漢威聯合 (HON) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Honeywell's fourth quarter earnings conference call.

(Operator Instructions) As a reminder, this conference call is being recorded.

And I would now like to introduce your host for today's conference, Mark Macaluso, Vice President, Investor Relations.

Thanks, Derek.

Good morning, and welcome to Honeywell's Fourth Quarter 2017 Earnings Conference Call.

With me here today are our President and CEO, Darius Adamczyk; and Senior Vice President and Chief Financial Officer, Tom Szlosek.

As a reminder, this call and webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com/investor.

Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and of our businesses as we see them today.

Those elements can change, and we ask that you interpret them in that light.

We identify the principal risks and uncertainties that affect our performance in our annual report on Form 10-K and other SEC filings.

This morning, we will review our financial results for the fourth quarter and full year 2017, share our guidance for the first quarter of 2018 and discuss how the recent U.S. tax reform impacts Honeywell.

As always, we'll leave time for your questions at the end.

So with that, let me turn the call over to President and CEO, Darius Adamczyk.

Thank you, Mark, and good morning, everyone.

Honeywell delivered an exceptionally strong fourth quarter with earnings per share of $1.85, enabled by organic sales growth of 6%, which reflects our renewed emphasis on commercial excellence, revitalization of the Velocity Product Development process and the benefits from growth investments.

In 2017, we expanded our sales force in key regions and businesses and armed all our sales teams with the newest digital tools that are helping us win in the marketplace.

We also revitalized our new product development process to ensure that the products we're selling are delivering value to our customers.

Our order rates continue to grow, and our backlogs are strong as we head into 2018.

Cash was a highlight as we generated $4.9 billion of free cash flow in 2017, above the high end of the guidance range.

In Q4, we achieved 123% conversion, which brought full year conversion to 90% or 109% excluding the effect of pension.

Our efforts to improve working capital discipline are working.

While I'm encouraged by our progress in this area, there is still significant opportunity.

And each of our businesses is taking the necessary steps to improve their working capital performance.

Full year earnings per share were $7.11, up 10% year-over-year.

This growth excludes the impact of separations costs for spin and charges for the fourth quarter 2016 debt refinancing, pension mark-to-market and Tax Cuts and Jobs Act.

Our EPS exceeded the guidance we provided in December, driven by 4% organic growth and 70 basis points of margin expansion.

We also continued to aggressively deploy capital for our shareowners in 2017.

We increased our dividend by 12% this year, which marked the eighth double-digit increase since 2010.

And we bought back $1.6 billion of shares in the fourth quarter and $2.9 billion for the full year.

As a company, our total shareowner return was 35%, far exceeding the S&P 500 TSR of 22%.

Today, we are raising our full year 2018 EPS guidance to $7.75 to $8, which reflects a lower expected tax rate as a result of the Tax Cuts and Jobs Act.

Tom will walk you through the tax reform detail later in the call.

But I'm pleased to announce today that our 2017 performance, coupled with the anticipated benefits from this legislation, has enabled us to increase our 401(k) employer match for Honeywell employees in the U.S. This change represents a sustained, long-term commitment to provide enhanced financial security in retirement, which we believe is extremely valuable and important to employees.

Honeywell remains committed to being an employer of choice.

Let's turn to Slide 3 to highlight a few of our recent commercial successes.

In Aerospace, United Airlines selected Honeywell avionics for its new fleet of more than 150 Boeing 737 MAX airplanes.

The flight deck package will include the first-ever installment of Honeywell SmartRunway and SmartLanding on a Boeing 737 MAX and will feature Honeywell's integrated multi-mode receiver and IntuVue weather radar system, which can enable connected radar, a part of our Connected Aircraft offering, allowing Honeywell to download weather hazard data and provide pilots and dispatchers immediate information through the GoDirect weather app.

Honeywell solutions work in tandem to greatly improve passenger safety and comfort during takeoff, landing and potentially hazardous weather conditions.

We are excited about our continued partnership with United Airlines.

In Home and Building Technologies, Honeywell designed a new contemporary and state-of-the-art connected home solution and we signed a long-term agreement with ADT, a leading provider of security and automation solutions in the United States and Canada, to sell it exclusively through ADT's direct and professional dealer network.

This solution includes security, smoke detection, carbon monoxide detection, innovative long-range and battery-operated motion viewers and home automation and incorporates both ADT's and Honeywell's User Experience.

We are excited to continue our long-term partnership with ADT, providing their customers the most innovative products for the connected home.

In Performance Materials and Technologies, Honeywell Process Solutions leveraged connected plant offerings to position Honeywell as a specialized software industrial partner, ultimately winning 3 strategic projects with Kuwait Oil Company to enhance crude production at Southeast Kuwait fields.

Honeywell will provide software and services to help KOC visualize and optimize the production and operations in the fields and will supply an integrated control and safety system based on our Experion PKS and Safety Manager technology for a gathering station.

This project enhances the capacity and capability of the existing facility in East Kuwait to manage excess water while keeping crude production at the facility's designated capacity.

In Safety and Productivity Solutions, we achieved major wins with 2 global package delivery companies to provide more than 100,000 Android-based handheld computers that will aid in delivery operations.

We are seeing strong adoption of our new Android-based offerings and have significant new launches planned for early this year that will drive growth for the Productivity products business in the second half of the year.

A number of these technologies will be on display at our Annual Investor Conference, which will take place on February 28 at Honeywell's headquarters in Morris Plains, New Jersey.

I'm looking forward to talking with you more about our progress then.

With that, I'd like to turn the call over to Tom, who will discuss our financials.

Thanks, Darius.

Good morning.

I'm on Slide 4. As Darius mentioned, we achieved 6% organic sales growth this quarter, capping off a very strong year.

Our growth improved sequentially every quarter in 2017, starting with 2% in the first quarter.

