Good day, ladies and gentlemen, and welcome to Honeywell's Third Quarter Earnings Release. At this time, all participants are in a listen-only mode and the floor will be open for your questions following the presentation. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Reena Vaidya, Director of Investor Relations. Reena, please go ahead.

Good morning, and welcome to Honeywell's Third Quarter 2021 Earnings Conference Call. On the call with me today are Chairman and CEO, Darius Adamczyk, and Senior Vice President and Chief Financial Officer, Greg Lewis. Also joining us are Senior Vice President and General Counsel, Anne Madden, and Senior Vice President and Chief Supply Chain Officer, Torsten Pilz. This call and webcast, including any non-GAAP reconciliations, are available on our website. Honeywell also uses our website as a means of disclosing information which may be of interest or material to our investors. Accordingly, investors should monitor our Investor Relations website in addition to following our press releases, SEC filings, public conference calls, webcasts, and social media. Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and our businesses as we see them today. Those elements can change based on many factors, including changing economic and business conditions. We identify the principal risks and uncertainties that may affect our performance in our annual report on Form 10-Q and other SEC filings. This morning, we'll review our financial results for the third quarter of 2021, share guidance for the fourth quarter and full-year 2021, and share some preliminary thoughts on 2022 planning. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to Chairman and CEO Darius Adamczyk.

Thank you, Reena. Good morning, everyone. Let's start with slide 2. Our strong discipline and execution allowed us to achieve third-quarter results that met or exceeded our financial guidance, even in a challenging environment. We reached the high end of our third-quarter adjusted earnings per share guidance and surpassed the top of our segment margin guidance by 60 basis points, despite facing significant challenges from inflation and supply chain issues that restricted our top-line growth. Nevertheless, organic sales increased by 8% year-over-year, driven by double-digit organic growth in safety and productivity solutions, the commercial aerospace aftermarket, and advanced materials and UOP. Our segment margin improved by 130 basis points to 21.2%, thanks to our strategic actions aimed at tackling the inflationary pressures and supply chain disruptions. We continued to implement our effective productivity measures and took decisive pricing actions that kept us ahead of inflation, resulting in a 4% year-over-year increase that provided about 40 basis points of margin expansion, net of inflation. Adjusted earnings per share were $2.02, up 29% year-over-year, achieving the high end of our guidance. We delivered a solid third quarter despite a volatile backdrop that included the impacts of a hurricane in the PMT battery corridor, power outages in China, and ongoing supply chain challenges. I am pleased with our disciplined execution, which enabled us to navigate these external challenges and take advantage of the recovery in our end markets. I'm encouraged by the strength we are seeing in various areas of our portfolio. Overall orders across Honeywell rose high single digits year-over-year organically. When excluding the COVID-related mask business, which has seen a significant drop in demand as the pandemic has eased, orders increased by double digits year-over-year. Our backlog increased by 7% to $27.5 billion, and by 9% excluding the impact of COVID mask orders, supported by strength across many of our segments, positioning us well for the next phase of recovery as we move into 2022. We remain committed to our rigorous value creation framework that drives exceptional shareholder value. Now, let’s move to Slide 3 to discuss some of our noteworthy recent announcements. Last month, United Airlines and Honeywell announced a joint multi-million dollar investment in Alder Fuels, leading to the largest sustainable fuel agreement in aviation history. Alder Fuels is a clean tech company pioneering innovative technologies to produce sustainable aviation fuel at scale. When combined with Honeywell's ecofining process, Alder's technologies can create a carbon-negative alternative to current jet fuels. As part of the agreement, United has committed to purchase 1.5 billion gallons of SAF tailored to its specifications, which is 1.5 times larger than the accumulated commitments from all global airlines. This makes it the largest publicly announced SAF agreement in aviation history, showcasing the effectiveness of Honeywell technologies in driving the global energy transition. We also recently announced the acquisition of Performics, a provider of manufacturing execution systems software for the pharmaceutical and biotech manufacturing sectors. This acquisition supports our strategy to establish a leading integrated software platform for life sciences customers looking to achieve faster compliance, enhanced reliability, and improved production throughput at the highest quality levels. The Performics software joins our extensive portfolio of automation solutions for the life sciences, including Sparta Systems Quality Management Software and Honeywell's Experion Process Knowledge System. Together, these offerings will meet the needs of life sciences customers throughout their product life cycles, from project execution to optimal production and sustainable quality. Lastly, we introduced a new aircraft cockpit system called Honeywell Anthem earlier this month. It is the first in the industry to offer a continuously connected cloud experience that enhances flight efficiency, operations, safety, and comfort. Honeywell Anthem provides exceptional connectivity and a user-friendly interface inspired by everyday smart devices, with a highly scalable and customizable design. This next-generation flight deck is powered by a flexible software platform that can be tailored for nearly every type of aircraft and flying vehicle, including large passenger and cargo planes, business jets, helicopters, general aviation aircraft, and the emerging category of advanced air mobility vehicles. Honeywell Anthem has already been selected by Vertical Aerospace and Lilium for their electric vertical takeoff and landing aircraft. These announcements demonstrate our continuous innovation and enhancement of our portfolio with exciting new technologies that align with our long-term strategic objectives. Now, let me hand it over to Greg on slide 4 for a more detailed discussion of our third-quarter results.

