Good day ladies and gentlemen and welcome to Honeywell’s third quarter earnings conference call. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star, one on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing star, two. Lastly, if you should require operator assistance, please press star, zero. As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mark Bendza, Vice President of Investor Relations. Please go ahead, sir.

Thank you Steven. Good morning and welcome to Honeywell’s third quarter 2020 earnings conference call. On the call with me today are Chairman and CEO, Darius Adamcyk, and Senior Vice President and Chief Financial Officer, Greg Lewis. 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 based on many factors, including changing economic and business conditions, and we ask that you interpret them in that light. Unless otherwise noted, the cost action plans described herein are not final and may be modified or even abandoned at any time. No final decision will be taken with respect to such plans without prior satisfaction of any applicable requirements with respect to informing, consulting or negotiating with employees or their representatives. We identify the principal risks and uncertainties that may 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 third quarter of 2020, share our guidance for the fourth quarter and full year 2020, and share some preliminary thoughts on 2021 dynamics. As always, there will be time for your questions at the end. With that, I’ll turn the call over to Chairman and CEO, Darius Adamcyk.

Thank you Mark and good morning everyone. Let’s begin on Slide 2. In the past few months, we’ve celebrated two significant milestones. First, we celebrated Honeywell’s 100th year anniversary as a publicly traded company. We are proud of our longevity and long legacy of innovation. Since 1920, we have navigated the Great Depression, World War II, numerous political changes, the Great Recession, and the emergence of disruptive technologies in every market we serve. The reason that Honeywell continues to thrive over all these years is simple: our ability to adapt to an ever-changing world and to innovate. The long list of inventions from the last 100 years and our legacy of innovation endures today. For example, we are transforming the way our customers do business through Honeywell Forge, our cloud-based operating model, and are helping the world cope and recover from the effects of the COVID-19 pandemic with a new portfolio of healthy solutions. In addition, we recently announced a breakthrough in the early era of quantum computing, the introduction of the system model H1, our next generation quantum computer which offers a proven quantum value of 128, the highest measured in the industry. We also announced new users, including DHL and Merck, which demonstrates the wide range of quantum computing use cases. The second milestone we celebrated was our return to the Dow Jones Industrial Average. The S&P Dow Jones indices announced in August that Honeywell was previously a Dow component from 1925 to 2008. Our return to the Dow 12 years later reflects years of consistent performance and our ongoing transformation to the world’s premier software industrial company. We are proud and honored to re-join the group of companies that comprise the Dow. Both of these milestones serve as timely reminders of our long legacy of innovation and performance. Throughout our over 100-year history, we have continuously risen to the occasion to meet challenges with inventive new technologies, and we are committed to continuing our legacy of innovation to shape the future of the next century. Let’s turn to Slide 3 to review our third quarter results. I’m very proud of our third quarter performance. We drove sequential improvements from the second quarter in sales, segment margin, and adjusted earnings per share. Although the COVID-19 pandemic continues to impact several of our businesses and end markets, we bounced back from second quarter lows through our laser focus on demand generation, operational execution, cost management, and our COVID-related new solutions. We delivered adjusted EPS of $1.56 in the third quarter, down 25% year over year, with a 15-point sequential improvement from adjusted EPS of $1.26 in the second quarter, which was down 40% year over year. Organic sales were down 14%, better than the more than 15% organic sales decline we expected in July, representing a four-point sequential improvement from the 18% organic sales decline in the second quarter. Our cost plans delivered approximately $450 million of year-on-year benefit in the third quarter. These actions helped us protect margins, limiting our decremental margins in the third quarter to only 29%, an improvement from 33% in the second quarter. Segment margins contracted by 130 basis points, also an improvement from the 280 basis point contraction in the second quarter, driven by another quarter of margin expansion in both Honeywell building technologies and safety and productivity solutions. We generated $758 million of free cash flow, down from $1.3 billion in the second quarter. As we discussed in July, we expected these cash flow dynamics which were the result of working capital reductions in the second quarter and higher repositioning cash outflows and capex growth investments in the third quarter. In terms of capital, we deployed approximately $1 billion of cash to dividends, growth capex investments, and share repurchases. Additionally, we announced our 11th consecutive dividend increase, underscoring our commitment to returning value to shareholders even amidst the current economic downturn. Let’s turn to Slide 4 to discuss our recent corporate development activity. I’m very excited about our recent announcement of the recently completed two acquisitions and established key partnerships to further drive innovation, strengthen our portfolio, and invest in the future. First, we acquired Rocky Research, a technology leader specializing in thermal energy and power management solutions. This acquisition will expand our existing aerospace portfolio and position us with an advanced capability in the fast-growing power and thermal management market, which is critical to meet the growing need for aircraft electrification, unmanned and autonomous aerial vehicles, and related systems. We also acquired assets from privately held Ballard Unmanned Systems that extend our presence into the hydrogen fuel cell market for unmanned aerial systems and strengthens our urban air mobility product portfolio. Ballard Unmanned Systems designs and produces industry leading stored hydrogen proton exchange membrane fuel cell systems that power unmanned aerial systems, or UAS. In addition to the creation of the new business unit specifically dedicated to the UAS-UAA market earlier this year, this acquisition is yet another example of our commitment to invest in our UAS-UAA initiative in the growing UAS market. I’m also pleased that we announced a new partnership between Honeywell and Microsoft that will reshape the industrial workplace. Honeywell Forge will integrate with Microsoft Dynamics’ field service to provide cloud-based predictive solutions to building owners and operators through closed-loop maintenance workflows, strengthening business continuity and improving operational efficiency. Moving forward, we are exploring more ways to bring innovation to customers by integrating Honeywell Forge solutions with Microsoft Azure services, such as Azure Digital Twin or Azure Edge capabilities. We also announced a partnership with Vertiv, a global provider of critical digital infrastructure and continuity solutions to improve sustainability, resiliency, and operational performance for data center operations across the globe. We look forward to collaborating with Vertiv to offer integrated solutions that make it easier for data center operators to distill the mountains of data they pull from their equipment into actions that create more efficient and environmentally friendly operations. The first offering from our partnership will be an intelligent power management solution that features an energy resource management and supervisory control system in a single integrated platform. In total, we expect these investments and partnerships to drive over $1.2 billion of sales over the next five years. There’s a lot of great progress, and I’m pleased by the momentum in these areas. Now let me turn it over to Greg on Slide 5 to discuss our third quarter results in more detail, as well as to provide our views on the fourth quarter.

