The operator introduces the Honeywell Third Quarter 2023 Earnings Conference Call and hands it over to Sean Meakim, Vice President of Investor Relations. Meakim welcomes everyone and introduces CEO Vimal Kapur and CFO Greg Lewis. They discuss the company's financial results for the third quarter, provide guidance for the fourth quarter and full year 2023, and share preliminary thoughts on 2024. They also mention the company's top priority of ensuring the safety and security of their employees and partners in the Middle East. Overall, it was a strong quarter for Honeywell.

In the third quarter, the company delivered adjusted earnings per share of $2.27, which was above the high end of their guidance range. Sales were up 2% year-over-year, driven by growth in commercial aviation, defense and space, and process solutions. The Aerospace business continued to perform well and the backlog reached a record high of $31.4 billion. Orders grew double digit, with a 30% increase in the Aero sector. Other segments, such as Honeywell Building Technologies and Safety and Productivity Solutions, showed stable orders and a positive book-to-bill ratio. The company also saw improvements in segment margins and free cash flow, with over 100% cash conversion and 17% free cash flow margin.

Honeywell remains committed to its capital deployment strategy and deployed $2 billion in the third quarter through various means. They also bought back shares and are on track to generate value for shareholders. They continue to execute their value creation framework and are confident in their ability to perform in all economic cycles. Recent wins and partnerships demonstrate their innovation across their portfolio, including a new customer in the air transport space and a partnership to deploy carbon capture technology in Korea.

The company is pleased with the success of its sustainable technology solution business and the implementation of its software in One Bangkok. They remain focused on aerospace, sustainability, and automation. The third quarter results showed organic sales growth and encouraging fundamentals in most end markets. The long-cycle warehouse automation business remains at trough levels, leading to a slight decline in overall volume. However, excluding one segment, volumes were up across the portfolio.

In the third quarter, Honeywell's backlog reached a record level, driven by strong orders in long-cycle businesses. Short-cycle businesses saw backlog reductions due to improved supply chain constraints. The company's segment margins improved, and they achieved the high end of their guidance. Cash flow decreased due to tax payments and higher net working capital, but the company continued to repurchase shares. Aerospace sales were up 18%, with double-digit growth in both commercial aviation and defense and space, driven by increased flight activity and deliveries to customers.

In the third quarter, the company saw strong growth in defense and space sales, driven by increased focus on national security. Despite supply chain constraints, the company was able to increase output and convert backlog into sales. The aerospace segment saw a 20% increase in original equipment and spare shipments for three consecutive quarters. In the Performance Materials and Technologies segment, sales grew 3% organically, with double-digit growth in HPS and strong demand in sustainable technology solutions. However, advanced materials saw a decline in sales due to macro-driven softness in certain businesses. Segment margins in Aero were flat year-over-year, while in advanced materials, margins contracted due to lower volumes.

In the third quarter, Safety and Productivity Solutions sales decreased by 25%, mainly due to lower volumes in warehouse and workflow solutions and productivity solutions and services. However, the project portion of the Intelligrated business saw double-digit growth in orders and solid sales growth in aftermarket services. The productivity solutions and services business is recovering from distributor de-stocking, while the sensing and safety technologies business remains resilient. Honeywell Building Technologies saw flat sales, with long-cycle building solutions outpacing short-cycle building products. Building solutions had strong growth in projects and orders, while product sales were slightly down. Segment profit for HBT continued to grow due to productivity actions and commercial excellence, resulting in an expanded segment margin.

Honeywell's strong software franchise in Honeywell Connected Enterprise has contributed to a 20% organic growth in the third quarter. The company's recent event, Honeywell Connect, showcased new products and advanced intelligence solutions, including a suite of cybersecurity solutions. Honeywell's operational execution drove a 1% increase in earnings per share, with segment profit being the main driver. Excluding a pension headwind, earnings per share increased by 7%. The company has also deployed $2 billion in the quarter and $5.7 billion year-to-date as part of their capital deployment strategy.