This is a reflection of the investments we've made in the sales organization, the M&A that we've done, our capacity expansions and new product development, coupled with an improved economic environment in many of our end markets.

We generated more than $2 billion in segment profit in the fourth quarter through our continued focus on effective selling and operational excellence.

We experienced strong volumes, primarily in Aerospace and Safety and Productivity Solutions.

Our margin rate increased by 30 basis points to 19.3%, stronger than we previewed in December, primarily due to stronger-than-anticipated demand in the Air Transport and Regional aftermarket.

Earnings per share was $0.01 better than our preview in December and includes a $0.19 contribution from segment profit.

Our tax planning actions drove a lower-than-planned tax rate for the fourth quarter of 16.5%.

Now this is before the impacts of the Tax Cuts and Jobs Act.

The lower tax rate and lower share count, driven by the share repurchase activity Darius mentioned, combined for a $0.22 benefit, which was more than offset by restructuring and other projects we funded in the quarter, which was a $0.30 headwind.

We funded over $150 million in attractive restructuring projects this quarter that will improve our cost structure, drive further productivity and address the potential residual costs that would otherwise result from the upcoming spin transactions.

On a reported basis, we had a loss per share of $3.18, driven by the impact of the $3.8 billion TCJA charge.

That reported loss also includes an $87 million pretax pension mark-to-market adjustment, primarily related to a lower discount rate, and $16 million in pretax spin-related separation costs.

Our free cash flow in the fourth quarter was very strong at $1.8 billion or 123% conversion.

We're in the early stages of our working capital initiatives, but we're encouraged by the progress so far, and more importantly, by the opportunities that we intend to pursue in 2018.

Overall, another strong performance with high-quality earnings to cap off a great year.

Let's turn to Slide 5 to discuss our segment results for the fourth quarter.

Starting with Aerospace, sales were up 5% organically, 2 percentage points above the high end of our sales guidance.

In Commercial OE, we saw improved air transport deliveries on key platforms, including the Airbus A320 and A330 and Boeing 737, and the benefit of lower OEM customer incentives, partially offset by slow demand in business jets, as expected.

Growth in the aftermarket was stronger than anticipated, driven primarily by air transport, repair and overhaul activities and sales of spares in Business Aviation.

In Defense, we saw continued strength in U.S. core defense, driven by spares demand and deliveries on the F-35 and Apache platforms.

In Transportation Systems, we saw a robust demand in commercial vehicles across all regions and continued growth in light vehicle gas turbos in China and South Korea.

Aerospace margins were up 270 basis points, driven primarily by higher volumes, productivity net of inflation, slightly more modest OEM and customer incentives and commercial excellence.

Aerospace margin performance was well ahead of our expectations.

In Home and Building Technologies, organic sales growth was 3% for the quarter.

As a reminder, we realigned the Smart Energy business from HBT into PMT in the fourth quarter.

So the HBT results for this quarter and going forward now exclude Smart Energy.

Organic growth in products of 2% was driven primarily by the commercial fire business and Environmental & Energy Solutions in Europe.

There was continued strength in Global Distribution, particularly in the fire vertical.

Our businesses in China grew high single digits, with strength in all of the HBT businesses.

HBT segment margins contracted 40 basis points, driven by lower residential security volumes, investments for growth and a different regional mix.

In Performance Materials and Technologies, sales were up 9% on an organic basis, driven by growth across UOP, Process Solutions and Advanced Materials.

That's the entire PMT portfolio.

In UOP, there was strong demand for our modular equipment, strong initial catalyst loads in the Middle East and significant growth from natural gas project wins at UOP, Russell in Russia and in North America.

Growth in the short-cycle businesses within HPS continued to be strong with significant demand for thermal solutions and field instruments.

In Advanced Materials, we again achieved double-digit organic sales growth, fueled primarily by our Solstice low global-warming refrigerant for mobile air-conditioning.

PMT segment margins contracted 100 basis -- 180 basis points in the quarter, primarily driven by the unplanned plant outage we flagged in November and a different year-over-year mix of sales in UOP.

The lower margin performance is also in part due to integration of Smart Energy, which was not contemplated in our original fourth quarter guidance.

In Safety and Productivity Solutions, sales were up 12% on an organic basis, exceeding the guidance we provided in October, driven by another strong quarter at Intelligrated, building on the robust orders and backlog growth throughout 2017.

We had a significant increase in retail business sales as our direct selling strategy matured as well as continued strength in China.

The results saw robust growth in the Safety business as refinery maintenance resumed, driving demand for our entire range of Safety Products and continued strong demand for our legacy Sensing Controls and Workflow Solutions, including solutions provided by Vocollect and Movilizer.

The mobility business remained soft, but we secured large orders -- several large orders for our new Android-based products, which Darius mentioned.

As a result of strong volumes in SPS, margins expanded 140 basis points, also exceeding the high end of our guidance, helped further by the benefits from ongoing productivity efforts and from previously funded repositioning.

I'm now on Slide 6. I'll be very brief on this slide as we've discussed each of these measures previously.

What this slide does, it takes us back to the original 2017 guidance and compares it to the final results.

For all categories, the final outcome met or exceeded the original guidance, so the do matches our say in Honeywell vernacular.

Also not included on this slide are long-cycle orders and backlog.

Those results were also impressive, each growing double digit in 2017.

Let's move to Slide 7 to discuss the recent U.S. tax reform and its impact on Honeywell's 2018 financials.

Honeywell has been a -- has long been proponent of corporate tax reform that would enable us to compete more effectively on a global basis and to enjoy efficient and unencumbered movement of our capital.

On December 22, as you know, the U.S. Tax Cuts and Jobs Act passed.

The legislation significantly revises the U.S. corporate income tax by lowering corporate income tax rates, implementing the territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries.