Thank you Darius, and good morning everyone. As Darius highlighted, we’re very pleased with the third quarter. Our operational execution drove significant sequential improvements from Q2 and an improvement versus our expectations in July, particularly in revenue. While third quarter sales declined by 14% organically due to the effects of the pandemic, this was a four-point improvement from the 18% organic sales decline in Q2 with sequential growth in all four segments. Importantly, we delivered strong double-digit organic sales growth in our defense and space, warehouse automation, and PPE businesses, as well as in recurring software sales in HCE. Lower sales volumes and mix in aerospace and PMT drove 130 basis points of year-over-year segment margin contraction, but we once again expanded margins in HBT and SPS, resulting in 140 basis points of sequential margin expansion from the second quarter. Our cost actions delivered approximately $450 million of year-on-year benefit in the quarter, which brought us to approximately $1.1 billion of savings year to date. We acted fast and early in the crisis and are now on track to deliver $1.5 billion to $1.6 billion of cost savings in 2020, up from our previous estimate of $1.4 billion to $1.6 billion. Adjusted earnings per share was $1.56, down 25% year over year but up 24% sequentially from adjusted EPS of $1.26 in the second quarter. We reported $124 million of repositioning in the quarter to fund cost savings initiatives for 2020 and into 2021. That repositioning funding was higher than the third quarter of last year, driving a $0.04 headwind below the line, and interest income was lower than the third quarter of last year, driving a $0.05 headwind below the line. As expected, our higher adjusted effective tax rate resulted in a $0.05 EPS headwind, partially offset by $0.04 of EPS benefit due to lower share count from our share repurchase program. This quarter, EPS is adjusted to exclude the impact of the non-cash $350 million pre-tax and after-tax charge associated with the reduction in carrying value to present value of reimbursable receivables due from Garrett in relation to Garrett’s September 20, 2020 Chapter XI bankruptcy filing, which we previously announced with the filing of our Form 8-K. A bridge from adjusted earnings per share in the third quarter of ’19 to adjusted earnings per share in the third quarter of 2020 can be found in the appendix of this presentation. We generated $0.8 billion of free cash flow in the quarter, down year over year as we discussed in some detail on our Q2 earnings call. Lower net income, higher repositioning cash flows, and higher growth capex investments pressured cash, resulting in adjusted free cash conversion of 68%. We expect these repo and capex dynamics to continue into the fourth quarter as we continue to drive our savings programs and invest in growth, and we’ll also have the impact of an additional payroll cycle, as we’ve shared previously. We do expect sequential improvement of free cash flow despite that, driven by working capital improvements mainly in inventory in the quarter. Turning to capital deployment, we paid out $636 million in dividends and, as Darius mentioned, announced our 11th consecutive dividend increase. We resumed opportunistic share purchases and invested $249 million in capital expenditures in the quarter, up approximately $60 million from the prior year. This included investments that we are making to produce N95 masks to support the COVID-19 relief efforts and to increase capacity in our warehouse automation business. Overall, we continued to execute commercially and operationally while investing for the future, driving sequential improvements in sales, segment margin and EPS, and setting ourselves up for the quarters to come. Now let’s turn to Slide 6 and we can talk about our individual segment results. Starting with aerospace, sales were down 25% on an organic basis as the ongoing reduction in flight hours and slowdown in original equipment build rates impacted commercial aftermarket and original equipment demand. Our air transport aftermarket business was down 55% organically compared to 56% in the second quarter. However, our business aviation aftermarket was down 28% organically in the third quarter, which was a significant improvement from the approximately 50% decline we saw in Q2. We continue to have strong demand for U.S. and international defense and space, driving double-digit organic growth in that segment for the quarter. Segment margin contracted 240 basis points year over year, driven by lower commercial sales volume and business mix, partially offset by cost actions to improve productivity. That was a 240 basis point sequential improvement from Q2 levels for aerospace. In Honeywell building technologies, sales were down 8% organically, a significant improvement from the 17% organic decline in the second quarter. The third quarter decline was primarily driven by lower demand for building management systems, security and electrical products, and softness in building solutions due to delays in projects and energy businesses, some of which was a result of resource mobility constraints, particularly in India and the Middle East. However, organic sales in all HBT businesses improved sequentially from the second quarter, creating positive momentum into Q4. Orders for the business solutions projects and energy businesses both grew double digits organically in the third quarter. Additionally, the building solutions service backlog was up double digits year over year, driven by larger orders in the Middle East and Asia. We are experiencing significant customer momentum with our portfolio of healthy building solutions. Our sales pipeline is over $600 million and we have secured orders around the world from Charlotte to Singapore. HBT segment margins expanded versus last year by 60 basis points in the quarter, driven by commercial excellence and cost actions to improve productivity, which offset the impact of lower sales volumes. In performance materials and technology, sales were down 16% on an organic basis, a slight improvement from down 17% in the second quarter. Process solutions sales were down 12% organically, a one-point improvement from 13% organic decline in Q2, driven by delays in service and automation projects as customers conserve cash and volumes decline in smart energy and thermal solutions. In UOP, sales were down 36% organically, steeper than the 25% organic decline in Q2 driven by declines in gas processing investments, lower licensing and engineering, and fewer catalyst shipments due to weakness in the energy end markets. As expected, COVID-19 and oil price weakness continue to drive delayed bookings in HPS and UOP; however, we still have not seen significant project cancellations and our backlog is approximately flat to the prior year. Organic sales in advanced materials were down 4% in the third quarter, a 14-point improvement from an 18% decline in Q2, driven by lower volumes in fluorine products partially offset by growth in packaging and composites. Auto refrigerants returned to growth in the third quarter as the auto end markets experienced a rapid recovery. PMT segment margins contracted 220 basis points in the quarter, a 70 basis point sequential improvement as the impact of lower sales volumes and mix were partially offset by cost actions to improve productivity. Finally, in safety and productivity solutions, sales were up 8% organically, a seven-point improvement from the 1% organic growth we had in Q2. All SPS businesses, apart from gas sensing, grew in the quarter with double-digit organic growth in calibrated and personal protective equipment leading the way and mid-single digit growth in productivity solutions and services, which was driven by strong demand for scanning and mobility products. Orders in SPS were up double digits for the fourth consecutive quarter, driven by personal protective equipment up approximately 150% year-over-year, continuing to position SPS well for the fourth quarter and into 2021. SPS backlog was up approximately 100% year-over-year to a new record high led by triple-digit growth in personal protective equipment and Intelligrated backlog. Despite some inefficiencies as we scale up capacity in the PPE space, SPS segment margins expanded 50 basis points in the quarter, driven by productivity actions and commercial excellence. As our new capacity comes up to speed, we expect favorable contributions