to see the inflection versus what we what you had experienced last quarter I think arrow is the only segment that grew last quarter.
Nicole DeBlase: Thank you.
I didn't I didn't hear the commentary on PMT. So if I missed it my apologies, but what were orders like in PMT. This quarter, maybe maybe specifically for HTS new okay.
Yes, so year to date I would say the orders rate in European Sps are pretty strong and we expect to finish.
Strongly for both of the businesses.
In 2023 and carry forward good backlog for 'twenty.
2024, the wins are.
Driven by multiple end markets in SBS and <unk>, certainly benefiting from strong demand of catalyst, but also announced strong demand coming from sustainable technologies. Our <unk> technology business is growing at triple digit rate as we had anticipated and all of that is really adding up for a strong performance of youll be four two.
Nicole DeBlase: Our next question comes from the line of Nicole de Blaze of Deutsche Bank. Yeah, thanks. Good morning, guys. Nicole. Good morning.
Vimal Kapur: Can we double click a little bit on what you guys are seeing with respect to channel inventory reductions within HPC and SPS? Where are we in that inventory destalking process? And do you think we will enter 2024 in a pretty clean position with respect to channel inventories? Nicole, we have, I would say, the channel inventory is reflected in our orders rate. Our orders rate for both buildings and SPS for had a book to bill of one last quarter.
22023 orders.
Thank you.
Our next question comes from the line of Andrew Kaplowitz of Citigroup.
Hey, good morning, everyone.
Good morning, Andrew.
So I know you're expecting a nice uptick in PMT margin in Q4, but as you have guided this year ended PMT margins tended to be a bit muted for the year. So maybe conviction level that it does it jumped in Q4 and then.
Vimal Kapur: And the similar trends are persisting so far in October, which tells me that we are on a path of slight recovery. And that is that's the indirect measure for me on channels are looking at stopping back again from the cycle. So and we expect short cycle to slide it covered progressively every month, moving forward, but not as fast as we like it to be at this point. Thank you.
I know you're moving HTS over.
But pro forma DCP empty as one of the better margin performers in 'twenty four.
So in terms of conviction level is high.
I feel pretty strongly about the PMT team's ability to perform here again, we're not at a place where we're giving guidance ranges for next year for any given segments I expect the PMT business. As currently constructed we expect accretion next year as well.
Greg Lewis: Our next question comes from the line of Dean Dray of RBC Capital Markets. Thank you. Good morning, everyone. Good morning. Hey, on HBT, you called out cost inflation, headwinds. Could you size that? What kind of pricing actions have you taken? And then on the verticals, airport government and education. How has government stimulus as that started to come through and you benefit in there? Thanks. Yeah, hey, Dean, we don't disclose our individual segments, you know, price, price cost.
But we're not going to get into any specific guidance ranges around that at this moment.
But our conviction level is high the team is delivering they've taken all the right actions.
In each of the three businesses and and as we said with a nice mix going into Q4 on catalysts.
We expect to be able to deliver the margin accretion.
In Q4.
Greg Lewis: But if you recall, I mean, we've, we've mentioned that we're going to retain our price cost positivity and we've done that inside of HBT, you know, throughout the course of the year. So, you know, you see the numbers for total Honeywell, you know, I think we're within our, within our zone that we had guided from a pricing perspective. It's probably going to be, you know, 4% for the year across the total portfolio.
Thank you I would now like to turn the call back over to BMO Kapoor for closing remarks.
Thank you.
Our value creation framework is working while the macro economy remains challenging and the timing of a short cycle exploration is uncertain. We are deploying a rigorous operating playbook to navigate near term volatility we are confident in our ability to weather near term challenges and meet our performance targets underpinned by ongoing stint in October.
Vimal Kapur: Maybe I'll pass it to Vimal on the other side. So we do get, I would say benefit of different comments, stimulus programs, the recent one being around our set chips tax and we conduct our activity in US. The proposal activity there is strong and hopefully will win enough to see the benefit of that in the times ahead. Or I might also point that we also see heightened infrastructure activity outside US specifically in high growth regions.
<unk> end markets Aerospace and energy combined with the operating rigor you have expected from Honeywell.
You, all and our Honeywell colleagues, who continue to enable us to outperform in any environment and drive differentiated performance for our customers and shareholders.
You all for listening and please stay safe and healthy.
Vimal Kapur: One of the strength of HPD businesses, very strong footprint in high growth regions, China, ASEAN, Middle East, India, etc. And there's the activity on infrastructure, but it's pretty strong, which is going to help us in building out our backlogs specifically in long cycle. So that's that's how we see those dimensions in the business. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Joe Richie: Next question comes from Joe Richie of Goldman Sachs. Thanks to one of your own. Hey Joe. Good morning, Joe. Hey guys, my one question is it's just on orders. So, you know, nice to see the inflection versus what we, what you'd experienced last quarter, I think arrow is the only segment that grew last quarter. I didn't, I didn't hear the commentary on PMP. So if I missed it, my apologies. But what were orders like in PMP this quarter or maybe maybe specifically for HPS and you OK?
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Vimal Kapur: Yes, so here today, I would say the orders rate in Europe and HPS are pretty strong and we expect to finish very strongly for both the businesses in 2023 and carry forward good backlog for 2024. The wins are, you know, driven by multiple end markets in HPS and UOP is certainly benefiting from strong demand of catalyst, but also now strong demand coming from sustainable technologies are sustainable technology businesses growing at triple digit rate as we had anticipated and all that is really adding up for strong performance of UOP for 2020, 2023 orders.
Operator: Thank you, from our next question.
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Andrew Kaplowitz: You comes from the line of Andrew Kaplowitz of City Group.
Greg Lewis: Hey, good morning, everyone. Good morning, Andrew. So, I know you're expecting a nice uptick in PMT Margin and Q4, but as you've got it this year, it's handed PMT Margin's intended to be a bit muted for the year. So maybe conviction level that it does jump in Q4. And then I know you're moving HPS over, but pro forma DC PMT is one of the better Margin performers in 24. So, in terms of conviction level is high.
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Greg Lewis: I mean, I feel pretty strongly about the PMT team's ability to perform here. Again, we're not at a place where we're giving guidance ranges for next year for any given segments. I expect the PMT business as currently constructed. We expect a creation next year as well, but we're not going to get into any specific guidance ranges around that at this moment. But our conviction level is high. The team is delivering. They've taken all the right actions in each of the three businesses. And as we said with a nice mix going into Q4 on catalyst, we expect to be able to deliver the Margin accretion in Q4.
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Thank you for standing by and welcome to the Honeywell third quarter 'twenty to 'twenty three 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 make them Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to Honeywell's third quarter 2023 earnings Conference call.
On the call with me today are Chief Executive officer of them with the board and senior Vice President and Chief Financial Officer, Greg Lewis.
This webcast and the presentation materials, including non-GAAP reconciliations are available on our Investor Relations website.
From time to time, we post new information that may be of interest or material to our investors on this website.
Our discussion today includes forward looking statements that are based on our best view of the world and of our businesses as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings.
This morning, we will review our financial results for the third quarter share our guidance for the fourth quarter and full year 2023, and provide some preliminary thoughts on 2024 as always we'll leave time for your questions at the end.
That I will turn the call over to our CEO I'm looking for.
Thank you Sean and good morning, everyone, let's begin on slide two.
We are saddened by recent events and mainly we are deeply upset by the loss of life.
Our number one priority continues to be safety and security of our employees and partners in the region and responding to their immediate needs.
Coming to the third quarter. It was another strong quarter one for Honeywell invest we delivered all of our financial commitments, we delivered adjusted earnings per share of $2 and 27%.
<unk> <unk> above the high end of our guidance range.
That was up 1% year over year or up 7%, excluding a 14 noncash pension headwind.
Disciplined execution of our rigorous operating principles in the face of ongoing macroeconomic challenges continue to serve us and our stakeholders.
Third quarter sales were up 2% year over year, driven by double digit growth in our commercial aviation defense and space and process solutions.
Our aerospace business continues to be a bright spot in our portfolio driving meaningful commercial success.
Our already robust backlog grew to a new record of $31 $4 billion in third quarter, and up 8% year over year, and 3% sequentially due to trends in Aero and other long cycle businesses.
Orders grew double digit in the quarter due to tremendous demand generation in Aero.
Orders were up 30% year over year, Honeywell building technology, and safety and productivity solutions ended with quarter with flat year over year with book to Bill of around one and indication that we are seeing a short cycle end markets beginning to stabilize.
In dedicated was another positive indicator in the third quarter as we converted on a robust pipeline to drive double digit year over year artist growth and over 50% sequential orders growth <unk>.
PMT was down mid single digits, an unfavorable comparison to last year's peak in advanced materials orders.
Our segment margin expanded 80 basis points year over year, achieving the high end of our guidance range led by SPD up 110 basis points.
We continue to see business mix improvement due to strong growth in our higher margin aerospace business as well as ongoing gains from productivity free.
Free cash flow was $1 6 billion.
Third quarter with over 100% cash conversion and 17% free cash flow margin in line with our expectation Greg will walk you through the free cash flow drivers in more detail in few minutes.
We remain committed to our capital deployment strategy and report our robust balance sheet to work in the third quarter by deploying $2 billion to dividend M&A growth Capex and share repurchases. We bought back five 3 million shares in the quarter, reducing our weighted average share count to 600.
$67 million is step up due to highly attractive valuation and our ongoing confidence in Honeywell performance.
We remain on track with our commitment to deploy capital to higher return categories and generate compelling value for Honeywell shareholders.
Greg Lewis: Thank you.
As always we continue to execute on our proven value creation framework effectively managing through ongoing external difficulties and delivering on our commitment.
Looking forward, our consistent adherence to our rigorous operating principle.
<unk> been by our exited their operating system.
<unk> strengthened our long cycle end markets and our technologically differentiated portfolio of solution should provide investors with comfort that we will remain highly resilient perform in all economic cycles and drive shareholder value for years to come.
Next let's turn to slide three to review some of our exciting recent win.
Before I hand, it off to Greg Let me briefly highlight some recent announcements that demonstrate our innovation across our portfolio.
Vimal Kapur: I would now like to turn the call back over to them for closing remarks. Thank you. Our value creation framework is working while the macroeconomy remains challenging and the timing of a short cycle acceleration is uncertain.
Vimal Kapur: Thank you all for listening and please stay safe and healthy.
In Aero, we recently won a key new customer in the air Transport space, That's an increase our Apu and avionics installed based on roughly 200, new aircraft over the next five years. This win helps demonstrate that strengthened our aerospace portfolio, regardless of the market conditions.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Thank you very much for your time, and I'll see you in the next video. .
Operator: after the speaker's presentation there will be a question and answer session.
In an earlier phase III announced a partnership with SK E&S to deploy our <unk> carbon capture technology at a natural gas pipeline in Korea, our technology will help enable the capture of greater than 95% of the carbon dioxide produced in the plant.