As a result of the legislation, we recorded a $3.8 billion provisional charge in the fourth quarter, comprising of 3 elements.

The first is a mandatory transition tax or deemed repatriation charge on the $20 billion of previously unremitted earnings of our foreign subsidiaries.

This noncash charge was recorded entirely in the fourth quarter of 2017, but is to be paid over an 8-year period in accordance with the legislation.

The second element is also a noncash charge.

It's a deferred tax liability adjustment, favorable in this case, to reflect the impact of the lower U.S. corporate tax rate on our deferred tax balances.

The third element, also a noncash charge, is for the implementation of the territorial tax system, including withholding and local taxes associated with the future repatriation of cash back to the U.S.

These taxes will generally be paid as the cash is repatriated.

This portion of the aggregate charge reflects the tax structures we have in place today as is required by the accounting rules and does not anticipate the benefit we would realize from future tax planning.

It's only been a month since the tax reform passed and further guidance continues to flow, clarifying the legislation.

Our accounting reflects our best estimate using the current information we have available to us, and the amount of the provisional charge may be adjusted over the course of 2018 as things become clearer.

We will update you on the changes, if any, to the amount of the charge, to our effective tax rate and to other provisions of the tax legislation which are material to Honeywell.

At our upcoming Investor Day, we will also update you more completely on the cash repatriation opportunities that we have as well as on our expectations for the use of those repatriation proceeds.

Preliminarily, we expect that at least $7 billion of the $10 billion of cash held by our foreign subsidiaries can be repatriated in the next 2 years.

And of course, we'll continue to generate overseas cash, which will add to that pool of potential repatriation.

But there still is extensive tax analysis and planning to be done to ensure we execute repatriation in the most efficient manner.

This new global mobility of our cash will allow us to continue investing in our businesses in the U.S.; to pay a competitive dividend; to more aggressively seek out M&A, particularly in the U.S.; and to repurchase our own shares.

Our preference is for attractive bolt-on acquisitions in our core markets.

But to the extent M&A opportunities do not materialize, we'll gradually accelerate share repurchases as we did in 2017.

Looking at 2018.

As a result of the reduction in the U.S. corporate tax rate, our effective tax rate is now expected to be between 22% and 23% versus our normal 25% to 26% historical rate.

Given the uncertainties that still remain around the implementation of tax reform and the extent of the analysis still to be done, we are conservatively assuming a tax rate of 23% in our guide, which increases our 2018 EPS guidance range by $0.20 to a new range of $7.75 to $8 per share, an increase of 9% to 13% from 2017.

So as Darius and I mentioned, we're pleased with the new legislation, particularly the mobility of capital and global competitiveness it provides to Honeywell and to our shareholders.

Let's discuss our expectations for the first quarter on Slide 8. We exited the year with strong order rates and firming backlogs that we expect will drive a continued acceleration in organic sales growth every quarter in 2018.

Segment margins are expected to expand 30 to 60 basis points, driven by volume leverage, commercial excellence and productivity net of inflation, leading to earnings per share of $1.87 to $1.93 or growth of 9% to 13%.

This is based on an estimated first quarter tax rate between 22% and 23%.

As we previewed in the December outlook call, the guidance for the first quarter and full year exclude costs related to Home and Transportation Systems spin-offs, and adjustments, if any, to the fourth quarter provision for the tax legislation.

Starting with Aerospace, we expect sales to increase in the low single-digit range organically.

Our Air Transport OE business will be impacted by fewer deliveries on Boeing 777 and a decrease in production rates at certain regional OEMs, partially offset by increased A350 deliveries.

On the Business Aviation side, we expect organic sales to improve as production rates increase across most of our OEM customers, offset by higher OEM customer incentives.

In the Aftermarket, we expect to see strong spare sales with airlines across Americas and Asia Pac and demand in maintenance service plans in Business Aviation.

For Defense, a very similar story to recent quarters with growth buoyed by demand in U.S. defense, partially offset by declines in Space.

In Transportation Systems, we expect continued light vehicle gas turbo penetration across most regions, particularly in China, North America and Europe as well as continued momentum in the commercial vehicle segment.

In Home and Building Technologies, sales will be slightly up.

We expect continued strength in Global Distribution, the commercial fire business and our businesses in China.

We see improving order pipelines in our EMEA products businesses offset by weaker volumes in residential security in the U.S.

In Building Solutions, growth will be modest as the robust high-growth region activity is offset by slower activity on large install and service projects in the Americas region.

As we progress through our planning for the spin-offs, we have reorganized Home and Building Technologies to better align with how the segment will operate going forward.

So instead of showing you results from products and distribution, we'll start reporting on results in the 2 new reorganized business units, Homes and Buildings.

This will be effective when we release first quarter earnings.

Moving to Performance Materials and Technologies.

Sales are expected to be up low to mid-single digit on an organic basis, driven by continued conversion of our strong backlog.

Entering 2018, PMT long-cycle backlogs are up 8% from 2017.

In Process Solutions, we also expect continued demand for our short-cycle software and service offerings and field instrumentation products.

In UOP, we expect significant catalyst deliveries for new units in China as well as sustained equipment and engineering growth.

Solstice growth in Advanced Materials is expected to continue, although there are tougher year-over-year comparisons in the first quarter.

Finally, in Safety and Productivity Solutions, we expect sales in the mid-single-digit range organically, driven primarily by large project wins at Intelligrated and strong orders demand exiting the year in Sensing and IoT and Workflow Solutions, including from Movilizer's cloud service application.

In Safety, we expect growth across the gas vertical in China and all lines of business in the Americas as a result of our new product launches, sales investments and improved market conditions.

We also expect improvement in the retail business.

On a regional basis, the SPS China business is expected to grow more than 10%, driven by Sensing and IoT, Safety and Productivity products in the region.

Let's turn to Slide 9. I want to talk about our revised full year guidance.