to SPS segment margin. Overall, we finished the third quarter with sequential improvements from the second quarter and all businesses making progress. We grew double digits in several businesses, including defense, Intelligrated, and PPE, and due to prudent cost management and commercial excellence, we were able to limit our decremental margins to 29% overall, a four-point improvement versus Q3, and expanded margins in two of our four segments. Now let’s turn to Page 7 and discuss our outlook for Q4. Throughout the pandemic, we have remained committed to providing shareholders with a quarterly outlook that’s commensurate with our level of visibility and the environment we’re in. We believe we have enough visibility at this stage in the fourth quarter of 2020 to reinstate full financial guidance for the quarter; however, this guidance is predicated on having no material supply chain or end market disruptions through the end of the year. We will independently reassess the macro environment in January to determine the appropriate format of our 2021 financial outlook based on conditions at that time. As we proceed to the fourth quarter, we’re actively monitoring the situation as many factors remain unpredictable, including COVID-19 infection rates, which we are seeing rise globally, particularly in the last two weeks. As of now, we expect organic growth in the fourth quarter in a range of down 11% to down 14%, driven by continued headwinds in commercial aerospace and UOP, partially offset by ongoing strength in defense, warehouse automation, and PPE, as well as gradual recovery in the remaining portion of the portfolio. We expect segment margin in the range of down 10 to down 30 basis points, resulting in segment margins in the range of 21.1% to 21.3% in the fourth quarter, which would be another 100-plus basis points sequential improvement as we gain leverage off our reduced cost base and drive commercial productivity. The net below the line impact, which is the difference between segment profit and income before tax, is expected to be between negative $50 million and positive $10 million in the fourth quarter, which includes capacity for an additional $50 million to $100 million of repositioning to drive productivity into 2021. We expect the effective tax rate to be approximately 19% in the fourth quarter and average share count to be approximately 710 million shares. As a result, we expect EPS between $1.97 and $2.02, down 2% to 4% year over year adjusted. Now let me provide a little color on the top line. In aerospace, we expect ongoing growth in defense and space, supported by stable government defense budgets and continued sequential improvement in business aviation aftermarket sales as flight hours improve. However, global flight hours will remain far below pre-COVID levels and we don’t expect air transport flight hours to improve materially, impacting our air transport aftermarket sales. Our commercial and regional equipment business will continue to be impacted by lower air transport, OEM build rates, and lower business jet demand due to the economic slowdown. In building technologies, we expect sequential sales growth driven by improvements in fire, security, and building management systems. We expect access to customer sites to improve in the fourth quarter, driving sequential improvement in long cycle building solutions projects and orders. Our healthy building pipeline, which is currently over $600 million, is maturing nicely and we expect to continue generating pipeline and orders in the fourth quarter. In PMT, we expect ongoing challenges in UOP and process solutions as customer capex and opex reductions and lower production and refining volumes continue. However, we expect sequential sales growth in the products businesses in process solutions and advanced materials as these end markets, including automotive, continue to strengthen. Finally, in SPS, we expect another quarter of double-digit growth in Intelligrated and personal protective equipment. We continue to see record-level demand for respiratory masks and other PPE. Our personal protective equipment and Intelligrated backlogs remain up triple digits year over year and our total SPS backlog is at a new all-time high, giving us confidence in the remainder of 2020 and into 2021 for the business. While macro conditions continue to put pressure on other SPS businesses, including sensing and IOT and gas sensing, we expect to see sequential improvement in the fourth quarter. Given these fourth quarter dynamics, for the full year we expect organic growth in the range of down 12% to down 13% and segment margins in the range of down 60 to 70 basis points, resulting in segment margin in the range of 20.4% to 24.5% for the year. The adjusted net below the line impact is expected to be between negative $185 million and $125 million for the full year. We expect the adjusted effective tax rate to be approximately 21% and the average share count to be approximately 711 million shares. As a result, full year adjusted earnings per share are expected to be between $7 and $7.05, down 14% year-on-year. Now let’s move to Slide 8 and we can talk about some of our preliminary thoughts we look into 2021. 2020 has clearly been a challenging year and it continues to be very dynamic, as we all see in real time. Many uncertainties persist as we look into 2021, so let’s highlight how we’re thinking about them. Our current assumption is that a COVID-19 vaccine receives approval and becomes available sometime in early 2021, allowing the global economies to largely reopen as the year progresses. We’re also assuming fiscal stimulus remains supportive of the economy. We’re currently seeing a second wave of infections in several regions, including the U.S. and parts of Europe, so we need to watch how that situation develops. We’re assuming no significant shocks to the economy from post-election circumstances and a stable geopolitical environment, particularly as it relates to U.S.-China trade relations. With this in mind, let’s look at our key markets. In aerospace, as the pandemic subsides and the global economy continues to recover, we assume passengers will begin flying again, leading to modest improvement in global flight hours that begins in the first half and accelerates slightly into the second half of the year. This will directly lead to improvements in our commercial aerospace business as aftermarket demand grows. We also expect stability in defense budget spending supporting continued growth in our defense and space business, though likely at a reduced pace versus our 2020 growth rates. In HBT, we expect stability in non-res construction with a greater emphasis on retrofits driving demand for building products and services, which should support continued demand for our healthy building solutions. In PMT, we’re assuming improved macroeconomic conditions will drive moderate increases in oil prices in the second half of the year, leading to improved business conditions in refining, petrochemical, and process automation in UOP and process solutions as the year progresses. SPS will be a robust growth segment from the strength in warehouse automation and personal protective equipment as we execute delivery of our robust backlog. We expect segment margins here to balance with the challenge of higher mix in Intelligrated growth and the efficiency gains as our PPE operations scale more efficiently. From a total Honeywell perspective, we expect organic growth driven by year-over-year growth in all four segments, as well as double-digit connected software growth in HCE. We expect our streamlined fixed cost base following 2020 cost actions to support a resumption in year-over-year margin expansion while affording the opportunity to invest in growth, particularly in R&D and connected enterprise commercialization, and the continuation of our supply chain and Honeywell Digital transformations. We expect to take advantage of our significant balance sheet capacity for M&A and share repurchases as well. We expect to reduce share count by a minimum of 1% again in 2021 and will be resuming buybacks as early as Q4 to do so. Overall, we have some insight into our end markets and confidence in our continued operational execution which will give us the ability to resume financial performance consistent with our prior framework in 2021. We’ll provide more specific inputs once we close out the year. With that, I’d like to turn the call back over to Darius.