Thank you and good morning, everyone. As Darius highlighted, we executed with a typical level of rigor that you have come to expect from Honeywell and delivered on our commitments despite a challenging backdrop. Our third quarter was strong with sales up 8% organically to $8.5 billion. Segment margins expanded by 130 basis points to 21.2%, resulting in 36% incremental margins and free cash flow of more than $900 million, up 20% year-on-year. Our third-quarter performance demonstrates our ability to deliver for our shareholders in all environments. Now let's take a minute to discuss how each of the segments contributed to that. Starting with aerospace, third quarter sales were up 2% organically as the ongoing recovery in flight hours drove another quarter of strong double-digit commercial aerospace aftermarket growth. As expected, air transport aftermarket sales continue to gain momentum, growing more than 10% sequentially from the second quarter and growing 40% year-over-year. Commercial original equipment returned to growth in the quarter driven by strong demand for business jets. The growth in commercial aerospace was partially offset by defense and space, which was down 17% in the quarter primarily due to supply chain constraints limiting our deliveries. Excluding those impacts, defense and space would have been down mid-single digits in the quarter, an improvement versus the first half run rate. Aerospace segment margins expanded by 390 basis points to 27.1% driven by growth in our high-margin aftermarket business, strong productivity from our lower cost base and pricing. Building technology sales were up 3% organically driven by broad-based demand across the building products portfolio, as well as continued growth in Building Solutions services. Orders were up double-digits year-over-year for the fourth straight quarter, driven by demand for fire products, building management systems, and projects. Backlog for Building Solutions services was up over 35% year-over-year, positioning the business for growth into 2022. Additionally, our healthy buildings portfolio maintained strong customer momentum with approximately $100 million of orders in the quarter, bringing year-to-date orders to $250 million. HPT segment margins expanded by 190 basis points to 23.5% driven by pricing and productivity, partially offset by inflation. PMT sales were up 9% organically, led by 29% growth in UOP and 14% growth in advanced materials. UOP sales growth was driven by higher petrochemical catalyst shipments and their backlog grew double-digits year-over-year, which should drive growth well into 2022. Process solutions sales were down 2% organically as the recovery in projects has lagged, partially offset by high single-digit growth in thermal solutions and lifecycle solutions and services. HPS orders were up 20% year-over-year, driven by broad-based demand across the portfolio, providing confidence in the longer-term outlook for the business. PMT segment margins expanded by 260 basis points to 22.2% in the quarter driven by pricing, strong operating leverage, and a healthy mix of UOP. In safety and productivity solutions, despite battling supply chain and inflation challenges, sales were up 21% organically driven by another quarter of double-digit warehouse and workflow solutions growth. Productivity solutions and services growth and gas analysis growth. Orders in these three businesses were also up double-digits year-over-year, resulting in a robust SPS backlog of more than $4 billion. Personal protective equipment sales declined year-over-year as mass demand declined meaningfully. This was partially offset by growth in the hearing, gloves, and fall protection categories. SPS segment margins contracted by 70 basis points to 13.2%, driven by unfavorable business mix, which combined with targeted investments and supply chain challenges, ultimately calibrated proven efficiencies in manufacturing installation as the business has been scaling to outsize growth, which was 60% organically this quarter. Finally, growth across our portfolio was underpinned by continued progress in Honeywell connected enterprise. Our connected buildings and cyber solutions delivered another quarter of double-digit organic growth, and third quarter recurring revenue growth was once again up double-digits year-over-year. So overall, we delivered strong organic sales growth, drove 130 basis points of improvement in segment margins, which is 60 basis points above the high end of our guidance despite the challenging environment. For the quarter, we delivered GAAP earnings per share of $1.80 and adjusted earnings per share of $2.02, up 29% year-over-year, achieving the high end of our guidance. A bridge from 3Q '20 adjusted EPS to 3Q '21 adjusted EPS can be found in the appendix of this presentation, which includes reference to a $160 million non-cash charge related to ongoing UOP matters described in our Form 10-Q. The majority of our year-over-year adjusted earnings growth, $0.26, was driven by our strong segment profit improvement. Below-the-line items were a $0.13 tailwind, driven by lower repositioning and higher pension income. A lower effective tax rate of 22.9% and a lower weighted average share count of 699 million shares drove a $0.04 and $0.03 benefit, respectively. We