We've updated our full year margin guidance to reflect our stronger-than-expected performance in 2017.

Full year segment margin is now expected to be between 19.3% and 19.6%.

This reflects 30 to 60 basis points expansion, which is consistent with what we said in December.

The segments have been updated accordingly.

We've also updated our earnings per share guidance, as Darius mentioned, to reflect a lower anticipated full year effective tax rate between 22% and 23% due to the tax legislation.

Full year EPS is now expected to be $7.75 to $8, up 9% to 13% year-over-year, excluding separation costs, the fourth quarter 2017 charge related to the tax reform and any 2018 adjustments to that charge.

Let me wrap up on Slide 10.

Fourth quarter was an outstanding finish to 2017.

We achieved strong sales growth, continued margin expansion, double-digit earnings growth and exceptional free cash flow conversion.

At the same time, we continued our aggressive capital deployment with more than $1.5 billion in share repurchases in the quarter and $2.9 million for the full year.

We also funded more than $350 million in restructuring in 2017, which is helping us to proactively address stranded costs ahead of our 2 planned spin-offs.

Both spin-offs remain on track for completion by the end of this year.

We're also pleased with the passage of U.S. tax reform, and we've raised our 2018 EPS guidance by $0.20 as a result.

We believe that the tax reform will provide a sustainable, long-term benefit to Honeywell, not a single quick hit.

In that same light, we believe that the benefit that we share with our work associates should also be a sustainable, long-term benefit.

So we've chosen an ongoing mechanism that will benefit them now and in the years to come throughout their retirement.

That is an increase of the employer matching contribution in our U.S. 401(k) plans.

Our strong order rates and increased backlog heading into 2018 give us confidence in our first quarter guidance.

We're well positioned for continued outperformance in 2018.

With Mark, let's -- or with that, Mark, let's move to Q&A.

Thanks, Tom.

Darius and Tom are now available to answer your questions.

So Derek, if you could, please open the line for Q&A.

(Operator Instructions) Our first question is coming from Jeff Sprague with Vertical Research.

Just a couple of things.

First, so just wonder if you could elaborate a little bit more on Aero margin.

It was very strong.

Was there any unusual timing and incentives or program closeouts or anything like that?

It's the first question.

I wouldn't say there was anything unusual.

We obviously had a very favorable mix as reflected by the Commercial Aftermarket, and that was probably a little bit even more favorable than we had anticipated.

But I wouldn't say there is any kind of onetime charges, other than the impact of a more favorable mix of business than we had originally projected.

Yes.

That's really the punchline.

Yes, you might be thinking about the incentive comment, Jeff, but the 270 basis points expansion, most of that was the combination of the volume, mix and productivity that we generated.

I think the incentives were probably [25] of the 270, so a small piece of it.

Okay, great.

And then just trying to kind of wrap up just the cash flow outlook overall.

Could you just update us on what you're thinking about CapEx?

Has pension income moved around at all here at year-end?

And does the outlook here anticipate any additional share repurchase in 2018 at this point?

Yes.

I mean starting with CapEx, Jeff.

I mean, we've been peaking in '14 to '16, north of $1.1 billion or so.

That'll be down in the $900 million range or less in 2018 and will continue to go down.

We've got continued emphasis on our working capital, hoping to get another 0.5 point of working capital turns.

The HOS Gold tool set is helping with -- us with that.

On pensions, the plan is -- at the end of the year, it was funded close to 105%.

Right now, it's funded probably 110% or more.

So it is -- those assets are driving more income, if you can believe that.

But from a cash perspective, it is a nonevent.

I mean, with the plans fully funded, there are no contributions for the foreseeable future.

We think that's in pretty good shape.

And we'll continue to drive the conversion.

I mean, our cash conversion in 2016 was 86%.

We told you we're trying to move towards 100%.

We hit 90% in 2017, and we think the prospects are good to drive that further in '18.

Yes.

And Jeff, it's kind of reflected in the cash guidance for 2018.

I think if you just take -- even if you only take the midpoint of our guidance, I mean, it's a fairly healthy increase.

And as we discussed at length last year, we're going to continue to make progress on cash generation and cash conversion just like we showed in 2017 where we reached the magical 90% level, and that's kind of where we want to -- it's a starting point.

Great.

And share repurchase?

And I'll cede the floor.

Yes, on share repurchases, Jeff, right now, the plan is do what we normally do, as I said.

So we will be offsetting the -- any dilution that comes up as a result of option exercises and contributions to employee benefit plans.

But as I also talked about on the repatriation, there's an opportunity materializing.

I mean, the timing is -- needs to be further analyzed.

Our priorities overall remain the same and we prefer to prioritize bolt-on acquisitions that can be accretive to our businesses.

But like in 2017 when the market was a bit more frothy for us in terms of M&A opportunities, we chose to deploy it towards share repurchase.

We did $1.5 billion in the fourth quarter alone, $2.9 billion for the full year and we were able to take the share count down for the year over 2%.

So that's the kind of approach that we'll continue to head into the year with.

Our next question comes from John Inch with Deutsche Bank.

So can we start with just the core volumes?

So you gave the update on December 13.

Tom, you thought core growth would be 7% to 8%.

It's 6%, but your numbers are solid with great cash flow.

I guess, my question is, did something happen at the end of the year?

Like was December an anomaly at the very end to cause the core growth expectations to shift lower kind of by 1.5 points?

No, I mean, as you can imagine, fourth quarter is a big volume quarter for our businesses.

Aerospace, in particular, you have a lot of OEM customers and we're kind of partnering with them to meet their delivery schedules.

Those change, and sometimes they -- their deliveries push out, which was the case for Aerospace.

Most of that slight moderation in the growth rate was due to Aerospace OEM.

But as you saw, the growth in Aero and Honeywell for the fourth quarter organically was still very strong, and we had a better mix in Aerospace aftermarket, as I said.