Sean Meakim: Please be advised that today's call is being recorded. I would now like to hand the call over to Sean Meakim, Vice President of Investor Relations. Please go ahead. Good morning and welcome to Honeywell's third quarter of 2023 earnings conference call. On the call of me today are Chief Executive Officer of Vimal Kapur and Senior Vice President and Chief Financial Officer of Greg Lewis. This webcast and the presentation materials including non-gap reconciliation are available on our investor relations website.
Sean Meakim: From time to time we post new information that may be of interest or material to our investors on this website. Our discussion today includes four looking statements that are based on our best view of the world and of our businesses as we see them today and are subject to risks and uncertainties, including the ones described in our SEC file links. This morning we will review our financial results for the third quarter, share our guidance for the fourth quarter in four year 2023 and provide some preliminary thoughts on 2024.
Sean Meakim: As always, we'll leave time for your questions at the end. With that, I'll turn the call over to our CEO, Vimal Kapur. Thank you Sean and good morning everyone. Let's begin on slide two. First off, we are saddened by recent events in mid-lea. We are deeply upset by the loss of innocent life. Our number one priority continues with safety and security of our employees and partners in the region and responding to their immediate needs.
We remain excited about the win rates across our sustainable technology solutions business as we help pave the way for the board grid energy transition.
Sean Meakim: Coming to our third quarter, it was another strong quarter one for Honeywell in which we delivered all of our financial commitments. We delivered adjusted earnings per share of $2.27, two cents above the high end of our guidance range. That was up 1% year over year or up 7% excluding a 14 cent non-cash pension headwind. The discipline execution of our rigorous operating principles in the face of ongoing macroeconomic challenges continues to serve us and our stakeholders well.
Finally, our fourth for building software was recently implemented in one Bangkok, the city's largest integrated district.
Sean Meakim: Third quarter says we're up 2% year over year driven by double digit growth in our commercial aviation, defense and space and process solutions. Our aerospace business continues to be a bright spot in our portfolio driving meaningful commercial success. Our already robust backlog grew to a new record of 31.4 billion dollars in third quarter up 8% year over year and 3% sequentially due to strengthen a row and other long cycle businesses. Orders grew double digit in the quarter due to tremendous demand generation and arrow where orders were up 30% year over year Honeywell building technology and safety and productivity solution ended with quarter with flat year over year orders with both to bail off around one and indication that we are seeing a short cycle end market beginning to stabilize.
This partnership with traders and DCC technology will foster an expanding adoption of our software offerings across business sectors as we support the achievement of sustainability goals.
Our core focus of the company continues to be on aerospace sustainability and automation.
Our recent wins are closely aligned with these initiatives and a proof that we continue to drive innovation across our portfolio.
Not only see profitable market outcome, but also positioned honeywell to address the world's toughest challenges.
Now, let me turn it over to Greg on slide four to discuss our third quarter results in more detail as well as provide our views on guidance.
Thank you <unk> and good morning, everyone.
As bill outlined we delivered another strong quarter and a dynamic macro environment.
Third quarter sales grew 2% organically led by double digit organic sales growth in commercial aviation defense and space and process solutions.
Sean Meakim: Integrated was another positive indicator in the third quarter as we converted on a robust pipeline to drive double digit year of years orders growth and over 50% sequential orders growth. PMT was down mid single digits on unfavorable comparisons to last year's peak in advanced materials orders. Our segment margin expanded 80 basis point year over year achieving the high end of our guidance range led by HPT up 110 basis point. We continue to see business mix improvement due to strong growth in our higher margin aerospace business as well as ongoing gains from productivity, free cash flow was 1.6 billion dollars in third quarter with over 100% cash conversion and 17% free cash flow margin in line with our expectations.
Commercial success in aerospace, which drove 18% year over year growth in the third quarter was once again, a bright spot for Honeywell.
Our short cycle businesses continued to show signs of stabilizing sequentially.
Encouraging fundamentals persist across most of Pmt's end market, which led to another quarter of 3% year over year growth. Despite more challenging comps as we entered the second half.
As expected our long cycle warehouse automation business remains around trough levels, which led to overall volume decline of 1% for the quarter. However.
However, excluding SBS volumes were up 6% across the portfolio.
Sean Meakim: Greg will walk you through the free cash flow drivers in more details in few minutes. We remain committed to our capital deployment strategy and we put our robust balance sheet to work in the third quarter by deploying two billion dollars to dividend, M&A, growth capex and share repartises. We bought back 5.3 million shares in the quarter, reducing our weighted average share count to 667 million. It step up due to highly attractive valuation and our ongoing confidence in Honeywell's performance.
Our backlog remains at a record level ending the third quarter at $31 4 billion up 8% year over year, driven by double digit orders growth across our long cycle businesses.
Sequential improvements in supply chain constraint that the past due backlog reductions in our short cycle businesses, while demand continues to outpace output and arrow, a bullish signal of the underlying robustness of that business.
And improving cost position and favorable business mix due to significant growth in our high margin aerospace business among others enabled us to expand segment margins by 80 basis points year over year to 22, 6% and achieved the high end of our guidance.
Sean Meakim: We remain on track with our commitment to deploy capital to higher return categories and generate compelling value for Honeywell's shareholders. As always, we continue to execute on our proven value creation framework effectively managing through ongoing external difficulties and delivering on our commitment. Looking forward, our consistent adherence to our rigorous operating principles underpinned by our accelerator operating system, continued strength in our long cycle end market and our technologically differentiated portfolio of solution should provide investors with comfort that we will remain highly resilient, perform in all economic cycles and drive shareholder value for years to come.
On cash we generated $1 $6 billion of free cash flow down 18% year over year due to the timing of cash tax payments and higher net working capital a strong aerospace sales performance drove up our receivables balances year over year that we improved collections on our past due balances.
Throughout this quarter, we accelerated our share buyback program more than doubling the amount of shares repurchased compared to the second quarter, we feel great about the future of Honeywell and believe in our next leg of transformation and we'll continue to Opportunistically buy Honeywell shares at attractive valuations.
Sean Meakim: Next, let's turn to slide three to review some of our exciting recent wins. Before I hand it off to Greg, let me briefly highlight some recent announcement that demonstrate our innovation across our portfolio. In Aero, we recently won a key new customer in the air transport space that will increase our APU and avionics install base on roughly 200 new aircraft over the next five years. This win helps to demonstrate the strength in our Aero Space portfolio regardless of the market condition.
Now, let's spend a few minutes on the third quarter performance by business.
Aerospace sales for the third quarter were up 18% organically with double digit growth in both commercial aviation and defense and space the strongest growth quarter for arrow in over a decade <unk>.
Commercial aviation growth was led by strength in the air transport aftermarket where increased flight activity globally continues to drive demand.
Commercial original equipment also grew in the quarter, an increase deliveries to both business and general aviation and air transport customers.
Sean Meakim: In a nerdy space, we announced a partnership with SKENS to deploy our UOP carbon capture technology at a natural gas power plant in Korea. Our technology will help enable the capture of greater than 95% of the carbon dioxide produced in the plant. We remain excited about the wind waves across our sustainable technology solution business as we help pave the way for the world's great energy transition. Finally, our force for building software was recently implemented in one Bangkok, the city's largest integrated district.
Defense and space sales inflected in <unk> growing 18% organically and orders grew over 30% year over year for the second consecutive quarter as we see the impact of increased global focus on national security come through.
While the aerospace supply chain remains constrained we are continuing to see modest sequential improvement, which enabled us to increase our output and convert our record backlog at the sales growth.
For example, this was the third consecutive quarter with a 20% year over year increase in original equipment and spare shipments.
Sean Meakim: This partnership with Fraser's and TCC technology will foster an expanding adoption of our software offering across business sectors as we support the achievement of sustainability goals. Our core focus of the company continues to be on Aero Space sustainability and automation. Our recent wins are closely aligned to these initiatives and our proof that we continue to drive innovation across our portfolio. We not only see profitable market outcome, but also position Honeywell to address the world's toughest challenges.
While these gains and output are encouraging and leading the sales acceleration demand continues to outpace supply.
This is evidenced by our aerospace book to Bill of around one three in the third quarter.
Segment margins in Aero were flat year over year as increased volume leverage and commercial excellence offset cost inflation and mix pressure in our original equipment as expected.
Performance materials and technologies sales grew 3% organically in the third quarter led by Hps, which saw double digit growth for the fourth consecutive quarter.
Sean Meakim: Let me turn it over to Greg on slide four to discuss our third quarter results in more detail as well as provide our views on guidance. As Vimal outlined, we delivered another strong quarter in a dynamic macro environment. Third quarter sales grew 2% organically, led by double digit organic sales growth in commercial aviation, defense and space, and process solutions. Commercial success in aerospace, which drove 18% year over year growth in the third quarter, was once again a bright spot for Honeywell.
Process solutions sales grew 11% organically driven by continued strength in our projects business and lifecycle solutions and services and.
<unk> sales grew 6% organically led by gas processing solutions and petrochemical catalyst shipments we.
We continue to see robust demand in our sustainable technology solutions business within <unk> as.
<unk> orders grew triple digits for the third consecutive quarter and sales grew at strong double digit rates.
Sean Meakim: Our short cycle businesses continued to show signs of stabilizing sequentially. Encouraging fundamentals persist across most of PMT's end market, which led to another quarter of 3% year over year growth, despite more challenging comps as we entered the second half. As expected, our long cycle warehouse automation business remains around trough levels, which led to overall bond decline of 1% for the quarter. However, excluding SPS, volumes were up 6% across the portfolio. Our backlog remains at a record level, ending the third quarter at $31.4 billion of 8% year over year, driven by double digit orders growth across our long cycle businesses.
In advanced materials sales decreased 8% organically driven primarily due to the continued expected macro driven softness in our electronics chemicals and life science businesses and challenging year over year comps.
Sequentially segment margins expanded 40 basis points, while on a year on year basis segment margins contracted 50 basis points to 22, 1% as a result of lower volume and advanced materials.
Safety and productivity solutions sales decreased 25% organically in the quarter.
Primarily driven by lower volumes in warehouse and workflow solutions and productivity solutions and services.
The project portion of our <unk> business is around trough levels in the current low investment warehouse automation environment, but our pipeline remains robust and successful execution of our sales strategies resulted in double digit year over year growth and over 50% sequential growth in orders in the third quarter.
Sean Meakim: Sequential improvements in supply chain constraints led to past due backlog reductions in our outpace output in arrow, a bullish signal of the underlying robustness of that business. And improving cost position and favor business mix due to significant growth in our high margin aerospace business, among others, enabled us to expand segment margins by 80 basic points year over year to 22.6% and achieve the high end of our guidance. On cash, we generated $1.6 billion of free cash flow.
Additionally, the aftermarket services portion of the business continues to deliver solid double digit sales growth.
And productivity solutions and services, we are working through the effects of distributor Destocking, but believe we are nearing the end of that cycle.
Sensing and safety technologies was also impacted by short cycle softness, but this business continues to remain relatively resilient.