Thank you Greg. Before we wrap up, I’d like to take a minute on Slide 9 to discuss an important topic: our commitment to a sustainable future, which is one of the key elements of our overall ESG story. At Honeywell, we believe our robust environmental, social, and governance in our ESG framework enables our long term success. Despite the unprecedented challenges we have faced this year, our commitment to our ESG principles has not wavered. To the contrary, I believe our perpetual drive to strengthen the sustainability of our business and uphold the highest ethical standards has only fortified our resilience. Our commitment to ESG is centered on the protection of our people and the environment, achieving sustainable growth and accelerated productivity, and developing technologies to expand the sustainability capacity of our world. As evidence, we established robust 10/10/10 ESG goals to achieve by 2024 and we closely monitor progress against these goals. Additionally, starting this year as part of our continued focus on sustainability reporting, we’re reporting in alignment with the FASD and TCFD framework. As you can see on the slide, we have already worked extensively to reduce greenhouse gas emissions, increase energy efficiency, conserve water, and proactively restore former operations of predecessor company sites to produce community assets. Honeywell is uniquely positioned to shape a safer and more sustainable future. We continue to invent and develop technologies that provide our customers with adaptable and efficient solutions to their safety, energy, and environmental needs. In fact, we focus approximately 50% of our new product research and development on solutions that improve environmental and social outcomes for our customers. Some of the challenges our technologies address include sustainable refrigerants and aerosols, sustainable buildings and building safety, sustainable aviation and aviation safety, sustainable electric power, plant, and personal safety, sustainable freight and worker safety. We have also recently created a new business in PMT called sustainable technology solutions to develop and commercialize new technologies that meet the growing demand for sustainable solutions, including plastics recycling, energy storage, and renewable fuels. These technologies will advance environmental sustainability, contribute to the expansion of our technology portfolio, and accelerate long-term growth. Now let’s wrap up on Slide 10. We continue to effectively manage through the ongoing challenges of this global pandemic and social and economic environment with the strong operational execution that is typical of Honeywell, driving sequential improvement from the second quarter in sales, segment margin, and adjusted earnings per share. Our diversified portfolio, innovation culture, and significant balance sheet strength continue to provide the resilience and ample capacity as we continue to set ourselves up for the recovery and beyond. We delivered double-digit growth in several parts of the portfolio, including defense and space, Intelligrated, personal protective equipment, and recurring software. We are also continuing to invest in growth opportunities through M&A, partnerships, and high-return capex. We are gaining traction in our innovative solutions that address emerging customer needs. We continue to align our cost base with the current environment, and we are now on track to deliver $1.5 billion to $1.6 billion of cost savings in 2020. I am proud of the improvements we drove in the third quarter. We’re effectively managing through the current environment and have positioned ourselves well for the recovery through cost actions and growth investments. In addition, we remain committed to doing our part to ensure a sustainable future by protecting our people and the environment, as well as developing technologies that improve the world’s sustainability. With that, Mark, let’s move to Q&A.