Yes, you did.

So Aero was the primary factor then, is that -- that's the message?

A little bit in PMT as well, lower-margin stuff in PMT, but no trends per se.

They're more binary kinds of things.

These are large transactions in most cases.

The shift from Windows to Android, you guys have called out increasing traction, right, in terms of orders.

What -- how does that dynamic work?

Like are you still selling the Windows-based products, but you have to write down the inventory?

Like what's actually going on here?

I'm trying to understand how that prospectively impacts the financials, probably in your margins, I'm assuming, in 2018 for that segment.

Yes.

No, I mean, we're still selling both types of products.

And as a matter of fact, the majority of the installed base in Productivity products is still -- most of the software was still written in Windows-based code.

So we foresee continuing robust sales on the Windows product offering.

But as we discussed on multiple calls last year, Android is becoming a much more prominent part of our portfolio offering.

We've launched some new products in Q4.

We launched some in Q2 and then we have a pretty big launch coming up here also in Q1.

The great news for us, as we highlighted in the announcement, is we've already secured some major, major wins with these new offerings that are Android based.

So it gives me a lot more confidence around the future of the Productivity products business.

But rest assured, Microsoft-based mobility offerings, there's -- we're still selling those fairly aggressively and they still make up more than 50% of our sales.

And it's the customer, Darius, right, that incurs -- if they want to shift from Windows to Android, it's sort of a -- it's their prerogative?

It's not as if Honeywell is somehow on the hook to pay migration costs or something like that, right?

Yes, exactly.

They have to convert their software from Microsoft-based to Android-based.

And we're offering our customers a choice.

Some of them are making that conversion, others are maintaining their current platforms.

Cash was very strong in the fourth quarter despite, obviously, the business putting up a robust growth.

How do you manage the '18 cash in terms of growth and acceleration in the economy and the demands in working capital, but then trying to get working capital out of the system?

I guess, I understand you want to keep a conservative guide, but do you think there is upside to cash given the backdrop of kind of macro improvement?

Or was there a little bit of an anomaly in the fourth quarter given how strong it was?

John, I'm an optimist.

I always believe there is upside, but I think there's a couple of factors going for us.

Number one is working capital has been a point of emphasis.

We saw -- we had our senior leadership meeting kickoff early in January, and I can tell you it was one of the 2 major, major highlights that we talked about.

Number two, as Tom talked about, the reduction in CapEx.

And we're not -- I think it's important to note, we're not constraining CapEx.

It's just that we have gone through a fairly substantial investment cycle and we just see that waning a bit.

But if we see great projects, we're going continue to invest.

But nevertheless, we anticipate that CapEx number being lower this year and even potentially next year.

And three is just being -- we're looking at all these working capital levers, and all the businesses have what I'd call pretty aggressive targets in terms of working capital.

But then also a last thing to add is we're still assessing a lot of these moving pieces when it comes to the new tax legislation, particularly as it relates to cash taxes because, as you know, we have kind of 8 years to pay back that onetime fee, so that's offset somewhat by the reductions.

So we still have some work to do in terms of the overall impact for the year and we're going to be working -- Tom and his team are going to be working through all those details.

Got it.

One last one.

As inflation, Darius, comes back into the U.S. economy, how are you thinking about managing the company in terms of, say, pricing, the trade-off between pricing and cost, that sort of thing?

Yes.

No, that's a good question because that can be a very dangerous phenomenon.

I can tell you that every one of the SBGs, and that's something that we already implemented last year, is they're really watching their inflation and the impact on their product costs, and I am very confident in saying that all of our businesses have a very good process to monitor their inflation of products and making sure that they're passing that through to the marketplace.

And frankly, the inflationary environment for raw goods is not new.

It's really been in place last year as well, particularly in the second half.

So we've been watching that one carefully and put the processes in to make sure that we monitor proactively.

Our next question comes from Steve Tusa with JPMorgan.

So just to follow up on John's question on cash flow, just to be clear.

You raised your net income guidance to reflect the tax rate, but you're basically not raising the cash number because of the uncertainties around this, the cash going out the door on the transition.

Is that kind of how we should read the lack of guide on raise on free cash?

Well, I mean, our original guide that we gave you in December, Stephen, was under the provisos of the old law.

And every year, we anticipate some cash benefit from the tax planning that we do.

And in fact, in 2017, we did realize some benefits there.

So it's not as if we had just taken the foot off the brakes on tax planning and the cash management around tax planning in that original guide.

When you look at 2018, there will be some benefit, certainly on the U.S. side, from that lower cash tax rate.

But it's offset by the payment of the mandatory toll charge.

And we need to continue to study the developments in the legislation before we step out and say it's going to be huge impact.

I mean, the guide range that we gave was fairly wide in any case, from $5.2 billion to $5.9 billion.

So I think we're still comfortable at this early point sticking to that range.

And Steve, as you know, we had substantial overseas cash and retained earnings.

So at least for the next 8 years, that is going to be a bit of a cash drag because we got to pay for that onetime tax hit.

Yes, okay.

Just on the EPS guide, a little bit of a higher kind of operating base and you guys clearly beat ops this quarter.

Yes, I think you tweaked up your margin assumptions, yet you are -- and I think share count is coming out a little bit lower than we expected exiting the year.

You're only raising for the tax -- incremental tax benefits.

Is there something else that's kind of below the line or anything else we have to be aware of?

Anything you're concerned about that has slowed down as to why the raise wasn't -- raise didn't flow a little more through there?

Or just building a little bit more contingency and hedge into the plan?

I think the -- not a lot has changed since December.

I mean, we actually expected a more robust fourth quarter, as we said earlier, from a top line perspective.

And so overall, the momentum in each of the businesses is strong and we expect that to continue.