Sean Meakim: Now 18% year over year, due to timing of cash tax payments and higher network and capital, a strong aerospace sales performance drove up our receivables balances year over year so we improved collections on our past due balances. Throughout this quarter, we accelerated our share buyback program more than doubling the amount of shares repurchased compared to the second quarter. We feel great about the future of Honeywell and believe in our next leg of transformation and will continue to opportunistically buy Honeywell shares at attractive valuations.
Segment margin in Sps contracted 120 basis points to 14, 5% as a result of volume deleverage, partially offset by our continued operational improvements and commercial excellence.
Turning to Honeywell building technologies sales were flat year over year in the quarter.
Our long cycle building solutions business continues to outpace our short cycle building products.
Building solutions grew 4% organically led by high single digit growth in building projects driven by strong execution, particularly in energy projects.
Sean Meakim: Now let's spend a few minutes on the third quarter performance by business. Aerospace sales for the third quarter were of 18% organically with double digit growth in both commercial aviation and defense and space, the strongest growth quarter for arrow in over a decade. Commercial aviation growth was led by strength in the air transport aftermarket, where increased flight activity globally continues to drive demand. Commercial original equipment also grew in the quarter on increased deliveries to both business and general aviation and air transport customers.
Orders for building projects were also substantial in the quarter up nearly 20% year over year and resulting in a book to bill ratio of approximately one two.
On the product side sales decreased modestly as a result of relatively soft demand for security products.
Segment profit remained the bright spot for the business continuing to grow as a result of productivity actions and commercial excellence all in HPT segment margin expanded 110 basis points to 25, 2%.
Sean Meakim: Defense and space sales and selected in 3Q growing 18% organically and orders grew over 30% year over year for the second consecutive quarter as we see the impact of increased global focus on national security come through. While the aerospace supply chain remains constrained, we are continuing to see modest sequential improvements, which enabled us to increase our output and convert our record back I'll get the sales growth. For example, this was the third consecutive quarter with a 20% year over year increase in original equipment and spare ships.
Growth across the portfolio continues to be supported by accretive results in Honeywell connected enterprise, providing further evidence of Honeywell strong software franchise across our businesses.
Sean Meakim: Johnson. While these gains in output are encouraging and leading to sales acceleration, Deane continues to outpace supply. This is evidenced by our aerospace book to bill of around 1.3 and the third quarter. Second, Martin Danero, we're flat year over year as increased volume leverage and commercial excellence offset cost inflation and mixed pressure in our original equipment as expected. Performance materials and technology sales grew 3% organically in the third quarter, led by HPS, which saw a double-digit growth for the fourth consecutive quarter.
Overall organic growth of approximately 20% in the third quarter was supported by strength in connected industrial connected buildings cyber security and connected aircrafts.
Orders growth above 20% in the quarter remains a powerful indicator of the continued robust demand for HPE offerings.
In October we held the latest installment of Honeywell connect where we conducted 29 technology demonstrations to a group of 200 customers with.
We launched three new products featured several product enhancements and showcase advanced intelligence solutions, using AI and generative AI technology.
One highlight from the event was the introduction of a suite of cyber security solutions, including Honeywell Forge cyber security plus cyber insight and cyber watch supported by the acquisition of Sky Defense in August leading to new sales opportunities and as early as the fourth quarter.
Sean Meakim: Process solutions sales grew 11% organically driven by continued strength in our projects business and life cycle solutions and services. In UOP, sales grew 6% organically, led by gas processing solutions and petrochemicals, catalyst shipments. We continue to see robust demands in our sustainable technology solutions business within UOP as orders grew triple digits for the third consecutive quarter and sales grew at strong double-digit rates. In advanced materials, sales decreased 8% organically driven primarily due to the continued expected macro-driven softness in our electronics, chemicals, and life-sized businesses and challenging year-over-year costs.
Overall this was a great result for Honeywell, our operational execution enabled us to grow third quarter earnings per share to $2 27.
Up 1% year over year on an adjusted basis.
Segment profit grew 15 sense of improvement in earnings per share the main driver of our EPS growth.
Excluding the 14th pension headwind EPS was $2 41 up.
Up 7% year over year.
Bridge for adjusted EPS from <unk> 22 to <unk> 23 can be found in the appendix of this presentation with all the details.
Finally, as <unk> mentioned earlier, we continue to leverage our healthy balance sheet.
Sean Meakim: Sequentially, segment margins expanded 40 basis points while on a year-on-year basis, segment margins contracted 50 basis points to 22.1% as a result of lower volume in advanced materials. Safety and productivity solutions sales decreased 25% organically in the quarter, primarily driven by lower volumes in warehouse and workflow solutions and productivity solutions and services. The project's portion of our integrated business is around trough levels in the current low investment warehouse automation environment, but our pipeline remains robust and successful execution of our sales strategies resulted in double digit year-over-year growth and over 50% sequential growth in orders in the third quarter.
$2 billion in the quarter, bringing the year to date total to $5 7 billion.
As we execute on our capital deployment strategy.
So overall honeywell's operating playbook continues to deliver strong results and our best in class Honeywell value creation framework will enable us to drive compelling growth in earnings and cash for quarters to come.
Now, let's turn to slide five to discuss our fourth quarter and full year guidance.
At this stage in the year and given the incrementally more challenging macro backdrop with geopolitics and interest rate dynamics, we are narrowing our full year guidance ranges for sales and EPS, while increasing the midpoint of our segment margin expectations.
Sean Meakim: Additionally, the aftermarket services portion of the business continues to deliver solid double digit sales growth. In productivity solutions and services, we are working through the effects of distributor destocking, but believe we are nearing the end of that cycle. Sensing and safety technologies was also impacted by short cycle softness, but this business continues to remain relatively resilient. Segment margin and SPS contracted 120 basis points to 14.5% as a result of volume delivery, partially offset by our continued operational improvements and commercial efforts.
Our demand profile remains healthy with record backlog and favorable orders performance, while we continue to monitor the timing of short cycle recovery, we are confident in our ability to deliver on our commitments.
For the fourth quarter, we anticipate sales to be between nine six and $9 9 billion.
Up 3% to 7% organically driven by continued strength in commercial aviation defense and space process solutions and <unk>.
We anticipate organic sales growth in Aero PMT and <unk> in the fourth quarter.
For the full year, we're raising the low end of our previous sales guidance by $100 million and lowering the high end by $200 million for a new range of $36 eight to $37 1 billion.
Sean Meakim: Turning the Honeywell building technologies sales were flat year-over-year in the quarter, our long cycle building solutions business continues to outpace our short cycle building products. Building solutions grew 4% organically led by high single digit growth and building projects driven by strong execution, particularly in energy projects. Orders for building projects were also substantial in the quarter, up nearly 20% year-over-year and resulting in a book to bill ratio of approximately 1.2. On the product side, sales decreased modestly as a result of relatively soft demand for security projects.
Representing 4% to 5% organic growth for the year.
This reflects continued solid execution in our long cycle business, while we awaited demand acceleration in some of our short cycle businesses.
Turning to segment margins, we anticipate the fourth quarter to be between $22 nine and 23, 2% flat to up 30 basis points year over year and up sequentially as we continue to benefit from improving business mix and our productivity actions for.
Sean Meakim: Segment profit remained a bright spot for the business, continuing to grow as a result of productivity actions and commercial excellence. All-in, HBT's Segment Margin expanded 110 basis points to 25.2%. Growth across the portfolio continues to be supported by a creative results and Honeywell-connected enterprise, providing further evidence of Honeywell's strong software franchise across our businesses. Overall, organic growth of approximately 20% in the third quarter was supported by strength and connected industrial, connected buildings, cyber security, and connected aircraft.
For the full year. We are also raising the low end of our segment margin guidance by 10 basis points for a new range of $22 five to 22, 6%, representing 80 to 90 basis points of year over year expansion.
This improvement is driven by HPT, Sps and PMT, which are all expected to expand margin.
Now, let me walk you through the expectations for each segment in a little bit more detail.
Looking ahead for aerospace, we're very pleased with the continued improvements in the aerospace lie chain that are allowing us to capitalize on our record backlog and.
Sean Meakim: Ordered growth above 20% in the quarter remains a powerful indicator of the continued growth demand for HCD offerings. In October, we held the latest installment of Honeywell Connect, where we conducted 29 technology demonstrations to a group of 200 customers. We launched three new products, featured several product enhancements, and showcase advanced intelligent solutions using AI and gendered AI technology. One highlight from the event was the introduction of a suite of cyber security solutions, including Honeywell Ford's Cybersecurity Plus, Cyber Insights, and Cyber Watch, supported by the acquisition of Skate Defense in August, leading to new sales opportunities in as early as the fourth quarter.
In <unk>, we anticipate another quarter of strong sales growth both year over year and sequentially in commercial aviation and defense and space.
In commercial aviation, we expect most of the sequential growth to come through increased original equipment volume. The commercial aftermarket will also deliver healthy year over year growth with demand driven by continued improvement in air transport flight hours.
In defence and space, we are coming off back to back quarters of 30% plus orders growth, which has bolstered our already sizable backlog and.
And we see another quarter of double digit growth to end the year.
With our growth momentum from the third quarter carrying over into <unk>. We now expect aerospace sales to be up mid teens for the year.
With much of the incremental sales and this upgrade coming from increased original equipment shipments as we capture a greater installed base, we expect aero margins to be flat to modestly down for the year.
Sean Meakim: Overall, this was a great result for Honeywell. Our operational execution enabled us to grow a third quarter earnings per share to $2.27 up 1% year over year on an adjusted basis. Segment profit drew a 15 cents of improvement in earnings per share, the main driver of our EPS growth. Excluding the 14 cents pension headwind, EPS was $2.41 up 7% year over year. A bridge for adjusted EPS from $3.22 to $3.23 can be found in the appendix of this presentation with all the details.
In performance materials and technologies, our strong execution and the encouraging outlook in our end markets will continue to drive favorable growth.
For the fourth quarter, we expect our typical solid finish to the year, leading to year over year and sequential sales growth.
Growth will be led by process solutions on strength in projects and aftermarket services.
Sean Meakim: Finally, as Vimble mentioned earlier, we continue to leverage our healthy balance sheet to point $2 billion in the quarter, bringing the year date total to $5.7 billion as we execute on our capital deployment strategy. So overall, Honeywell's operating playbook continues to deliver strong results and our best-in-class Honeywell value creation framework will enable us to drive compelling growth and earnings and cash for quarters to come.
In Europe.
Our growth outlook is supported by robust demand for petrochemical and refining catalysts.
The sustainability technology solutions business will continue to grow as we capitalize on legislation back demand.
For advanced materials, we expect continued demand for fluorine products a rebound in life Sciences end markets and an improvement in our electronics and chemicals business supportive of sequential growth.
For the full year, we continue to expect high single digit sales growth in PMT.
Vimal Kapur: Now let's turn to slide five to discuss our fourth quarter and full year guidance. At this stage in the year and given the incrementally more challenging macro backdrop with geopolitics and interest rate dynamics, we are narrowing our full year guidance ranges for sales and EPS while increasing the mid-points of our segment margin expectations. Our demand profile remains healthy with record backlog and favorable orders performance. While we continue to monitor the timing of short cycle recovery, we are confident our ability to deliver on our commitment.