Thank you Darius. Darius and Greg are now available to answer your questions. Steven, please open the line for Q&A.

We will begin with our first question from Scott Davis with Melius Research. Please go ahead.

Good morning guys.

Morning Scott.

Good presentation, and obviously really good decrementals, but I just wanted to focus a little bit on the future. One of the real tools you have, I think, Darius and Greg, is your balance sheet. Perhaps just update us a little bit on M&A, and then what’s your appetite to getting more aggressive in purchases here, share purchases, just given a disconnect between your stock price and perhaps the upside reality?

I believe the situation hasn't changed significantly. We are very pleased to have completed a couple of recent acquisitions. While they may not be large, they are meaningful, and their long-term impact on our business is quite substantial, exceeding a billion dollars. It’s wise to strategically position these acquisitions, which may seem small initially, as they are fundamentally about building for the future, and these two fall into that category. Additionally, our pipeline is currently very strong, likely in better shape than it has been for quite some time. The M&A environment is improving, although there are practical challenges, particularly with international mergers and acquisitions. Conducting due diligence has become quite difficult due to ongoing quarantines and travel restrictions. Much of our due diligence team is based at corporate, which means they are not always local, adding to the challenges. Nevertheless, we are navigating these issues and are exploring several opportunities, both domestic and international. As mentioned in our presentation today, we are committed to reducing our share count by at least 1% over the upcoming year. We are getting back to business, and conditions are improving. We made solid sequential progress from Q2, and we aim to continue this strong momentum into Q4. Our decrementals are expected to decrease to the low 20s, which I believe is a respectable performance given the circumstances. We will continue to focus on delivering results today while also planning for the future. The two acquisitions we completed earlier this month reflect that commitment.

Okay, that’s helpful. Quantum is something you have been discussing for the past year, and while I find it somewhat complex, how do you receive compensation for that? What do you anticipate for the pricing model? Is there a way to identify a total addressable market or an opportunity that we can start considering?

Yes, I think the business model pricing value models are still evolving, as you can imagine. It can vary anything from do we cover some part of the value that you create by solving the problem, which frankly is the model we would prefer, although it’s a little more challenging to implement, but to leasing time and those kind of structures. You know, early on we’re going to experiment, we’re going to try. I think the thing that’s exciting about our quantum effort is the people. The first thing is, as you saw yesterday, we’re making very strong progress in terms of technology, and we believe we have the world’s most advanced quantum computer. The second part, and I think this is maybe even more important, we’re gaining more and more customers, because when people are willing to pay for these services, so you can sort of make all sorts of claims but if you can’t secure customers and revenue, which we’re now starting to do, I think that’s a pretty good testament of saying that we have something real and differentiated, and continue to be in momentum on the commercial side.

Okay, good luck guys. Thank you. I’ll pass it on.

Yes, thanks Scott.

We will take our next question from Steve Tusa with JP Morgan. Please go ahead.

Hey guys, good morning.

Good morning.

I think looking at the sub-segment data, that your aftermarket, aerospace commercial aftermarket was up 18%, something like that sequentially. Can you just maybe confirm that, and then also just talk about how you may be leveraged to flight hours? You seem to be kind of bouncing off the bottom sooner than some of these other guys, kind of leading off the bottom, if you will.

Well, I think Steve, we’re down in the ACR aftermarket by, again, mid 50s, 55% I think, which is similar to what I thought I heard from some of the peer groups earlier this week, and again consistent with Q2 where we were down 56%, so yes, nominally it’s up a little bit, as you mentioned, but kind of on a year-on-year basis, it’s pretty consistent with what we saw in Q2. Obviously the upside, the BGA was nice because that went from down 50 to only down 28, so we saw some nice sequential improvement on the BGA space.

Yes, I mean, I think whether they’re coming from business jets or aircraft, I think revenues still matter, but it was up. Your total commercial aftermarket was up 18% or something like that, so it must be more of a segmented level.

Yes, that’s true.

Okay, when it comes to the commercial aftermarket, the large stuff, how tethered is that to flight hours versus perhaps stuff that’s a little more inventory and durable goods type of related?