generated $900 million of free cash flow in the quarter, an increase — as increased earnings — excuse me, as increased earnings increase in working capital due to growth of the business and related supply chain challenges, which tempered that down a bit. Finally, we strategically deployed $1.5 billion primarily to share repurchases, dividends, and Capex in the third quarter, which significantly exceeded operating cash flow. We paid $646 million in dividends, deployed $208 million of capital expenditures, and reduced $650 million of Honeywell shares, reducing our weighted average share count to 699 million. Total capital deployment was up 44% year-over-year. And all of this was another strong quarter under difficult circumstances. We continue to manage through the multi-speed recovery across our portfolio, making disciplined investments for the future and meeting or exceeding our commitments while proactively addressing macroeconomic challenges. With that, let's turn to slide 5 to discuss the impact of the supply chain constraints we're facing and how Honeywell is adapting to address those challenges. As we saw last quarter, the world continues to face persistent supply chain challenges as the sourcing environment of direct materials and electrical components continues to be tight. Logistics capacity remains strained and labor availability becomes more challenging, all driving constraints and operating and inflationary pressures on our cost base. Semiconductors remain an acute problem due to a structural disconnect between supply and demand driven by canceled industrial and automotive orders during COVID-19, as well as unplanned growth in 5G, personal computing, and consumer electronics. We've also started feeling pressure in aerospace as the supply chain broadly ramps up more slowly than needed, leading to parts challenges due to deteriorating supplier delivery. While we have been mitigating overall risk by proactively partnering with distributors and alternative suppliers, the challenge has accelerated in the last quarter, constraining growth in some of our businesses. The businesses that are most impacted in our portfolio are SPS, Aerospace, and HPT. We provide guidance ranges for our quarterly and annual outlook in order to incorporate an adequate level of risks for things just such as this, as we've seen these dynamics in the last few quarters. We are managing the situation aggressively on a daily basis and deployed the full strength of our re-engineering efforts to qualify alternative parts, which has mitigated some risks in our Productivity Solutions and Services, advanced sensing, and fire businesses. We created tiger teams using advanced digital tools to track shortages and deploy a number of actions to liberate supply in the market. We also continue to mitigate inflation in materials, freight, and labor, in our operations through targeted regular pricing actions. For the longer term, we're developing dual-source platforming strategies and executing long-term supply agreements with some of our key suppliers. This, coupled with strengthening direct engagement with the semiconductor OEMs and foundries, will improve our ability to secure increased volumes in the future. We do expect this environment to persist into the fourth quarter and the first half of '22; we'll continue to adapt as we manage through this period. With that, let's turn to slide 6 to talk about our expectations for the fourth quarter. As we enter the fourth quarter and given the ongoing challenges I mentioned, we expect sales to be in the range of $8.5 to $8.9 billion, down 4%, just flat on an organic basis, including the impact of the COVID-19 driven mass sales decline. Excluding this impact, organic sales would be down 2% to up to organically. We would also normally see a seasonal step-up from the third to the fourth quarter, which this year will be somewhat dampened by the unique calendar impact of having more days in the third quarter than we do in 4Q. In Aerospace, we expect our commercial business to continue to improve as business aviation and air transport flight hours continue to accelerate, driving continued sequential and year-over-year growth in commercial aftermarket sales. The pace of the air transport acceleration will continue to vary regionally with domestic travel recovering faster than international. Commercial original equipment build rates will also continue to progress gradually. Defense and space sales will be down due to lower demand from U.S. DoD programs, driven by moderating U.S. Defense spend and soft international defense funds. We will continue to manage through the constraints as the Aerospace supply base ramps up, but we are expecting to miss out on potentially hundreds of millions of dollars worth of shipments due to these continued challenges in Q4. We now expect organic sales growth to be down mid-single-digits for the year in Aerospace. In building technologies, we expect continued strong demand across the portfolio as the world continues to reopen and sustainability solutions take hold, driving sales and orders growth in the fourth quarter. We will face ongoing pressures from the supply constraints but continue to work our mitigation actions, as we anticipate mid-single-digit sales growth for the year. In PMT, we see