Honeywell's operating playbook is delivering strong results and their value creation framework will drive growth in earnings and cash. They are narrowing their full year guidance ranges for sales and EPS, but are confident in their ability to deliver on commitments. For the fourth quarter, they anticipate organic sales growth in various segments and for the full year, they are raising the low end of their sales guidance and increasing the midpoint of their segment margin expectations. This is driven by solid execution in long-cycle business and expected margin expansion in certain segments.

The company expects strong sales growth in Aerospace and Performance Materials and Technologies segments, with increased original equipment volumes and demand for aftermarket services driving the growth. The company also anticipates double-digit growth in the defense and space sector and mid-teens growth in Aerospace for the year. Margins for Aerospace are expected to be flat to slightly down due to increased original equipment shipments. In Performance Materials and Technologies, growth will be led by process solutions and demand for petrochemical and refining catalysts. The sustainability technology solutions business is also expected to grow due to legislation-backed demand.

The company expects continued demand for fluorine products and a rebound in life sciences and electronics markets, leading to sequential growth in the advanced materials segment. In the safety and productivity solutions segment, the impact of low investment and distributor destocking is declining, leading to stabilization and potential return to growth in the coming quarters. In building technologies, orders have shown sequential growth each month in the third quarter, with double-digit growth in September, despite a difficult operating environment.

In the fourth quarter, the company expects modest sales growth led by their long-cycle building solutions business. They also anticipate improvement in their supply chain and converting past due backlog into sales. The company is encouraged by the resilience of certain verticals and expects institutional demand to support amid commercial softness. They project HBT sales to be up low-single digits for the year and anticipate it to be their largest margin expander in 2023. The company also provides guidance for net below the line impact, adjusted effective tax rate, average share count, and adjusted earnings per share for the fourth quarter and full year. They expect adjusted EPS to be between $2.53 and $2.63 for the fourth quarter and $9.10 to $9.20 for the full year, representing a 4% to 5% year-over-year increase.

The company is narrowing its full year guidance ranges for sales and EPS and raising the midpoint of its segment margin expectations. They are confident in their ability to deliver results in a volatile operating environment and have favorable end market exposures in aerospace, energy, and infrastructure for 2024. All four of their reconstituted businesses are expected to experience growth next year.

The timing of a recovery in short cycle is uncertain, but the company is confident in its long-term financial framework and expects organic growth in its long-cycle businesses in 2023. New product innovation and efforts to penetrate new markets are expected to drive growth. Supply chains are expected to gradually improve in the aerospace sector next year. Margins in 2024 will benefit from business mix, price costs, and productivity actions, as well as investments in R&D and growth-oriented expenditures. The company remains focused on creating innovative technologies to address automation, digitalization, and sustainability challenges. There may be slightly higher expenses in 2024 due to interest rates and pension income.

The company has announced a portfolio reorganization that aligns with major trends in automation, the future of aviation, and energy transition, all supported by their digitalization capabilities. They expect to see growth in cash and earnings next year, with the absence of one-time settlements and a multi-year unwind of working capital buildup. They also plan to fund high-return projects through disciplined CapEx spending and have the capacity for M&A. The CEO has passed the call to Vimal to discuss the portfolio and strategic priorities.

Honeywell's realignment will allow for a simpler and clearer strategic focus on automation, aerospace, and sustainability. This change will empower business leaders to prioritize efforts and create a more focused framework for M&A. Despite challenges such as the pandemic and trade disputes, Honeywell is confident in its ability to deliver strong financial performance in 2024. The CEO's priorities include simplifying the portfolio, driving organic growth, managing M&A, and advancing the Accelerator operating system. Progress is being made on the long-term growth algorithm discussed at the May Investor Day.

The paragraph discusses the company's 2023 financial guidance and their progress since 2017. They remain confident in their ability to accelerate growth, expand margins, and generate cash. The CEO expresses optimism for future opportunities and highlights their strong performance in the third quarter. The company's portfolio is aligned with powerful trends and their operating system will enable them to drive profitable growth. They expect a strong finish in 2023 and further growth in 2024. The CEO concludes by stating that Vimal and Greg are available for questions.