So far, we haven’t seen any divergence between our MSP growth, which is that’s the power by the hour, that’s directly tied, and more of our shop business, spares, etc. Those right now are moving in very similar trajectories as far as year-on-year growth, so they have not diverged in any meaningful way so far.

Got it, so you guys should kind of lead out of this if business jets continue to trend, and you’re kind of tracking flight hours in your large commercial aftermarket stuff relative to peers?

Yes, the growth in flight hours is closely linked to confidence, which fluctuates monthly based on current conditions. At this moment, we anticipate that growth will align with the changes in flight hours, but it is challenging to predict exactly where that will lead us.

Yes, and just to maybe add, Steve, we’re expecting very, very modest improvement in Q4 and then continued improvement on a sequential basis, but that does presume some medical solution starting to get rolled out early in 2021, which frankly I don’t think is completely unrealistic based on what I’ve been reading. I think it gives our aerospace business actually a really nice long runway for the next two to three years as things ramp up, so given the adjusted cost base, I think this is actually a pretty positive thing. I do want to note one thing about the costs, because we’ve been going through something called Honeywell digital automation and so on. This is not just a simple cut of cost just to reduce it. Much of what we’ve done is we just accelerated some of our initiatives that we were going to do anyway, so I think that some of this is sustainable. Now granted, it’s going to be offset somewhat by investments, but I think it’s important to note that this is a bit of an acceleration of some of the initiatives that we were doing anyway.

I understand, and I have one more quick question about HBT. Over the past few weeks, I've noticed a lot of activity in tech forums where building managers are exploring how to address ESG and indoor air quality related to COVID. It seems like your company is at the forefront of this. Some HVAC companies are emphasizing this more, but it may not directly result in immediate revenues. Can you share how active the quotation process is? Are there any metrics you can provide regarding the discussions you're having with customers? Are you receiving a lot of inquiries about how to manage these challenges? I'm interested to know if there's been an increase in activity in this area.

Yes, think about an open pipeline in the half a billion dollar range in terms of some of our healthy building offerings. Bookings in the double-digit million range, mid-double digit with potential to approach triple-digit million by the end of the year. It’s accelerating. It’s something that everybody needs. Most, at least in the U.S. and some other parts of the world, people are not back working in their workplace yet, but when they do come back, they do want to come back to a healthier environment. I think we’re kind of hitting the spot there, and the time to implement those solutions is now, not after people come back. So we’re seeing good activity, and we’re very encouraged by the order progress.

About $500 million, did you say?

Pipeline - pipeline, Steve.

Wow, okay. Great, thanks. Appreciate it.

We will take our next question from Nicole DeBlase with Deutsche Bank. Please go ahead.

Yes, thanks. Good morning guys. I just wanted to focus first a little bit on free cash. Totally understand that you guys have made the commentary about Q2 being the high point of the year, but I guess I was surprised that inventory was actually up a little bit year-on-year, so is there opportunity to improve inventory as you move into Q4 and into 2021?

Yes, that's exactly how it unfolds and aligns with what we discussed in July. We anticipated cost pressures due to the repositioning efforts we are undertaking, which resulted in nearly a $200 million year-over-year increase. We also mentioned our ongoing capital investments, particularly in PPE and Intelligrated, even in the current environment. Inventory is indeed an area where we need to make adjustments. Our aerospace segment has a significant amount of inventory that we're currently addressing, and we expect to see this decrease in the fourth quarter, which is part of our strategy. As I noted earlier, we expect cash flow to improve sequentially from the third to the fourth quarter. However, we will encounter an extra payroll cycle in December due to the length of the year, which adds approximately $150 million in pressure. These are the dynamics at play. Looking ahead to next year, managing working capital and cash remains a critical focus for the company, and we are committed to making further improvements in these areas. The Honeywell digital initiative will also support us in this effort.

Yes, and Nicole, just to add a couple of things, Q3 performed at or slightly above our expectations, so there’s nothing surprising here considering the cash impact from the restructuring and the additional investment in growth capital. As we approach Q4, despite facing some challenges from the extra pay cycle, we anticipate our conversion to exceed 100% and get back on track. We indicated that Q3 might be difficult due to these extra cash challenges, but we believe the reasons are justified. One reason is our investment in making the business more efficient, and the other is in growth capital, which makes our cash position, even with the adjustments, quite in line with what we expected. Regarding inventory, in a long cycle business like aerospace, when we began adjusting our forecasts early in Q2, it takes some time for those changes to filter through the system. We expect to see more benefits from inventory reductions as we move into Q4 and beyond.

Got it, thanks Greg and Darius. That’s really helpful color. Then for my second question, I just wanted to ask one more on M&A - clearly a very hot topic for you guys. As we‘ve moved through this pandemic and you’ve seen some changes in what’s going on by end markets and the outlook, have your M&A priorities changed at all with respect to the areas of the portfolio where you’d be interested in making deals? I guess maybe why I’m a little focused is does aerospace become a more attractive opportunity set, given what’s going on in that end market?

Yes, obviously on your last one, obviously some of the aerospace assets are probably at different value points than they have been in a while, so from that perspective it is appealing. Have our priorities dramatically changed? I would say it’s probably too early to tell because I’m not really ready to declare as to what the post-COVID world will look like, and I think we need to see a little bit of what that will look like. But in terms of our levels of interest, they really vary across all our businesses, including HCE, and we envision a scenario where we’re going to augment and do bolt-ons for all five of our businesses. I wouldn’t say it’s changed dramatically, but obviously the aerospace segment is a bit more approachable from a valuation perspective.