Maybe there'll be some upside on the top line, but in terms of things that we're -- the large things that we're concerned with that we haven't articulated, there's nothing of that sort here.

Most of the assumptions we talked about in December are still intact.

Yes, and Steve, just to maybe to add onto it.

I mean, first of all, as you know, 60 -- roughly 60% of our business is short cycle versus longer cycle.

And we're in a new year so it's -- I think, early on in the year, it's best to be prudent and just really a little more on the caution side to really see how the business evolves.

But having said that, I can tell you that I'm a lot more bullish on the year heading '17 into '18 versus '16 into '17.

Now the comps are a little bit tougher, but nevertheless, as I look across the entire business portfolio, I can't think of a single business where I would view as a down arrow versus '17.

So overall, things are -- things look good.

But we have to see and see that the business materializes and comes through on the P&L.

And I think kind of first quarter, we'll see how things go.

And after that, we'll be back to discuss it with you and see what adjustments we need to make for the year.

Okay.

One last one.

In your March investor meeting, can you just maybe describe not what the targets are going to be, but are you going to give kind of a refreshed longer-term view financially?

Just asking about kind of framework and format, how you guys are going to approach that.

Yes.

I mean, I kind of felt like I did that last year, kind of the low to mid-single digit, 30 to 50, that kind of range.

I mean, I think we'll probably -- just to give you a little bit of a preview, I think you should expect to see something in that similar range going forward.

But yes, I mean, we'll give a refresh on that outlook.

I don't know if it's going to be as precise as laying out every year because I think once you get out 4 or 5 years, I think it's a little bit more unknown and if we go through a recession or something, you end up kind of not looking so smart.

But I think the kind of framework that we provided in last year's March will be -- is kind of should be your expectation for this year.

Our next question comes from Steven Winoker with UBS.

So Darius, maybe just talk a little bit about the key messages and the difference for managers, the [HS] elements of leadership meeting that you just had.

I know you mentioned cash, but just a little more on sort of how you're kind of steer -- trying to steer the ship and give folks priorities as they think about 2018.

Sure.

Yes, no.

First of all, the key message was that I thanked them for a really nice 2017.

I think we had a very nice year across the board and I think it was a good time to recognize the kind of outstanding efforts that the team contributed.

So that was sort of the first key message.

In terms of priorities for 2018, I'd say two- or threefold.

Number one, working capital, I talked about that.

We want to drive free cash flow.

We want to drive free cash flow conversion.

I just want to emphasize, too, that this is sort of where a very healthy and well-funded pension plan is actually hurting us from a cash flow conversion perspective, and I always emphasize that because that somehow gets forgotten.

The second point is software, and software not just in our connected enterprise and our connected, but really the incorporation of software into anything and everything we do, so software and sensor strategy for any and all products that Honeywell launches.

And the third one was much more about innovation, making sure that we leverage the latest and greatest technologies available in the marketplace today and making certain that those are reflected in our NPD pipelines and so on.

And then the last one is that we've kind of had a bit of a -- we have different behaviors that we're trying to incorporate in the company and reemphasize leveraging and exhibiting those behaviors in everything we do.

So those were some of the key messages from our senior leadership meeting.

All right, that's helpful.

And then, secondly, as you think about the kind of follow-on effects of tax reform for your customer base and their decisions about how to spend that money and whether or not that kind of works its way back to your own growth rate, and your own decisions even, what -- I'm really seeing kind of mixed messages out there from corporates in terms of what they see in their own customer base kind of considering additional spending that's just sort of macro related versus maybe tax related.

I'm not sure it matters.

But maybe a few thoughts on that potential for acceleration.

I think, for us, undoubtedly, this is a very constructive outcome.

I mean, we were supportive of tax reform.

We're very pleased with what ended up happening.

I think it's going to be good for U.S. business.

For us, we certainly see much greater level of bullishness on the part of our customers, which should translate to continued investment.

And you're right, their CapEx is our revenue and we do expect some level of investment to accelerate.

Now I think it's a little bit early.

I think we sometimes forget that the details of this are still becoming clear.

It's only 30 days old and what the implications are for us.

I mean, for us, we've been bullishly investing in the U.S. already.

I mean, if you think about our elevated CapEx that's been in place for the last 2 to 3 years, a lot of that investment went into manufacturing jobs, particularly in states like Louisiana and others.

In addition, we're aggressively hiring a lot of software engineers, particularly in our Atlanta COE, and we're going to continue to do that.

So we have and we'll continue to invest in the U.S. Now will this -- longer term as we assess further investments, will this -- does this make U.S. a more appealing place to invest?

Absolutely.

We think that this is -- this makes the U.S. a much more appealing place to invest and as we contemplate further investment, U.S. will be near the top of the list.

Yes, just to add a little color on that, Steve.

When you look at the momentum that we have in the U.S., I mean, overall, we closed the year out 3% organic growth or so in the region, but the fourth quarter was pushing close to double digits.

So I think there was some anticipation of what was coming, possibly.

And we'll see how that goes.

I mean, so far, so good on -- at this early point in January as we look forward.

But it's hard to make that direct connection between the benefits from the legislation, including the expensing of CapEx, and our order rates.

But we're looking for it, for sure.

Our next question comes from Andrew Kaplowitz with Citi.

Darius or Tom, we know you have more difficult growth comparisons in Aero moving forward, but you did 5% growth in 4Q and you averaged over 4% in the second half of the year.

We've heard some more positive commentary on business jets that you guys have talked about, a potential turn toward the end of this year and next year.

So how do you look at the business at this point?

Is the 1% to 3% -- I'm sure there's some conservatism for the usual suspects like Space and maybe TS.

But is the overall environment actually still getting better, would you say, in Aerospace?

Yes.

I think as we discussed, we think the environment is still getting better.

But I think what is also important to note is that we're coming off a much stronger year, '17, than a weaker year, which is '16.