continued strength in the short-cycle HPS businesses. Though this will be tempered by the slower recovery in projects, our strong orders growth in the third quarter will support our growth acceleration into '22. For UOP, we're pleased with our robust 3Q performance and expect continued growth into the fourth quarter and into '22, supported by the strong backlog, which is up double-digits year-over-year. Last, we expect continued healthy demand for products across the Advanced Materials portfolio. We expect PMT organic sales to be up low-single-digits for the year. In Safety and Productivity Solutions, we expect another quarter of robust growth in our warehouse and workflow solutions and Productivity Solutions and Services businesses. In our Productivity Solutions and Services business, which is having an outstanding year, backlog remains up triple digits year-over-year, which combined with our Intelligrated backlog that is over $2.4 billion gives us confidence in these businesses for the remainder of '21 and into '22. Vast demand has accelerated as expected as the world recovers from the pandemic, though we will partially offset this softness with strengths in other areas, the PPE portfolio. Finally, we expect to see strength in our short-cycle gas analysis and advanced sensing businesses driven by double-digit orders growth in the third quarter. We'll continue to manage through this challenging supply environment, which will impact our growth potential, but we anticipate strong double-digit growth for the year. Now let me turn to our expectation for our other core guided metrics. For our fourth quarter segment margins, we expect to be in the range of 21.2% to 21.7%, up 10 to 60 basis points year-over-year. We expect margins to continue to benefit from pricing actions ahead of inflation, volume leverage, and ongoing productivity from our streamlined cost base despite the headwinds from unfavorable business mix and Intelligrated and efficiency challenges due to the supply chain environment. Fourth quarter net below-the-line impact, which is the difference between segment profit and income tax before tax, is expected to be in the range of negative $10 million to negative $95 million, with a range of repositioning between approximately $140 million and $250 million as we continue to fund ongoing restructuring markets. We expect the effective tax rate to be approximately 20%, with an average share count to be approximately 698 million shares. As a result, we expect fourth quarter adjusted earnings per share between $2.03 and $2.13, down 2% to up 3% year-over-year. Given these fourth-quarter expectations, full-year organic sales growth will be in the range of 4% to 5%, narrowing the range we provided last quarter to $34.2 to $34.6 billion. We are once again raising the low end of our segment margin guidance by 10 basis points for the year to a new range of 20.9% to 21.1%, representing expansion of 50 to 70 basis points for the year. We expect margin expansion in Aero, HBT, and PMT as we carefully invest back into the business while managing the multi-speed recovery across the portfolio. Our fixed cost management remains a focus, and we are tracking favorably to the permanent reduction of $1 billion of fixed costs from our 2020 cost actions. We expect our net below-the-line impact to be in the range of $40 million to $125 million, including capacity for $400 million to $475 million of repositioning. Our full-year effective tax rate will be approximately 22% and the weighted average share count will be approximately 701 million for the year, over delivering on our minimum 1% reduction in shares. This will take adjusted earnings per share to a range of $8 to $8.10, up 13% to 14% year-over-year. This maintains the high end of our previous guidance and raises the low end by $0.05. Despite these challenges, we are maintaining the same cash flow outlook for the year in the range of $5.3 to $5.6 billion. Now let's turn to page 7 and review our guidance progression throughout the year. Since we provided our initial 2021 guidance in January, we have navigated through several uncertainties: the ongoing global pandemic, supply chain challenges, unprecedented raw material inflation, and labor market challenges. And at each turn, our rigorous operating principles have enabled us to continue to demonstrate our resiliency. With our latest update, we have adjusted our sales outlook purely due to the constraints we're battling in the supply chain, which stands in Q3 and our fourth-quarter sales potential. We continue to have a robust backlog of demand. Despite these changes to top-line expectations, we have not only maintained the high end of our segment margin and adjusted EPS guidance but we have further increased the low end of both ranges and maintained our previous free cash flowbacks. These are excellent proof points of our ability to execute in all economic cycles. In total, I'm encouraged by the strength we are seeing here in our portfolio as we head into '22, particularly driven by strong orders growth and backlog position, as well as aggressive supply chain factors that are mitigating risks, enabling us to deliver on our long-term commitments. Now let's move to slide 8 where we can talk about some of the preliminary thoughts we have on 2022. With