Thanks, I’ll pass it on.

We will take our next question from Andy Kaplowitz with Citigroup. Please go ahead.

Hey, good morning guys. Darius or Greg, achieving a 22% to 23% decremental margin in Q4 would be another significant improvement from Q3’s decrementals, so could you talk about where you expect to see the most improvement? It seems like it may be in aero given the improvement in Q3, and then for all of Honeywell, what does it tell you about the carryover of permanent cost reduction that you’ve talked about before, that 60% to 70% of the $1.55 billion into ’21, and does it give you confidence in terms of recording incrementals that could be above the decrementals you reported at the bottom of the cycle?

Yes, in terms of decrementals, I think we’re expecting those across the business because, as you can imagine, a lot of our cost actions occurred in Q2 and during Q3, so you didn’t see the full benefit of those actions until the quarter ended, and that obviously rolls through into Q4. We have a lot of confidence in those decrementals dropping into the low 20s from that 29 that you saw this year. I think we added quickly and decisively and made those adjustments on the cost base, which I think is really going to pay off, not just in 2020 but 2021 and 2022 as we really position the company well for the future, while still investing for the future, which I think is important because we’re going to need to do that in 2021. So I think that the story is that we’re very confident. Maybe one other thing that I’ll add before I turn it over to Greg here is we’re building up a lot of capacity in our SPS business. We brought on a lot of capacity in Q3, we’re bringing more on in Q4. Both expansion of capacity as well as really maximizing efficiency of that capacity, because as you can imagine when you first bring capacity on board, it is not at an ideal efficiency in the first or second month - that takes a little bit of time. But the good news here is that as we get into 2021, not only will we get substantial expansion in SPS capacity, we’re also going to be much more efficient in the processing backlog that we have, and we’re already starting to see that even this month, but we’re still in the capacity expansion process. I’ll turn it over to Greg for some more color.

Yes, so Andy, the straightforward approach is that we expect to see improvement across the board. The simplest way to think about it is that we will achieve leverage in the fourth quarter. We plan to keep our fixed cost base relatively flat from the third to the fourth quarter. Some costs will begin to rise as travel resumes, among other factors, but with an increase in revenue anticipated from the third to the fourth quarter, we expect to see leverage throughout the portfolio. Regarding your question about 2021, our position remains unchanged: we are delivering a cost reduction of 1.5 to 1.6 billion, with an expectation that 60% to 70% of that will continue into 2021. This suggests we will face about half a billion dollars in year-on-year headwinds due to the temporary nature of some costs, which aligns with what we previously communicated in the last two calls. We are very confident in our execution of these plans and actions.

Very helpful. Then Darius, obviously it seems like you continue to face some pressure in PMT and specifically in UOP. I think you said in UOP, sales were down year-over-year in Q3. Are you seeing any signs of improvement yet within UOP and HPS, and you did have good backlog at HPS coming into the downturn, I think you mentioned flattish backlog for this quarter. Are you seeing any signs of projects moving forward again within HPS, and what are customers telling you about the prospects for recovery in 2021?

A couple of points. First one is I think there’s a part of PMT that’s particularly challenged - our gas processing business because, as you know, the number of rigs, that’s way down year-over-year, and gas processing is down year-over-year. The other thing to keep in mind is that as a lot of our customers, who are much of the oil and gas customers, as they announce their capex and opex cuts for the year, they’re not likely to reverse those in 2020, so we really don’t expect to see an uptick this year. We expect an uptick next year as some of those budgets get normalized and, as you know, you can’t not invest in your infrastructure for too long or you’re actually going to have a crisis the other way, where your demand is going to dramatically outstrip supply, so we envision an incremental improvement and obviously there is an alignment to overall economic conditions here, so as the world returns to a bit more of the normal, we would also see that pick-up in PMT. The thing that I am very encouraged by is that we have not seen project cancellations. We’ve seen slide-outs and push-outs, but we have not seen cancellations. Frankly when I was running the PMT business in ’15 and ’16, we saw probably more cancellations back then than we are seeing now, so I think that that’s very encouraging and I’m bullish on PMT for 2021 and beyond.

Appreciate it, guys.

Thank you.

We will take our next question from Jeff Sprague with Vertical Research. Please go ahead.

Thank you, good morning everyone. Just two from me. First, I guess for Greg, just to clarify the comment about the headwind next year on return of costs, and I understand that’s consistent with what you said, but I think today for the first time, we are getting the comment, strong incremental margins for 2021. I just want to clarify, those are strong incremental margins net of that headwind - is that the message?

The message is that we plan to return to margin expansion, even considering the additional headwind. I believe our positioning in terms of fixed costs allows us to grow margins and reinvest in the business next year. As Darius mentioned earlier, we’re not looking to have an extraordinary 2021 at the expense of our long-term goals. We have significant transformation initiatives that we want to continue investing in, along with crucial investments in our breakthrough initiatives in quantum and HCE. Therefore, we do expect to return to our margin expansion strategy, even accounting for the estimated half a billion headwind.

Yes, just to add to that, Jeff, I’d just echo what Greg said, I think it’s exactly right, we will drive margin expansion next year. There’s no question about that. How much is still a little bit of a TBD, and that includes, by the way, the impact of those headwinds, so we have accounted for that. But we also have to invest in our future, and I think particularly in some areas, R&D specifically, aero, HCE, Honeywell Digital, those are areas where we definitely want to invest in.