Due to typical catalyst seasonality, we still expect meaningful sequential and year over year margin expansion in the fourth quarter, resulting in modest segment margin expansion for the year for PNC.
In safety and productivity solutions, our outlook continues to be impacted by the current low levels of investment in new warehouse capacity and distributor Destocking. However, the impact on our financials is declining freeing stabilization and signs of potential return to growth in the coming quarters.
Vimal Kapur: For the fourth quarter, we anticipate sales between $9.6 and $9.9 billion, up 3% to 7% organically, driven by continued strength in commercial aviation, defense and space, process solution and UOP. We anticipate organic sales growth in Arrow, PMC, and HBT in the fourth quarter. For the full year, we're raising the low end of our previous sales guidance by $100 million and lowering the high end by $200 million for a new range of $36.8 to $37.1 billion, representing 4 to 5% organic growth for the year.
For the fourth quarter, we expect these effects to lead to sales at a roughly flat sequentially.
Gavin organically, but to a lesser degree than earlier in the year.
Orders will grow sequentially and year over year in the fourth quarter as we build on momentum from this quarter.
While new warehouse investment remains challenged customers continued to upgrade their existing infrastructure, which will lead to another quarter of double digit growth for the aftermarket services portion of our <unk> business.
For the full year, we now expect sales to be down approximately 20% as the Sps portfolio bounces along the bottom of the cycle.
However, the productivity actions and operational improvements we have made this year will still enable us to expand margins solidly for the year.
Vimal Kapur: This reflects continued solid execution in our long cycle business, while we awaited demand acceleration in some of our short cycle businesses. Turning the second margin, we anticipate the fourth quarter to be between 22.9 and 23.2%, flat to up 30 basis points year over year, and up sequentially, as we continue to benefit from improving business mix and our productivity actions. For the full year, we are also raising the low end of our segment margin guidance by 10 basis points for a new range of 22.5 to 22.6%, representing 80 to 90 basis points of year over year expansion.
In building technologies, we were prudent with our posture at the start of the year as we faced unprecedented central bank tightening cycle and uncertain demand environment.
While the operating backdrop remains difficult we are encouraged by the sequential orders progression, we saw each month throughout <unk>, including double digit products orders growth in the month of September.
For the fourth quarter, we expect modest sequential sales improvement from our <unk> and <unk> levels with growth continuing to be led by our long cycle building solutions business.
The supply chain is improving each quarter and we expect to make further progress on converting our past due backlog into sales.
Vimal Kapur: This improvement is driven by HBT, SPS, and PMT, which are all expected to expand margin. Now let me walk you through the expectations for each segment and a little bit more detail. Looking ahead for aerospace, we're very pleased with the continued improvements in the aerospace supply chain that are allowing us to capitalize on our record backlog. In 4Q, we anticipate another quarter of strong sales growth, both year over year and sequentially, in commercial aviation and defense and space.
We're also encouraged by the resiliency, we are seeing in verticals, such as airports government and education and expect institutional demand to provide support amid commercial softness.
We project HPT sales to be up low single digits for the year with commercial and operational excellence, enabling HPT to be our largest margin expander in 2023.
Now moving onto our other key guidance metrics, we anticipate net below the line impact to be between negative $105 million to negative $155 million in the fourth quarter and between negative 525 and negative $575 million for the full year.
Vimal Kapur: In commercial aviation, we expect most of the sequential growth to come through increased original equipment volumes. The commercial aftermarket will also deliver healthy year over year growth with demand driven by continued improvement and air transport flight hours. In defense and space, we are coming off back to back quarters of 30% plus orders growth, which is bolstered our already sizable backlog. And we see another quarter of double digit growth to end the year.
This guidance includes a range of repositioning between 45 and $85 million in the fourth quarter and between 260 and $300 million for the full year as we continue to invest in high return projects to support our future growth and productivity.
Vimal Kapur: With our growth momentum from the third quarter, carrying over into 4Q, we now expect aerospace sales to be up mid teens for the year. With much of the incremental sales in this upgrade coming from increased original equipment shipments, as we capture a greater install base, we expect arrow margins to be flat to modestly down for the year. In performance materials and technologies, our strong execution and the encouraging outlook and our end markets will continue to drive favorable growth.
We expect the adjusted effective tax rate to be around 19% in the fourth quarter and around 21% for the full year unchanged from our previous guidance.
We anticipate average share count to be around 664 million shares in the fourth quarter and around 669 million shares for the full year as we continued to reduce our share count through opportunistic buybacks.
Vimal Kapur: For the fourth quarter, we expect our typical solid finish to the year leading to year over year and sequential sales growth. Growth will be led by process solutions on strength and projects and aftermarket services. In UOP, our growth outlook is supported by robust demand for petrochemical and refining catalyst. The sustainability technology solutions business will continue to grow as we capitalize on legislation back demand. For advanced materials, we expect continued demand for flooring products, our rebound in life sciences and markets.
As a result of these inputs, we anticipate adjusted earnings per share to be between $2 53.
And $2 63 for the fourth quarter.
Flat to up 4% year over year.
Excluding pension headwinds fourth quarter, EPS growth would be up 6% to 10%.
For the full year, we're nearing both ends of our EPS guidance ranges by <unk>.
For a new range of $9 <unk>.
To $9 20.
Up 4% to 5% year over year, holding the midpoint of our prior guidance.
Vimal Kapur: And an improvement in our electronics and chemicals business supportive of sequential growth. For the full year, we continue to expect high single digit sales growth and being, and Nancy. Due to typical catalyst seasonality, we still expect meaningful sequential and year-over-year margin expansion in the fourth quarter, resulting in modest segment margin expansion for the year for PMT. In safety and productivity solutions, our outlook continues to be impacted by the current low levels of investment in new warehouse capacity and distributor destocking.
Excluding pension headwind EPS growth would be up 10% to 11% for the year.
On cash we continue to expect to meet our original free cash flow guidance of $3 nine to $4 3 billion in 2023 or five one to $5 5 billion.
Excluding the net impact of the settlement.
Driven by stronger collections and inventory management.
Higher cash tax outlays in the third quarter will be offset by more favorable cash outlook in the fourth quarter, giving us confidence in our full year guidance.
Vimal Kapur: However, the impact on our financials is declining, creating stabilization and signs of potential return to growth in the coming quarters. For the fourth quarter, we expect these effects to lead to sales that are roughly flat sequentially, down organically but to a lesser degree than earlier in the year. Forters will grow sequentially and year-over-year in the fourth quarter as we build on momentum from this quarter. While new warehouse investment remains challenged, customers continue to upgrade their existing infrastructure, which will lead to another quarter of double-digit growth for the aftermarket services portion of our integrated business.
So to summarize we're narrowing our full year guidance ranges for sales and EPS, while raising the mid point of our segment margin expectations based on our confidence and the ability to successfully deliver results in a fluid operating environment.
Before turning back to demo.
Let's turn to the next page and discuss our preliminary thoughts for 2024.
While next year's environment is shaping up to be just as volatile as the last few years, our proven track record of navigating an uncertain macro backdrop should give investors confidence in our ability to execute on our commitments.
Vimal Kapur: For the full year, we now expect sales to be down approximately 20%, as the SPS portfolio bounces along the bottom of the cycle. However, the productivity actions and operational improvements we have made this year will still enable us to expand margins solidly for the year. In building technologies, we were prudent with our posture at the start of the year as we face unprecedented central bank tightening cycle and uncertain demand environment. While the operating backdrop remains difficult, we are encouraged by the sequential orders progression we saw each month throughout 3Q, including double-digit products orders growth in the month of September.
We have a unique set of operating principles that enable us to move quickly and decisively to drive growth protect margins and ensure liquidity and position ourselves well to deliver in any environment.
Our end market exposures remain favorable into 2024, particularly in aerospace and energy we expect.
Continued commercial aviation fleet growth and replenishment increased domestic and international defense investment.
Mid geopolitical uncertainty.
Heightened focus on automation due to labor scarcity.
Increased energy demand and intensifying de carbonization goals accelerating the need for technologies, enabling the energy transition and increased infrastructure spending.
Vimal Kapur: For the fourth quarter, we expect modest sequential sales improvements from our 2Q and 3Q levels, with growth continuing to be led by our long cycle building solutions business. The supply chain is improving each quarter, and we expect to make further progress on converting our past 2 backlog into sales. We're also encouraged by the resiliency we are seeing in verticals such as airports, government, and education, and expect institutional demands to provide support amid commercial softness.
All of these compelling vertical tailwind as well as ongoing customer demand to help enabled digitalization.
As confidence that all four of our reconstituted businesses will deliver growth next year.
The timing of an eventual recovery in short cycle is lesser than it will be a swing variable to our sales outcome.
Vimal Kapur: We project HPT sales to be up low single digits for the year, with commercial and operational excellence enabling HPT to be our largest margin expander in 2023. Now moving on to our other key guidance metrics, we anticipate net below the line impact to be between negative 105 million to negative 155 million dollars in the fourth quarter. And between negative 525 and negative 575 million dollars for the full year. This guidance includes a range of reposition between 45 and 85 million dollars in the fourth quarter and between 260 and 300 million dollars for the full year as we continue to invest in high return projects to support our future growth and productivity.
We have a strong setup that will drive growth in sales margin and earnings in 2024 within our long term financial framework.
We expect organic growth to be led by our long cycle businesses due to record level demand and backlog in 2023.
Additionally, our focus on new product innovation is yielding benefits.
We believe extending our success in delivering new solutions to our existing vast installed base as well as the commercial efforts driving greater penetration of our current set of technologies to new markets.
Help enable robust organic growth.
That coupled with our ongoing leadership in high growth regions and the strength of our software franchise gives us confidence in the top line.
We also expect supply chain to continue to improve gradually in aero throughout next year.
Vimal Kapur: We expect the adjusted effective tax rate to be around 19% in the fourth quarter and around 21% for the full year unchanged from our previous guidance. We anticipate average share count to around 664 million shares in the fourth quarter and around 669 million shares for the full year as we continue to reduce our share count through opportunistic buy. Zach. As a result of these inputs, we anticipate adjustments for share to be between $2.53 and $2.63 for the fourth quarter, flat to up 4% year over year, excluding pension headwinds, fourth quarter EPS roads would be up 6% to 10%.
For overall Honeywell 'twenty 'twenty four margins will benefit from an improving business mix continued benefits from price cost and productivity actions, including our precision focus on reducing raw material costs as well as implementing AI into our development and production.
We will continue our investments in R&D and growth oriented capital expenditures and remain keenly focused on creating uniquely innovative differentiated recession proof technologies to address the world's toughest automation digitalization and sustainability challenges.
While we expect our spend on repositioning to be relatively stable year over year in 'twenty. Four we also anticipate modestly higher interest expense and lower pension income next year, both driven by the acceleration in yields across the bond market, we have seen since this summer.