The speaker is responding to a question about the fourth quarter margin outlook and explains that they are expecting a 40 bps margin uplift and 30% operating leverage. They mention that the PMT segment is expected to see a big margin uplift, despite year-on-year margins being down. The speaker then passes the question to Vimal for the second part, who talks about Honeywell's ability to drive margin expansion in any environment and mentions a healthy UOP mix for PMT in Q4.

The company is seeing recovery in operations in AM and PMT is on track for a good year. HBT's business model is 60% product and 40% solution, with a focus on short-cycle and critical building products. The segment is expected to grow in 2024. SPS is now only 10% of profits and it is uncertain if it will grow next year or have another down year.

The CEO and CFO of Honeywell are discussing the performance of the company's SPS business, which has been impacted by the COVID pandemic. They expect to see a recovery in the business in Q4 and 2022, with margin expansion and leverage from short-cycle businesses. They also mention the volatility in China as a potential factor in the company's performance.

The speaker is asked about geographic trends and provides information about growth in China and other parts of the world, mentioning the impact of high interest rates. They also mention a positive backlog and orders forecast for the fourth quarter, which will help drive revenue growth in 2024. The speaker also mentions a long-term framework for operating margin in 2024.

In summary, the speaker clarifies that it is too early to give specific guidance, but they see things within their long-term framework. They expect free cash flow to grow in line with earnings, with the one-time $1.2 billion settlements being added back to the base. They also mention the possibility of good things from a CapEx standpoint next year. They are pleased with the progress made in cash flow and note that Aero is bringing their days of supply down in inventory.

In the upcoming year, the company will have a better understanding of their financial situation in 90 days. The pension may be affected by changing interest rates, but not as drastically as in the previous year. The advanced materials business saw declines due to softness in electronics, chemicals, and life science, but there are signs of recovery in the electronics segment. The company expects overall improvement in the short-term cycle.

The speaker expresses strong conviction in their business and notes outstanding performance in 2021 and 2022. They also mention a strong booking quarter in Aerospace, specifically in the defense and space sector, driven by both domestic and international markets. They anticipate continued growth in this segment in the future. The speaker also mentions that this growth will not have a significant impact on margins.

The speaker asks about changes in pension accounting and the impact of interest rate changes. The company has not changed anything in their accounting and will provide more information after the year-end. They are also prepared for the transition from Solstice 410A to 454 with key OEMs. The next question is from Nicole DeBlase of Deutsche Bank.

During a recent earnings call, Honeywell executives discussed the state of channel inventory reductions within their Home and Building Technologies (HBT) and Safety and Productivity Solutions (SPS) segments. CEO Vimal Kapur stated that the company's orders rate for both segments had a book-to-bill ratio of 1 in the previous quarter and that similar trends were continuing in October. This indicates a slight recovery in the short cycle, but not as fast as desired. The company also mentioned facing cost inflation headwinds in HBT, but has managed to maintain a positive price/cost ratio. Additionally, they have seen benefits from government stimulus programs, particularly in the semiconductor industry.

The proposal activity is strong and the company hopes to see the benefits in the future. Infrastructure activity is also strong in high-growth regions, which will help build out the backlog in long cycle projects. Orders have been strong in the PMT segment, driven by multiple end markets and demand for sustainable technologies. The UOP business is also benefiting from strong demand for catalysts and sustainable technologies.

In the paragraph, Andrew Kaplowitz asks about the expected increase in PMT margin in Q4 and the company's confidence in this growth. Greg Lewis expresses high conviction in the PMT team's ability to perform and expects accretion next year, but does not provide specific guidance. Vimal Kapur concludes by stating that the company's value creation framework is working and they are confident in their ability to meet performance targets despite near-term challenges.

This summary was generated with AI and may contain some inaccuracies.