So all in all, we're still very bullish.

And I'm very excited about our prospects, more excited than going into '17.

But nevertheless, the baseline is a little bit different.

In terms of specifics around your question on Aerospace, yes, I think the framework there on the business jets is similar to what we've been saying.

We expect some level of acceleration, but more likely in the second half of '18, not early, particularly as some of the new platforms are launching and deliveries taking place.

So I'd I say cautious optimism reflected in the growth rates, but probably more later rather than sooner given the year.

Appreciate that, Darius.

And then you mentioned that you're seeing short-cycle growth in Process Solutions.

In December, you suggested you really hadn't seen any evidence of bigger projects coming back, but you guys see the same things that we do, tax reform and Brent oil prices being very high.

Do you have any expectation that larger projects could begin to come back?

Or are you seeing any signs of them yet as we sit here today?

Yes.

I mean, I think, overall, our pipelines are very strong.

I think you have to remember that our PMT backlog is up 10% on a year-over-year basis and we had positive orders growth in both UOP and HPS in Q4.

But I would tell you also the pipeline and the project pipeline is strong.

And I think what's important in terms of the price of oil is sustainability, is that -- what we don't like to see is it bouncing around.

So to the extent that it stays at this level, is right around, is a very healthy environment for investment.

So as long as this is sustained, I become that much more bullish on our outlook in PMT, particularly UOP and HPS.

Our next question comes from Scott Davis with Melius Research.

I asked this question of a couple of other corps.

I haven't really gotten an answer that seems helpful yet, and I'll throw it at you guys.

I mean, this new tax act thing seems to have somewhat made it simpler to do tax planning globally, that maybe creates an opportunity for you guys to unwind some structures that were created in the past, that -- whether it's supply chain related or otherwise.

Is there a cost benefit at all from this simplification?

I mean, you guys probably have like 700 different corporate entities or something crazy like that, right?

So is there any chance that you can unwind some of that stuff and just create some (inaudible)?

You got some inside information there.

Yes -- no, I think, Scott, it's funny.

If you could see us in the room, I'm actually smiling at Anne Madden because that's actually -- I think your point is spot on.

I mean, I think -- what I think is underestimated today is that there is an opportunity to simplify a lot of our legal entities.

That is an effort that actually we've already launched.

Anne is leading that effort.

But I also think that something that's underestimated is the level of complexity in this new tax structure in terms of versus -- where we're going versus where we are today.

So I applaud the new tax code and we think it's extremely helpful for U.S. business.

But it will require us to restructure ourselves and we do believe that new structure longer term will be simplified, will cost us less, will make it a lot easier to do business.

Can I quantify that for you right now?

I can't because I mean, we literally just started that work a couple of weeks ago.

But I do anticipate it'll be a source of value for Honeywell and our shareholders.

Okay, good.

That's the only good answer I've gotten so far.

I wanted to ask about business jets in the context of this Tax Act, too, in that you've got all this money coming back and, seemingly, it doesn't seem like anybody's bought a business jet in a while.

I mean, you guys have always had really good forecasters who were known for a long time as being the best source for a business jet forecast.

What are your guides saying?

And if you commented on this earlier and I missed it when I went out for coffee, sorry, but what are your guides saying as far as the potential impact on guys having a few extra bucks sitting around and buying some planes?

Yes.

I think probably the right answer is it's a little bit too early to tell because we'd like to see that reflected in kind of the order rates on the part of our business jet customers.

But one would have to believe that this should have a positive impact on the overall demand.

I think for now we're kind of sticking to what we said before, is that we anticipate some uptick in the second half of this year and stronger environment in 2019.

But like I said, I think it's just a little bit too early to tell the real impact.

The new tax code is 30 days old and difficult to project at this point the impact it could have.

But sort of logic would tell you it should be an up arrow for us.

Yes, I think the other thing we have going is the mandates and some of the software aftermarket offerings that we do in -- on the business jet side.

So even though OEM might not be clicking away at double digits, we certainly are getting new technology investments for existing platforms.

Our next question comes from Gautam Khanna with Cowen and Company.

Two questions.

First, I just wanted to ask, given tax reform, how does it change, if at all, the profile of the types of acquisitions you're looking at?

Does it encourage you to go bigger?

Does it do anything to the criteria that you've set out earlier?

I don't know that it dramatically changes it.

I think given with our -- maybe the only thing that's certainly very helpful for us is that with the ability to bring back some more cash to the U.S., it certainly makes U.S.-based acquisitions a bit easier to execute because now we have got more access to cash.

But in terms of focus or -- I think our financial metrics are set up such that the hurdles are a bit -- adjustments in the tax rates would be reflected in the financial metrics we look at.

So does it dramatically change the calculus?

I'm not sure, other than we have -- we'll have more firepower in the U.S., which is important and it's important to have that kind of flexibility.

Yes, I would add to that, though, that we've not really been constrained in where we're looking.

Like, our M&A team and the businesses aren't saying -- haven't been saying, well, let's not look in the U.S. because we don't have cash.

We've always been able to accommodate that with our capital structure and that will continue to be the case even more so now.

Okay, I appreciate that.

And just one follow-up.

Darius, how do you keep this -- the potential SpinCos kind of focused ahead of the spin?

What kind of -- just to make sure that everyone keeps their eye on the ball and doesn't get distracted as they move into the new world on their own.

Yes.

So I mean, I think both through sort of our attention.

We view these as our businesses before and after the spin.

I mean, I think it's -- we want to make sure that these are incredibly successful.

We have very focused management teams in both the spins businesses.

They're doing a great job in running their businesses, but also getting ready for the spins.

We have a very -- I'm very confident that the teams in those businesses are focused on delivering now and after the spins take place.

So I think the proper -- there's also proper incentives that are aligned to the success before and after the spin as well, which we've taken care of and put in place.