Vimal Kapur: For the full year, we're nearing both ends of our EPS guidance ranges by 5 cents, for a new range of $9.10 to $9.20, a 4% to 5% year over year hold in the midpoint of our prior guide. Excluding pension headwind, DPS roads would be up 10 to 11% for the year. On cash, we continue to expect to be our original free cash flow guidance of $3.9 to $4.3 billion in 2023 or $5.1 to $5.5 billion excluding the net impact settlement driven by stronger collections and inventory management.
That will lead to slightly higher net below the line expense.
We will provide more information about the year over year magnitude of these changes at year end when we snap the line on pension, but we anticipate there'll be more in line with normal historical changes not last year's outsized impacts.
As a reminder, pension income is a noncash item given our overfunded pension status and will ensure no incremental contributions are needed.
This is a great position to be in for our employees, both former and current and our shareholders.
Vimal Kapur: Higher cash tax outlays in the third quarter will be offset by more favorable cash outlook in the fourth quarter giving us confidence in our full year guidance. So to summarize, we're nearing our full year guidance ranges for sales and EPS while raising the midpoint of our 7th margin expectations based on our confidence and the ability to successfully deliver results in a fluid operating environment. Before turning back to them all, let's turn to the next page and discuss our preliminary thoughts for 2024.
We.
Our cash to grow in line or above earnings next year with improvement assisted by the absence of the onetime settlement from Derisking, our balance sheet earlier, this year, which had an outsized effect on our cash performance.
We're also embarking on a multi year unwind over the last two years of working capital buildup. We will continue benefiting from improved demand planning and optimize production and materials management using our enhanced end to end process and digitalization capabilities through accelerator.
Vimal Kapur: While next year's environment is shaping up to be just as volatile as the last few years, our proven track record of navigating an uncertain macro backdrop should give investors confidence in our ability to execute our commitments. We have a unique set of operating principles that enable us to move quickly and decisively to drive growth, protect margins, ensure liquidity, and position ourselves well to deliver in any environment. Our end-market exposures remain favorable into 2024, particularly in aerospace and energy.
We see several compelling growth capital opportunities and expect to fund high return projects through disciplined capex spending in the coming years.
Our balance sheet strength will continue to give us meaningful capacity for M&A and we expect an ongoing favorable deal environment going into 2024, which supports our intention to accelerate capital deployment.
Now I'm going to pass the call over to them all to say a few words about the announcement, we made earlier this month on our portfolio and strategic priorities over to you Bill.
Vimal Kapur: We expect continued commercial aviation fleet growth and replenishment increased domestic and international defense investment amid geopolitical uncertainty, heightened focus on automation due to labor scarcity, increased energy demands and intensifying decarbonization goals accelerating the need for technologies enabling the energy transition and increased infrastructure spending. All of these compelling vertical tailwinds as well as ongoing customer demand to help enable digitalization give us confidence that all four of our reconstitutive businesses will deliver growth next year.
Thanks, Greg two weeks ago, we announced the portfolio reorganization that aligns our business with distinct compelling mega trends that are shaping the future of our industries and our planet.
These are automation the future of aviation and energy transition and all are underpinned by our robust capability in digitalization.
This realignment will enable us to have a simpler a clear strategic focus and clearly define honeywell's value proposition for our customers investors and employees.
Vimal Kapur: The timing of an eventual recovery and short cycle is less certain and will be a swing variable to our sales outcomes. We have a strong set up that will drive growth in sales, margins, and earnings in 2024 within our long-term financial framework. We expect organic growth to be led by our long cycle businesses due to record level demand and backlog in 2023. Additionally, our focus on new product innovation is yielding benefits.
We are in automation aerospace and sustainably focused technology company.
We believe this change will empower our business leaders to better prioritize R&D effort.
Capital expenditures M&A pipeline go to market strategies and more it will also create a more focused framework for M&A, allowing us to pursue bolt on acquisitions and select disposition that aligns to our teams and enhance our portfolio.
Overall, we have demonstrated the ability to operate under dynamic circumstances, including a global pandemic.
Vimal Kapur: We believe extending our success in delivering new solutions to our existing vast-install as well as the commercial efforts driving greater penetration of our current set of technologies to new markets will help enable robust organic growth. That coupled with our ongoing leadership and high growth regions and the strengths of our software franchise gives us confidence in the top one. We also expect supply chain to continue to improve gradually in arrows throughout next year.
<unk> scaled supply chain disruption heightened inflation international trade disputes unprecedented central bank tightening and geopolitical tension.
Underpinned by the strength of our differentiated <unk> operating system. We are confident that we can deliver strong financial performance in 2024, we will provide more specific inputs than our annual outlook call. Once we close out the year now, let's turn on to the slide seven and I will close with some long term comments.
Vimal Kapur: For overall Honeywell, 2024 margins will benefit from improving business mix continued benefits from price costs and productivity actions, including our precision focus on reducing raw material costs as well as implementing AI into our development and production. We will continue our investments in R&G and growth oriented capital expenditures and remain keenly focused on creating uniquely innovative, differentiated, recession-proof technologies to address the world's toughest automation, digitalization and sustainability. While we expect our spend on repositioning to be relatively stable year over year in 24, we also anticipate modestly higher interest expense and lower pension income next year, both driven by the acceleration and yields across the bond markets we have seen since this summer.
Let's take a minute to zoom out from the quarterly result.
As a reminder, my priorities as CEO, our first simplify the portfolio to better align with the key Mega trend that I mentioned earlier.
Next I will drive accelerated organic growth by strengthening our innovation playbook growing our sustainability and digitalization offering and maintaining our leadership position in high growth regions.
On top of those organic growth efforts I will manage the portfolio of enhancing our M&A capability, including staying disciplined and executing on bolt on M&A aligned to these three mega trends.
I also plan to advance the accelerated operating system to create more value through business model optimization.
We continue to make progress on our long term growth algorithm that we discussed during our May investor day.
Vimal Kapur: That will lead to slightly higher net below the line expense. We will provide more information about the year over year magnitude of these changes at year end when we snap the line on pension, but we anticipate there'll be more in line with normal historical changes, not last year's outside impacts. As a reminder, pension income is a non-cash item given our overfunded pension status and will ensure no incremental contributions are needed. This is a great position to be in for employees, both former and current and our shareholders.
Our 2023 guidance represents another year of strong financial performance consistent with our framework following meaningful progress in 2017 through some very turbulent time.
We will continue to carefully track our progression towards achieving our targets and remain confident in our ability to accelerate growth expand gross margin to above 40% achieved 95% plus segment margins and generate free cash flow margins of mid teens plus.
Vimal Kapur: We expect our cash to grow in line or above earnings next year with improvement assisted by the absence of the one-time settlement from derisking our balance sheet earlier this year, which had an outside effect on our cash performance. We're also embarking on a multi-year online of the last two years of working capital build up. We will continue benefiting from improved demand planning and optimized production and materials management using our enhanced end to end process and digitalization capabilities through accelerators.
I am thrilled to lead Honeywell into the next phase of our transformation and I'm optimistic about the tremendous opportunity. We are uncovering to capture value drive incremental sales growth expand margins and generate more cash.
And we will continue to update you as these efforts increasingly translate into enhanced financial performance.
Now, let's turn to slide eight for clothing part before we move into the Q&A.
We delivered on all commitments in third quarter.
Vimal Kapur: We see several compelling road capital opportunities and expect a fund high return project through discipline, cafe expending in the coming years. Our balance sheet strength will continue to give us meaningful capacity for M&A, and we expect an ongoing favorable deal environment going into 2024, which supports our intention to accelerate capital deployment. Now I'm going to pass the call over to Vimel to say a few words about the announcement we made earlier this month on our portfolio and strategic priorities over you, Vimel.
We have and will continue to demonstrate resiliency, while managing to a dynamic macroeconomic and geopolitical backdrop overall demand generation remained strong, particularly in the long cycle businesses with orders up double digit year over year and record backlog levels will continue to support.
Strong results.
While we navigate an external and an environment that remains challenging for the short cycle.
Our portfolio is aligned to thoughtful mega trends, including automation the future of aviation.
Vimal Kapur: Thanks, Rick. Two weeks ago, we announced a portfolio reorganization that aligns our business with distinct compelling mega trend that are shaping the future of our industries and our planet. These are automation, the future of aviation and energy transition and all are underpinned by our robust capability in digitalization. This realignment will enable us to have a simpler, clearer, tragic focus and clearly define Honeywell's value proposition for our customers, investors and employees. We are an automation, aerospace and sustainability focus technology company.
And as you transition all underpinned by digitalization.
Our technologically differentiated portfolio of solutions and a world class Honeywell <unk> operating system.
Enable us to capitalize on these trends.
And drive the profitable growth, we outlined in our long term financial framework.
We're expecting a strong finish to 2023 and well positioned for further growth in 2024, we'll look forward to updating you on our progress as we execute on our commitment.
With that Sean let's move to Q&A.
As a reminder.
Vimal Kapur: We believe this chain will empower our business leaders to better prioritize R&D efforts, capital expenditures, M&A pipeline, go to market strategies and more. It will also create a more focused framework for M&A, allowing us to pursue board on acquisition and select this position that aligns to our teams in enhanced our portfolio. Overall, we have demonstrated the ability to operate under dynamic circumstances, including a global pandemic, large-scale supply chain disruption, heightened inflation, international trade disputes, unprecedented central bank tightening and geopolitical tensions.
And Greg are now available to answer your questions. Yes can you please be mindful of others in the queue by only asking one question.
Operator, please open the line for Q&A.
As a reminder to ask a question you will need to press star one one on your telephone.
To remove yourself from the question queue plus star one again.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Julian Mitchell of Barclays.
Hi, good morning.
Maybe good morning, Joe.
Good morning, maybe just wanted to start off with a question on the fourth quarter.
Vimal Kapur: Underpinned by the strength of our differentiated accelerator operating system, we are confident that we can deliver strong financial performance in 2024. We will provide more specific input in our annual outlook all, once we close out the year. Now, let's turn on to the slide 7 and I will close this some long-term comments. Let's take a minute to zoom out from the quarterly result. As a reminder, my priorities at CEO are first simplify the portfolio to better align with the key mega trend that I mentioned earlier.
Margin outlook, so I think youre looking at about.
40 bps of margin uplift sequentially, 30% operating leverage sequentially it.
It looks like PMT, perhaps just a segment, where we're expecting a very big margin uplift.
So just wondered if you could go into a little bit more detail around that.
The margins have been down year on year old year. There. So just maybe help us understand what's really changing a lot.
In the fourth quarter to get that.
Vimal Kapur: Next, I will drive accelerated organic growth by strengthening our innovation playbook, growing our sustainability and digitalization offering and maintaining our leadership position in high growth region. On top of those organic growth efforts, I will manage the portfolio of enhancing our M&A capability, including saying discipline and executing on bolt on M&A aligned to these three mega trends. I also plan to advance the accelerator operating system to create more value through business model optimizations.
Moving and then just as a very quick follow up.
HPT.
Cross currents.
You got a low base as we think about 'twenty full but the interest rate environment is negative so just confidence in HP Ts growth stability looking out thank you.
Hey, Julien so I'll take the first one and ill pitch it to them for a number too. So overall, we've had a great year and margin expansion for Honeywell.