That makes sense. Maybe somewhat related, Darius, you mentioned, and I think Greg, obviously going through this difficult environment was a window to accelerate restructuring and some other things that maybe were on the shelf, that you would have done later. Given that, should we expect a more normal restructuring year, from a historical brute force type of restructuring relative to what we saw in 2020 here?

Can you repeat that, because I didn’t quite get it? What kind of restructuring, Jeff?

The question is really just on restructuring and the cost base itself, kind of the normal flow of restructuring.

Oh yes, I get it. Yes, I think we’re going to return to more normalized levels. Obviously we’ve pulled some things in that we were probably going to do later. We rationalized our cost structure because frankly we had to - I mean, that’s what we were facing early in Q2, and we did do that, so I think as we look in 2021 and 2022, we’re going to return to a little bit more of a normalized level. But Jeff, as you know, this never fully exits our playbook. In good times and bad, we always look for opportunities to be much more efficient, so yes, it’s not going to be at the same level as this year, but we still are executing our ISC transformation, we’re still executing on Honeywell Digital, that’s going to continue to pay off in terms of productivity and efficiency, so hopefully that helps.

It does, thank you.

We will take our last question from John Walsh with Credit Suisse. Please go ahead.

Hi, good morning everyone. I guess just wanted to follow back to the margin question here in Q4 and just make sure I understood the underlying comments. If we look at where you’ve spent most of the restructuring dollars this year, it’s been in aerospace and PMT, and if we look at Q3, that’s where you had the largest deltas from a pick-up. Is that still where you would think to see a lot of the improvement in Q4, particularly in those two segments year on year?

Yes, so John, absolutely. I think when you look at it, those are the ones where we spent the most repositioning. For obvious reasons, they’re the most challenged of the businesses in the portfolio, so yes, I would expect that that’s where you’re going to see some healthy improvements. But as I mentioned, we’re going to see it across the board.

Got you, and then maybe just a finer point on thinking about cash next year. You sized that payroll. I don’t know if you’ve spoken about capex plans yet into ’21, but should we think of next year as maybe those net and it’s just net income growth and working capital blocking and tackling, or are there any other things to be aware of in the headwinds and the tailwinds column for next year, particularly thinking about capex?

We’re still obviously in our planning stages for ’21. As you said, if you think about capex this year, we’re probably going to wind up spending around what we thought we were going to in the early part of the year, before COVID even hit, because our reductions in some of the discretionary areas we backfilled with the growth capital that was important to us to go spend. As we head into next year, it wouldn’t surprise if we spend capital at about the same rate, plus or minus a bit, but again that’s all subject to us completing our planning. But I wouldn’t expect us, as we sit here today, to see that as a materially different mover in the context of a $5 billion to $6 billion cash flow generator that we usually are. And as I mentioned, working capital, we’re always going to be driving our working capital progress and we would expect to continue to do that into ’21 so we’ll update you in 90 days with more specifics around some of the finer points around it as we complete our planning and complete the year.

Great, thanks for the additional color.

Steve, let’s just take one last caller.

Absolutely, sir. We will take our final question from Deane Dray with RBC Capital Markets. Please go ahead.

Thank you, good morning everyone. I appreciate the last slide on the focus on sustainability and ESG. I noticed that 50% of your new product introduction investments are classified as ESG, and I was wondering whether that 50% is a target or an outcome, and what the economic implications are.

No, no, that’s not a target, that’s where we are today. That is not aspirational, that’s currently where we are. I want to point something that’s really, really important, which is we talked a little bit about on our script is the formation of a whole new business unit, the sustainability business unit within PMT which really is going to help a lot of our customers really make the transition to sort of the new energy future. I think nobody is going to transition this in a month or a year or two, but what we’ve done and what we’re doing is really creating a whole new sustainability infrastructure in PMT, and really all our business units to create a business structure which is going to be much more sustainable, aligning with the needs of the planet and society in general, and I think it might be even the most needed in PMT where a lot of our customers are really looking at what the future of energy looks like. We want to be part of the solution to create that bridge.

Great. Just last question, and to the extent that you can comment on it, was hoping you’d put this whole Garrett situation in context. This is such a small piece of your cash flow, it’s a small piece of the capitalization, but it does get some headlines, and I was hoping you might comment.

Sure. Your observation is accurate regarding the overall value of Honeywell. While it may not be particularly relevant, you might have noticed that there is an ongoing offer for Garrett. We are confident that we will secure a majority of that cash flow. There is a more attractive offer from some partners we have. We don't believe there is much validity to the litigation that Garrett is pursuing, and we are confident in our ability to protect those future cash flows. A lot of this will continue to evolve over the next few months. However, we remain very confident in our approach and believe we will recover most of that receivable.

Appreciate that, thank you.

Thank you Deane. We’re pleased with the improvements we achieved in the third quarter compared to the challenging second quarter. We are growing in areas not as impacted by the current pandemic and we’re gaining momentum in the new growth opportunities by providing innovative solutions for customer needs. We remain focused on continuing to perform for our shareholders, our customers, and our employees in any environment. We are well positioned for the recovery with a balanced portfolio, a track record of execution, and a strong balance sheet. Thank you for listening and please stay safe and healthy.

Thank you, this does conclude today’s teleconference. Please disconnect your line at this time and have a wonderful day.