Gautam, this is not an effort that's being done in some far-flung part of the company.

The team, the SpinCo team that's executing on the transactions actually reports into Darius and I directly.

We do involve the businesses being spun, but we want them focused, for the most part, on executing on their operating plans and that's the way we've structured it.

The 2 objectives of the spin team are, one, day 1 readiness for those organizations, and we have a very a strong cadence and operating system around that in terms of systems, in terms of people and staffing and doing all the regulatory filings and so forth.

So that's very rigorous.

Secondly, it's stranded costs.

And with 20% of the revenues from the RemainCo going with the spin, we need to rightsize the company, and so that SpinCo leadership team also is in the process of managing that cost structure.

So Darius and I get regular weekly visibility to it.

We've put on some of the most senior people in Honeywell to do this, and we're encouraged by the progress they're making.

Yes, and I think, just add to it, I mean, we have a full-blown what we call de-integration team, which is staffed by senior leaders whose full-time job is nothing but to focus on making certain that we have a successful spin in place and execute the business in the near term.

So we have the right level of focus on this.

Our next question comes from Peter Arment with Baird.

Darius, just a quick one, sticking in the Aerospace.

Obviously, the United Airlines' selection, that was certainly very favorable for you guys, but just kind of talking about the competitive landscape.

We're months into this deal with one of your bigger competitors, and certainly the headline reads that it would be more competition for you.

But at the same time, seems like there's going to be a lot of opportunity.

What are your guys hearing in terms of your sense of, post this merger, that you'll see other opportunities for growth?

Yes.

I mean, Peter, we haven't been really focused on the merger of others.

I think what we've really been focused on is executing our strategy.

I continue to be extraordinarily excited about our vision for Connected Aircraft.

I think it's industry-leading.

It's reflected in our rates, certainly been a factor in the United win and we're getting more and more traction every day.

And I feel good because we have -- if you think about the real estate and the scope on an aircraft, we have the avionics and we have mechanical systems and we have an integrated play and integrated our offering.

I think we have a very compelling vision for the kind of value we can create for aircraft owners, maintainers, passengers, pilots, create a more efficient, more safe experience for everybody.

And that's not visionary, that's not a dream.

That's something that we're executing, selling and generating revenue in today and we feel that's a very unique place to be in, in the aerospace industry, and frankly, we're the only ones that are executing it.

I think probably our biggest opportunity or challenge at the same time is just being able to communicate that clearly in that value to end customers.

But as you can tell by some of these wins, we're doing that more and more effectively.

Okay, that's helpful color.

And just a quick one, Tom.

Just the sensitivity around -- for your Defense business with the CR impacts, how do we think about that?

Is there any near-term impact?

Or what's the right way to think?

Well, thankfully, we've got another reprieve, but it's kind of one of those things that's more timing than anything else.

There's a slight risk that volumes push out depending on shutdowns and so forth, but I think we're -- I don't think we are anticipating any significant adverse impacts from those activities.

And our final question comes from Andrew Obin with Bank of America.

Just a question.

The focus on the economy was all in the U.S., but European macro metrics are actually looking better than the U.S. right now, so is China.

Can you just talk about what you guys are seeing in Europe and what you guys are seeing in China and other emerging markets?

And specifically on China, if you're seeing any signs of deceleration.

We've been getting a lot of questions from investors on that.

Yes -- no.

I mean, we -- we're extremely bullish on China.

It was an absolutely terrific year for us in China.

I mean, I think close to a 30% organic growth rate in China last year.

And could there be a slight downtick from that rate?

Maybe, but we continue to see double-digit and planning on double-digit growth rate in China for us.

So we're bullish there.

And that was every...

Every business.

Every business grew and I think we really kind of figured out the calculus as to how to be successful in China, acting like a local company.

Our whole value chain now is localized.

And the great news and the one that I'm really excited about is we made similar progress in India.

So I think we're really firing on all cylinders in China and India.

Back to your Europe question, we're also bullish on Europe.

I mean, Europe is continuing to grow.

We're seeing growth in Western Europe.

Not seeing a lot of trouble spots here.

So as we head into this '18, as I said, I'm continuing to be bullish on a global basis in terms of our prospects for growth.

So overall, strong environment.

Just to follow up on your Aero '18 outlook.

You said on the call that none of your businesses are going to be negative, but just sort of this 1% to 3% growth does imply that perhaps Commercial OE is negative on wide-body deliveries.

How should I think about sort of sub-segments within Aero?

Well, I think, number one, is that the aftermarket and the services business are going to continue to be strong.

Both are sort of what I call the proactive segment as well as the brake fix.

Sort of we talked about the business jet OE, which is -- our plan is that acceleration as we get deeper into the year.

And on the narrow-bodies, I mean, obviously, this is going to be really aggressive growth for our customers.

So that's sort of a rough framework that we're planning for in 2018.

So none of them within your framework -- none of the sub-segments are negative into '18?

No.

I mean, on the OE side, we'll continue at low single-digit kind of growth, all-in, is the plan.

I mean, that could change quarter-to-quarter, vary quarter-to-quarter based on customer delivery schedules, but I think we're planning on an overall Commercial OE growth rate in that range.

So just similar level of conservatism across your guidance.

And that concludes today's question-and-answer session.

At this time, I'd like to turn the conference back to Mr. Darius Adamczyk for any additional or closing remarks.

Thank you.

We've begun 2018 with significant momentum, including strong order rates, a growing backlog and favorable U.S. tax legislation.

We are excited by our prospects, both the near term and long term, as Honeywell continue to outperform.

I'm looking forward to speaking to you next at our Annual Investor Conference Day on February 19 here in Morris Plains.

Thank you.

Thank you.

This does conclude today's teleconference.

Please disconnect your lines at this time, and have a wonderful day.