Again, we're looking to finish the year.
Vimal Kapur: We continue to make progress on our long-term growth algorithm that we discussed during our main yesterday. Our 2023 guidance represents another year of strong financial performance consistent with our framework following meaningful progress since 2017 through some very turbulent time. We will continue to carefully track our progression towards achieving our target and remain confident in our ability to accelerate growth, expand growth margin to above 40%, achieve 25% plus segment margin and generate free cash flow margins of mid-teens plus.
At the high end of our guidance range as you've seen so I think we've continued to demonstrate our ability to drive margin expansion in any environment and as we look into Q4 as you said, we see a nice sequential improvement from Q3 to Q4.
And some healthy margin expansion there as well in PMT, we talk about it often.
The margin tends to be somewhat lumpy from any one quarter to the next big part of that of course is where catalyst ship.
Shipments windup in during the course of the year in which end market.
So as we go into Q4 for PMT.
Vimal Kapur: I'm thrilled to lead Honeywell into the next phase of our transformation and I'm optimistic about the tremendous opportunities we are uncovering to capture value, drive incremental sales growth, expand margins and generate more cash. And we'll continue to update you as these efforts increasingly transferred into enhanced financial performance. Now let's turn to the slide 8 for closing part before we move into the Q&A. We delivered on all commitments in third quarter. We have and will continue to demonstrate resiliency while managing through a dynamic macroeconomic and geopolitical backdrop.
A pretty healthy.
Mix for sure and we're seeing also some recovery from some of the challenges that we've had earlier in the year.
With operations and am so that's really the underlying.
NOI theme for Q4, but we think the teams have done a great job in PMT is on track also to have a very nice year overall with high single digit top line growth and some modest margin expansion. So we're pretty pleased with where we are going with that and maybe them I'll hand. It to you on the HPT with Julian on Expedia, I would say I'll spend a minute to kind of flows.
Go back to what our business model list before I kind of answer your question I think there are three parts of our SPD business model first it is 60% product, 40% solution and within the party business solution more than half is after market, so, but very mixed success sharp cycle oriented business.
Vimal Kapur: Overall, demand generation remains strong, particularly in the long cycle businesses with orders up double digit year over year and record backlog levels will continue to support stronger results. While we navigate an external environment that remains challenging for the short cycle. Our portfolio is aligned to powerful mega-trend, including automation, the future of aviation, and energy transition, all underpinned by digitalization. Our technologically differentiated portfolio of solutions and our word-class Honeywell accelerator operating system will enable us to capitalize on these trends and drive the profitable growth we outlined in our long-term financial framework.
The second point is the products. We have they are critical to the buildings and Thats why they are higher margin and that explains our constant margin improvement in the segment and finally unexploited and building. This combination of real estate, but also infrastructure and all of that put together explains all of those sub 2022.
It grew.
Double digit and this year will grow low single digit.
To your question of 2024.
Remain confident.
<unk> will grow about our guidance.
Vimal Kapur: We're expecting a strong finish to 2023 and well-positioned for further growth in 2024. We look forward updating you on the progress as we execute on our commitment. But that, Sean, let's move to Q&A. As a reminder, we're more than Greg to now available to answer your questions. We ask you, please, do you mind if others in the queue by only asking one question.
The other backlog is growing in our solution business and of course, the swing factor remains here the short cycle position.
Great. Thank you.
Our next question comes from the line of Steve Tusa of Jpmorgan.
Hey, guys good morning.
Hey, good morning, Steve.
So some cross currents here at Sps I mean, it's now down to.
Like 10% of your of your profits.
Sean Meakim: Operator, please open the line for Q&A. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. To remove yourself from the question queue, press star 1-1 again. Please stand by while we compile the Q&A roster.
Things seem to be bottoming there, but.
Does the timing of those shipments can that business grow next year or should we be kind of prepared for another down year. There maybe if you could just like base out the expectations there for Sps.
Operator: Our first question comes from the line of Julian Mitchell of Barclays. Hi, good morning. Maybe just wanted to start off with a question on the fourth quarter margin outlook. So I think you're looking at about 40 bits of margin uplift, sequentially, 30% operating leverage, sequentially. It looks like PMT perhaps is the segment where you're expecting a very big margin uplift. I just wondered if you could go into a little bit more detail around that.
Sure Steve.
So you're right spss coming out of the bullwhip effect of Covid.
And clearly that is reflected in our Q3 numbers, but as we mentioned in our earlier conversation. The Sps artisan Q3, we had a book to Bill of one and we see similar trends continuing in Q4, which means we are in a recovery cycle in this business moving forward, starting Q4, and we will see that in 2024.
Operator: The margins have been down year on year or year there to just maybe help us understand what's really changing a lot in the fourth quarter to get that moving. And then just as a very quick follow-up, HBT, cross-current BCAA, you go to low base as we think about 24, but the interest rate environment is negative. So just confidence in HBT's growth ability looking out. Thank you. Hey Julian, so I'll take the first one and I'll pitch it to them for number two.
Margin expansion will certainly help there because the volume growth will help and margin expansion, we have rebased <unk> cost base aligned to the new revenue scale. So overall, we should see a recovery from this point onward.
Okay. So that's a growth business with some nice leverage next year, so what youre, saying.
I think Steve the overall topline growth could be flattish next year, but as <unk> said with particularly as the short cycle accelerates. There is theres a lot of leverage in those short cycle businesses in particular.
So we absolutely will do that I expect to see that come through and again on the <unk> side.
With the aftermarket growing far greater than the project business, we should see some nice mix in that in that business as well so the timing of that acceleration as we've said overall still.
Operator: So overall, we've had a great year in margin expansion for Honeywell and again, we're looking to finish the year at the high end of our guidance range as you've seen. So I think we've continued to demonstrate our ability to drive margin expansion in any environment. As we look into Q4, as you said, we see a nice sequential improvement from Q3 to Q4 and some healthy margin expansion there as well. In PMT, we talk about it often.
Is something that we're waiting to see happen, but we've flattened out bottomed out the orders rate. So it should be coming anytime now and when it does a lot of leverage comes along with it.
Thank you.
Our next question.
Operator: The margin tends to be somewhat lumpy from any one quarter to the next. A big part of that, of course, is where catalyst shipments wind up during the course of the year and which end market. And so as we go into Q4 for PMT, we have a pretty healthy UOP mix for sure. And we're seeing also some recovery from some of the challenges that we've had earlier in the year with operations in AM.
Comes from Scott Davis Melius research.
Hey, good good good good morning, guys and won't Gregg good morning, Scott.
Hey.
The world is kind of changing and volatile China's seems like it's taken another step down but.
Can you guys walk us around the world.
What youre seeing from a geographic mix perspective.
So a little bit of color on how things may be change through the quarter or into <unk>.
Operator: So that's really the underlying theme for Q4, but we think the teams have done a great job and PMT is on track. Also to have a very nice year overall with high single digit top line growth and some modest margin expansion. So we're pretty pleased with where we are going with that and maybe them all hand it to you on the HPD model. So Julian, on HPD, I would say, I'll spend a minute to kind of first go back to what a business model is before I kind of answer your question.
From that front as well and that will be my question I'll pass it on after that thanks.
Okay. Thanks, Scott I would say you are absolutely right Scott that is sort of aviation how things are working in the world at this point.
Let me start with China, we are going to have high single digit growth in China. This year.
Primarily supported by growth in Aero, but also in some other businesses too.
Operator: I think there are three parts of our HPD business model. First set is 60% product, 40% solution and within 40% solution more than half is after market. So by very mix, it's a short cycle oriented business. The second point is the products we have, they are critical to the buildings and that's why they are higher margin and that explains our constant margin improvement in the segment. And finally, our exposure and building this combination of real estate, but also infrastructure.
We see China to be a similar trend mid single digit to high single digit in 2024, we have enough backlog and strengthen arrow to support that in other parts of the world I would say.
<unk> a lot of strength in Asia in particular, India, and ASEAN countries and Middle East also given our strong position in energy.
<unk>, that's pretty well.
And then Europe.
Europe and U S probably.
I'll see the impact of high interest rate and challenging environment. So probably we are expecting the same here. So it's a good balance of positive and negative, but one thing I would like to add there is as we see our.
Operator: And all that put together explains our results of 2022 where we grow double digits and this year we'll grow low single digits. To your question of 2024, we remain confident, HPD will grow for our guidance. You know, our backlog is growing in our solution business. And of course, the swing factor remains here, the short cycle position. Great. Thank you.
Backlog, which grew by 8%. We also see good artist position forecasted for quarter, four it's going to position us pretty well for 2024 ahead in spite of the challenging condition, because we do expect our long cycle businesses are going to have to drive in our.
Julian Mitchell: Next question comes from the line of Steve Tusa, of JP Morgan. Hey guys, good morning. Thanks, my name is Steve. So some cross-currents here at SPS, I mean it's now down to, you know, like 10% of your profits. Things seem to be bottoming there, but the timing of those shipments can have business grown next year or should be kind of prepared for another down year there. Maybe if you could just like base out the expectations there for SPS.
The forecasted range of revenue growth for 2024.
Thank you guys.
Thank you.
Our next question.
Comes from the line.
Nigel Coe.
Wolfe research.
Your line is open. Please proceed.
Yes, sorry about that.
Let me answer that.
Thanks for the question.
So Greg I don't want to put.
Kind of what's in your mouth, but.
Julian Mitchell: Steve, it's all right. SPS is coming out of the bullfifx effect of COVID and clearly that reflects on our Q3 numbers. But as we mentioned in our earlier conversation, the SPS orders in Q3, we had a book to bail of one and we see similar trends continuing in Q4, which means we are under recovery cycle in this business moving forward starting Q4 and we'll see that in 2024. Margin expansion will certainly help there because the volumes growth will help in margin expansion.
I think I had.
Do you see in 'twenty 'twenty four is.
So within the long term framework of four to six basis points of AUM.
Is that sort of what you meant based on what you see today man spends a lot of macro uncertainty out there and if I could just clarify the free cash flow growing in line with earnings whatever that might be should we add back. The one time as this year as the base and then grow from there because obviously $1 $2 billion is a big number.
Any thoughts on the pension headwind will be helpful as well.
Julian Mitchell: We have rebassign a cost base aligned to the new revenue scale. So overall, we should see recovery from this front onwards. Okay, so that's a growth business with this nice leverage next year. So what you're saying. I think the overall top line growth could be flatish next year, but as Bimmel said, with particularly as the short cycle accelerates, there's a lot of leverage in those short cycle businesses in particular. So we absolutely will do that, you know, expect to see that come through.
Sure sure, yes, so again, it's way too early for guidance of course, we'll do that specifically in 90 days or so when when we announce our full year earnings. So the comments, we've been giving is that we see things within that long term framework. That's that's a reasonably good.
Barometer for how we're seeing things at the moment, but again 90 days from now we'll know a lot more in terms of the free cash flow Youre exactly right, we have $1 $2 billion of settlements, that's obviously not going to happen again.
Julian Mitchell: And again, on the integrated side, you know, with the aftermarket growing, you know, far greater than the project business. We should see some nice mix in that in that business as well. So, you know, the timing of that acceleration, you know, as you said, overall, still, you know, is something that we're waiting to see happen. But we've flattened out bottomed out the orders rate. So, you know, it should be coming any time now. And when it does a lot of leverage comes along with it. Thank you.
Next year, so that's immediate add back to the base and then from there we expect to see free cash grow in line or maybe better with earning the maybe the maybe around that is really a matter of we expect to start seeing the.
Liquidation of our working capital, but we also have a very robust.
Set of growth projects on capital and so we're going to be going through our budgeting process here over the course of the fourth quarter and we may have some good things to put forth from a capex standpoint next year. So.
But we feel really good about the progress that we're making in.
Greg Lewis: Our next question comes from Scott Davis, Amelia's research. Hey, good, good, good, good, good morning, guys. Good morning, Scott. Hey, the world is kind of changing and volatile. China seems like it's taken another step down, but can you guys walk us around the world and what you're seeing from a geographic mix perspective and just a little bit of color on how things may be changed through the quarter or into 4Q from that front as well.
<unk> cash flow again, this quarter very nice cash flow number.
100% conversion, 17% cash margin. So we've made some nice progress.
One other kind of good anecdotal point, we've started to see arrow bring their days of supply down in inventory. So while the number in the aggregate has gone up they are obviously growing the business in the high teens.
But we are starting to see the efficiency and inventory show up so.
It's really how we're thinking about it at this stage for next year, but we'll we'll know a lot more in 90 days and be a bit more precise on pension.
Greg Lewis: That'll be my question. I'll pass it on after that. Thanks. Okay. Thanks, Scott. I would say you're absolutely right. Scott, there is a lot of variation and how things are working in the world at this point. Let me start with China. We are going to have a high single digit growth in China this year. It's primarily supported by growth in a row, but also in some other businesses too. We see China to be a similar trend mid single digit to high single digit in 2024.
Could it could it be 50 or 100 million worse, we'll see rates move around a lot as you know.
And as I mentioned in my comments, we snap the line at the end of the year.
But it's.
It's trending to be lower income next year, but obviously nowhere near the kind of shock that we had.
In 2023 change.
Greg Lewis: We have enough backlog and strength in a row to support that. In other parts of the world, I would say we see a lot of strength in Asia in particular India and ASEAN country and Middle East also given us strong position in energy positions are pretty well. And then Europe and Europe and US probably we all see the impact of our interest rate and challenging environment. So probably we are experiencing the same here.
Thank you. Our next question comes from the line of Andrew <unk> of Bank of America.
Yes, good morning.
Good morning.
Just a question on.
Advanced materials I think it was a little bit weaker than we expected I think you said softness in electronics come from lifestyle drove the declines I think last quarter, you highlighted electronics and chemicals.
Greg Lewis: So it's a good balance of positive and negative, but one thing I like to add there is as we see our backlog, which grew by 8%. Again, we also see good orders position forecasted for quarter four. It's going to position us pretty well for 2024 ahead in part of the challenging condition because we do expect our long cycle businesses are going to have to drive in our, you know, the forecast range of revenue growth for 2024. Thank you guys. Thank you.
Just.
I want to understand what the changes are because I think before you were saying that electronic materials.
Improve in second half just right I know, it's a high margin business, just what has changed and how does that business look into and then maybe what kind of momentum you Havent come next year. Thanks, so much.
Yes, Thanks, Andrew.
I would say.
In fluorine products the business of solstice is doing extremely well continues to grow as its applications keeps growing.
Im going to fixed spread keeps growing so that's very positive electronic materials have definitely bottomed out we have we have seen segmenting of recovery from the key fab manufacturer and part of that is seen in Q4, not as good as we'd like it to see but we are seeing signals of recovery in the electronics side and thereafter.
Vimal Kapur: Our next question comes from the line of Nigel Coe of Wolf Research. Nigel Coe, your line's open, please proceed. Yes, I think I heard you see in 2024 as a sort of within the long-term framework of 47, you know, 50 base points of OM. Is that sort of where you meant based on what you see today in Manstand, a lot of macro and senior there. And if I could just clarify, you know, the free cash flow growing in line with earnings, whatever that may be, should we add back the one time as this year as the base and then grow from there because obviously, you know, 1.2 billion dollars is a big number.
Chemicals, which are weak which is affected in our overall revenue.
And like any other short cycle.
We expect it to recover aligned with economic conditions, there, but I must say that.
Four of our conviction in the business is very strong we had outstanding years in 2021, and 2022 and this year should be seen in comps to the past two years.
Our next question comes from the line of Sheila <unk> of Jefferies.
Hey, good morning, everyone. Thank you.
Vimal Kapur: And any thoughts on the pension head would be helpful. Sure, sure. Yes. So again, it's it's way too early for guidance. Of course, we'll do that specifically, you know, in 90 days or so when when we announced our full year earnings. So, you know, the comments we've been giving is that we see things within that, you know, long-term framework that's that's a reasonably good, you know, barometer for how we're seeing things at the moment.
Thanks Julien.
Hi, I wanted to ask about Msas, Please and specifically defense and space great growth in the quarter up 18%. What are you seeing from a bookings perspective, there the sustainability of demand with everything going on and how does that factor into your Aero margin mix. Thank you.
Okay.
Thanks Sheila.
I think our one of our highest headline of our Q3 has been arrow and within Aero defense and space, our bookings continued to be strong.
Vimal Kapur: But again, 90 days from now will know a lot more. In terms of the free cash flow, you're exactly right. You know, we have 1.2 billion dollars of settlement. That's obviously not going to happen again, you know, next year. So that's a immediate add back to the base. And then from there, we expect to see, you know, free cash grow in line or maybe better with earnings. The maybe the maybe around that is really a matter of we expect to start seeing the liquidation of our working capital, but we also have a very robust set of growth projects on capital.
Q3 was a strong booking quarter, so Q2, and thats driven by not only the U S. Domestic bookings, but also internationally defense markets opening up and we clearly see reflecting that in our booking rates.
Revenue growth is driven by supply chain actions, which are now being seen in defense also and we expect.
The continued growth in the defense segment in quarter, four and 2020, Florida had too. So punch line is that defense is going to become a contributing factor in the continued aero growth given the overall geopolitical political conditions in the vote.
Vimal Kapur: And so we're going to be going through our budgeting process here over the course of the fourth quarter. And we may have some good things to, you know, put forth from a Catholic standpoint next year. So, but we feel really good about the progress that we're making in in cash flow. Again, this quarter, very nice cash flow number, 100% conversion, 17% cash margin. So made some nice progress. One other, you know, kind of good anecdotal point, we've started to see arrow, bring their days of supply down in inventory.
Thank you Sean.
On.
On aerospace margins as it relates to defence and space. It is not a material drag on our margins so that growth is going to be.
Not materially different than the overall margin rates. So we find that to be that growth quite nice to segment profit growth.
Vimal Kapur: So while the number and the average gone up, they're obviously growing the business in the high team. But we are starting to see the efficiency and inventory show up. So, you know, that's really how we're thinking about it at the stage for next year, but we'll we'll know a lot more in 90 days and be a bit more precise. And then, you know, on pension, you know, could it could be 50 or 100 million worse, you know, we'll see race move around a lot, as you know.
Yes.
Thank you. Our next question comes from Jeff Sprague of vertical research.
Hey, Thank you good morning, everyone.
Joining Jeff good morning.
And not to get too tied up in arcane pension accounting.
But did you guys change something.
Intention to mitigate the impact of interest rate changes certainly nice to hear the headwind is that modest but.
Vimal Kapur: And as I mentioned in my comments, we snap the line at the end of the year. But it's it's it's trending to be, you know, lowering come next year, but but obviously nowhere near the kind of shock that we had in the 2023 change. Thank you.
My rough math with us maybe suggested a bit more.
And then maybe just to add another part than when you touched on advanced materials, a little bit in the previous.
Answer, but can you give us a little bit of color on.
Nigel Coe: Our next question comes from the line of Andrew Oben, a bank of America. I guess good morning. Good morning. Yeah, just a question on advanced materials I think was a little bit weaker than we expected. I think you said softness and electronics came from lifestyle drove the declines. I think last quarter you highlighted electronics and chemicals. Just, you know, one, understand what the changes are because I think before you were saying that electronic materials should improve in second half.
How you see the four <unk> to $4 54 be transition unfolding whats happening to <unk>.
Prices and availability.
Where you stand competitively as these Oems are making the shift thank you.
So maybe I'll hit the pension one first so no Jeff we havent changed anything in our accounting, we will do our normal mark to market.
In the fourth quarter as we've done for many years now.
And again, what I mentioned $50 million to $100 million is a range, we will see how the final numbers pan out with discount rates.
Nigel Coe: Just, right, I know it's a high margin. And business just what has changed and how does the business look into year and then maybe what kind of momentum you have until next year. Thanks so much. Yeah, thanks Andrew. Look, the, I would say in, in, in, in the, the fluorine products, the business, the thought is extremely well. Continue to grow as this application keeps growing. It's geographic spread keeps growing. So that's, that's very positive.
Returns on assets for for the asset basis themselves so nothing different.
We will give you a more precise answer after the turn of the year when we snapped the line.
And therefore on advanced materials I would say.
It's pretty fascinating to see how this changeover is happening between salt sales for Dan and $4 54, we are working with all key Oems for several years. This is not a new dimension for US we have been on it for last several years and we see the switch of what happening from 410 to 454 in the times ahead, and we have secured our position.
Nigel Coe: Electronic materials have definitely bottomed out. We have, we have seen signaling of recovery from the crease fat manufacturer and part of that is seen in Q4 not as good as you like it to see, but we are seeing signals of recovery in the electronic side. And there are parts of chemicals which are weak, which is reflected in our overall revenue. And like any other short cycle, we expected to recover aligned with economic conditions there.
The key Oems, So I would say for US is I would call it like business as usual because this is something which is part of our business and we were ahead of the game here to look ahead and think about is simplification and on us and we are well covered on that.
Our next question comes from the line of Nicole delays of Deutsche Bank.
Nigel Coe: But, but I must say that our, our conviction in the business is very strong. We had outstanding years in 2021 and 2022. And this year should be seen in comms to, you know, the past two years.
Yes, thanks, good morning, guys.
Hey, Nicole good morning, Ken.
Can we double click a little bit on what you guys are seeing with respect to channel inventory reductions within HBC and Sps where are we in that inventory destocking process and do you think we will enter 2024 and a pretty clean position with respect to channel inventories.
Sheila Kahyaoglu: Next question comes from a line of Sheila, Kyallu of Jeffries. Hey, good morning, everyone. Thank you. Hi, I wanted to ask about space please and specifically defense and space of great growth in the quarter of 18%. What are you seeing from a bookings perspective there, the sustainability of demand with everything going on and how does defense factor into arrow margin next. Thank you. Thanks, Sheila. I mean, the, I think our one of our headline of our Q3 is in arrow and within arrow that fence and space.
Nicole.
We have I would say.
The channel inventory is reflected in our orders right.
Are those rates for both buildings in Sps for had a book to Bill of one <unk>.
Last quarter and the similar trends up assisting so far in October which tells me that we are on a path of slight recovery and.
Sheila Kahyaoglu: Our bookings continue to be strong Q3 was a strong booking quarter. So was Q2. And that's driven by not only the US domestic bookings, but also international defense markets opening up. And we clearly see reflecting that in our booking rates. The revenue growth is driven by supply chain actions, which are not being seen in defense also and we expect. You know, the continued growth in the defense segment in quarter four and 2024 ahead too.
That is that's the indirect measure for me on channels are looking at stocking back again from the cycle.
No.
And we expect short cycle to slightly recover progressively every month moving forward, but not as fast as we'd like it to be at this point.
Thank you. Our next question comes from the line of Deane Dray of RBC capital markets.
Thank you and good morning, everyone.
Hey, Deane good morning, Hey on HPT, you called out cost inflation headwinds could you size that and what kind of pricing actions have you taken and then on the verticals Airport government and education.
Sheila Kahyaoglu: So punchline is that defense is going to become a contributing factor in the continued error growth given the overall geopolitical conditions in the world. Thank you. On, on aerospace margins, as it relates to defense space, it's not a material drag on our margins. So that growth there's going to be, you know, not materially differently the overall margin rate. So we find that to be that growth be quite nice to second profit growth. Thank you.
How has government stimulus has that started to come through and are you benefiting there. Thanks.
Yeah, Hey, Deane, we don't disclose our individual segments.
This price cost.
But if you recall I mean, we've we've mentioned that we're going to retain our price cost positivity and we've done that inside of HPT.
Greg Lewis: Our next question come from Jeff Sprig of vertical. [inaudible] Certainly nice to hear the headwind is you know that modest, but my rough math would have maybe suggested a bit more and then maybe just to add another part then when you touch some advanced materials a little bit in a previous answer but can you give us a little bit of color on how you see the 410 A to 454 B transition unfolding what's happening to you know 410 A prices and availability and you know where you stand competitively as these OEMs are making the shift thank you so maybe I'll hit the pension one first so no you know Jeff we haven't changed anything in our accounting you know we'll do our normal market market in the fourth quarter as we've done you know for many years now and again you know what what I mentioned you know $50 to $100 million is a is a range we'll see how the final numbers you know pan out with discount rates and you know returns on assets for for the asset basically.
Throughout the course of the year. So you see the numbers for total Honeywell.
I think we're within our within our zone that we had guided from a pricing perspective, its probably going to be 4% for the year across the total portfolio I'll, maybe I'll pass it to them on the on the other side.
We do get.
I'd say a benefit of different government stimulus programs.
The recent one being around I would say <unk> semiconductor activity in U S.
The proposal activity is strong and.
Hopefully, we'll win enough to see the benefit of that in the times ahead.
Must also point that.
We also see heightened infrastructure activity outside the U S, particularly in high growth regions. One of the strengths of SPD businesses very strong footprint in high growth regions, China, ASEAN Middle East, India et cetera, and there the activity on infrastructure build out is pretty strong which is going to help us in.
Building out our backlog specifically in long cycle.
So that's how we see those dimensions and the business.
Thank you.
Our next question comes from Joe Ritchie of Goldman Sachs.
Hi, Thanks, good morning, everyone.
Hey, Joe Good morning, Joe.
Hey, guys. My one question is just on orders so nice to see the inflection versus what we what you had experienced last quarter I think arrow is the only segment that grew last quarter.
Greg Lewis: This is themselves so nothing different and you know we'll give you a more precise answer after the turn of the year when we snap on. Jeff on advanced material I would say pretty fascinating to see how this change over is happening between solstice 410 A and 454 we are working with all key OEMs for several years this is not a new dimension for us we have an on it for last several years and we see the switch over happening from 410 to 454.
I didn't I didn't hear the commentary on PMT. So if I missed it my apologies, but what.
What were orders like in PMT this quarter, maybe maybe specifically for HTS new okay.
Yes, so year to date I would say the orders rate in European Sps are pretty strong and we expect to finish.
Strongly for both of the businesses.
Greg Lewis: In the times ahead and we have secured our position with the key OEMs so I would say for us is I would call it like business as usual because this is something which is part of our business and we were ahead of the game here to look ahead and think about its implication and on us and we are well covered on that. Thank you our next question comes from the line of Nicole de Blaze of Deutsche Bank.
In 2023 and carrying forward good backlog for 'twenty.
2024, the wins are.
Driven by multiple end markets, and Sps and youll be suddenly benefiting from strong demand of catalyst, but also announced strong demand coming from sustainable technologies. Our spinel technology business is growing at triple digit rate as we had anticipated and all of that is really adding up for a strong performance of <unk>.
Greg Lewis: Yeah thanks good morning guys. Nicole. Can we double click a little bit on what you guys are seeing with respect to channel inventory reductions within HPC and SPS where are we and that inventory de stocking process and you think we will enter 2024 in a pretty clean position with respect to channel inventories. Nicole we we have I would say the channel inventory is reflected in our orders rate are orders rate for both buildings and SPS for had a book to bill of one last quarter and the similar trends are persisting so far in October which tells me that we are on a path of slight recovery and that that is that's the indirect measure for me on channels are look forward.
22023 orders.
Thank you.
Our next question comes from the line of Andrew Kaplowitz of Citigroup.
Hey, good morning, everyone.
Good morning.
So I know youre expecting a nice uptick in PMT margin in Q4, but as you have guided this year ended PMT margins tended to be a bit muted for the year. So maybe conviction level that it does jumped in Q4 and then.
I know you're moving HTS silver.
But pro forma DCP empty as one of the better margin performers in 'twenty four.
So in terms of conviction level is high.
Greg Lewis: We are looking at stopping back again from the cycle so and we expect short cycle to slide it covered progressively every month moving forward but not as fast as we like it to be at this point. Thank you our next question comes from the line of Dean Dre of RBC Capitol Mark. Thank you. Good morning, everyone. Good morning. Hey, on HBT, you called out cost inflation headwinds. Could you size that and what kind of pricing actions have you taken?
I feel pretty strongly about the PMT team's ability to perform here again, we're not at a place where we're giving guidance ranges for next year.
For any given segments.
I expect the PMT business as currently constructed we expect accretion next year as well.
We're not going to get into any specific guidance ranges around that at this moment.
But our conviction level is high the team is delivering they've taken all the right actions in.
Greg Lewis: And then on the verticals, airport government and education, how has government stimulus has that started to come through and you benefiting there? Thanks. Yeah. Hey, Dean, we don't disclose our individual segments. You know, price price cost. But if you recall, I mean, we've we've mentioned that we're going to retain our price cost positivity. And we've done that inside of HBT, you know, throughout the course of the year. So, you know, you see the numbers for total Honeywell.
In each of the three businesses and as we said with a nice mix going into Q4 on catalysts.
We expect to be able to deliver the margin accretion.
In Q4.
Thank you I would now like to turn the call back over to BMO Kapoor for closing remarks.
Thank you our value creation framework is working while the macro economy remains challenging and the timing of a short cycle acceleration is uncertain. We are deploying a rigorous operating playbook to navigate near term volatility we are confident in our ability to weather near term challenges and meet our performance targets under <unk>.
Greg Lewis: You know, I think we're within our within our zone that we had guided from a pricing perspective. It's probably going to be, you know, 4% for the year across the total portfolio. Maybe I'll pass it to them all on the other side. So we do get, I would say benefit of different comments, stimulus programs, the recent one being around our set chips acts and we conduct our activity in U.S. The proposal activity, there is strong and hopefully will win enough to see the benefit of that in the times ahead or I must also point that we also see heightened infrastructure activity outside US particularly in high growth regions.
And by ongoing strength in our two biggest end markets aerospace and energy combined with the operating rigor you have expect to from Honeywell. Thank you all and Honeywell colleagues, who continue to enable us to outperform in any environment and drive differentiated performance for our customers and shareholders. Thank you all for listening and please stay safe.
And Hendi.
This concludes today's conference call. Thank you for participating you may now disconnect.
Greg Lewis: One of the strength of HPD businesses, very strong footprint in high growth regions, China, ASEAN, Middle East, India, etc. And there's the activity on infrastructure, but it's pretty strong, which is going to help us in building out our backlogs specifically long cycle. So that's that's how we see those dimensions in the business. Thank you.
Joe Richie: I next question comes from Joe Richie of Goldman Sachs. Thanks. Good morning, everyone. Hey, Joe. Good morning, Joe. Maya, hey guys, my one question is it's just on orders. So, you know, nice to see the inflection versus what we, what you'd experienced last quarter. I think arrow is the only segment that grew last quarter. I didn't, I didn't hear the commentary on PMP. So if I missed it, my apologies, but what were orders like in PMP this quarter, maybe, maybe specifically for HPS and you OK. Yeah, so here's the date.
Joe Richie: I would say the orders rate in European HPS are pretty strong and we expect to finish very strongly for both the businesses in 2023 and carry forward good backlog for 2024. The wins are, you know, driven by multiple end markets in HPS and UOP is certainly benefiting from strong demand of catalyst, but also now strong demand coming from sustainable technologies are sustainable technology businesses going at triple digit rate as we had anticipated and all that is really adding up for strong performance of UOP for 2020, 2023 orders. Thank you.
Andrew Kaplowitz: Our next question comes from the line of Andrew Kaplowicz of city group. Hey, good morning, everyone. Good morning, Andrew. So, I know you're expecting a nice uptick in PMT Marginine Q4, but as you've got it this year, it's handed PMT margins, it tended to be a bit muted for the year, so maybe conviction level that it does jump in Q4, and then I know you're moving HPS over, but pro forma DC PMT is one of the better margin performers in 24.
Andrew Kaplowitz: So, in terms of conviction level is high, I mean, I feel pretty strongly about the PMT team's ability to perform, you know, here, again, we're not at a place where we're giving guidance ranges for next year, for any given segments. I expect the PMT business as currently constructed, we expect a creation next year as well, but we're not going to get into any specific guidance ranges around that at this moment. But our conviction level is high, the team is delivering, they've taken all the right actions in each of the three businesses, and as we said, with a nice mix going into Q4 on catalyst, we expect to be able to deliver the margin of and Q4. Thank you.
Vimal Kapur: I would now like to turn the call back over to Vimo Kampur for closing remarks. Thank you. Our value creation framework is working, while the macroeconomy remains challenging, and the timing of a short cycle acceleration is uncertain, we are deploying our rigorous operating playbook to navigate near-term volatility. We are confident in our ability to weather near-term challenges and meet our performance targets underpinned by ongoing Sentinel two biggest end markets, aerospace and energy combined with operating rigor you have expected from Honeywell.
Vimal Kapur: Thank you all and our Honeywell colleagues who continue to enable us to outperform in any environment and drive differentiated performance for our customers and shareholders. Thank you all for listening and please stay safe and healthy. This concludes today's conference call. Thank you for participating.
Operator: You may now disconnect.