the commercial Aerospace recovery in view, upcoming capital reinvestment in the energy sector, non-residential construction spending returning to 2019 levels, and the exponential growth we continue to see in e-commerce, we have a strong setup for 2022. We expect organic growth in all four segments, driven by strong portfolio-wide demand and backlog, underpinned by year-to-date orders growth of 17% in HBT, 14% in Aero, 10% in PMT, and 6% in SPS, or 8% in SPS if we exclude the COVID mask business. This, coupled with the strategies we have in place that are focused on driving uniquely innovative, differentiated technologies to address the world's increasing demand for digital transformation, process technology, and sustainable solutions, gives me confidence in our future. However, we do expect growth in the first half of '22 to be constrained due to the continued challenges from labor force uncertainty, supply availability, and logistics challenges. Inflation will continue to be a factor under the circumstances. So our pricing rigor, as reflected in our margin rates, will help us. We do expect changes to corporate tax legislation, though the exact impact of that is as of yet unknown. With these dynamics in mind, let's look at our key markets. In Aerospace, we expect strong growth in our commercial Aerospace business. Ongoing improvement in global flight hours will drive growth in our commercial Aerospace aftermarket. We also expect original equipment build rates, which have lagged the flight hour recovery to ramp up in '22. In defense and space, we expect flat to low single-digit growth year-over-year as U.S. and international defense budget spending stabilizes and our supply challenges continue. In HBT, we expect non-residential construction growth, and an ongoing return to public spaces to drive demand for building products, services, and projects. We also expect continued demand for our portfolio of Healthy Building Solutions, as well as tailwinds from U.S. infrastructure projects. We expect a large backlog to drop off as we end 2021. In PMT, we're assuming improved macroeconomic conditions and higher stable oil prices will improve growth in UOP and also help recover automation projects in HPS. We expect continued strength in advanced materials driven by demand in the auto construction and healthcare sectors. For Safety and Productivity Solutions, we expect strong demand in our Productivity Solutions and Services businesses, gas analysis, and Advanced Sensing businesses. We also execute on our robust backlog of major projects in our warehouse and workflow solutions businesses. However, we will face constraints to growth as supply chain challenges continue in the first half of '22. Mass demand will remain at our lower second half exit rates as the world recovers from the pandemic. For overall Honeywell, we expect margin expansion to be driven by aftermarket recovery in Aerospace, accelerating catalyst shipments in UOP, and improving mix in SPS. Our strong productivity and pricing actions, which should carry through to next year and provide potential upside, will enable key investments to support medium-term top-line growth, including a step-up in R&D and our digital initiatives. We look forward to completing the combination of Honeywell Quantum Solutions with Cambridge Quantum Computing, which is a significant strategic step forward for us but will be a minor drag on our margins. We have significant balance sheet capacity for M&A and share repurchases, and we expect to reduce our share count by a minimum of 1% again in 2022. So overall, we have some insight into our end markets and a lot of confidence in our continued operational execution, which will give us the ability to deliver strong financial performance and continue to execute our strategy to be the premier software industrial. We'll provide more specific input once we close out the year. So 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, Honeywell's culture, inclusion, and diversity. Our commitment to inclusion and diversity enables better decision-making, helps build competitive advantages, and further long-term success. Inclusion and diversity is one of our foundational principles, and Honeywell expects all employees to exemplify these principles. We continue to build on our initiatives to promote racial equality and inclusion and diversity, including employing mandatory unconscious bias training through our global workforce, establishing our Global I&D Steering Committee co-sponsored by me, and fortifying Honeywell's I&D governance structure by embedding I&D councils into each business group. We also established 2021 goals for each of my direct reports that include an annual objective for driving diversity within their organization. These initiatives have yielded results. Women and people of color represent a higher percentage of the workforce at Honeywell compared to our peers. In addition, representation of women and people of color at Honeywell has increased each year since 2018, which is a testament to our ongoing commitment to hiring, developing, and retaining diverse talent. Now let's wrap up on slide 10. We delivered on our third quarter commitments despite a challenging backdrop. As always, we remain laser-focused on executing our strategic objectives and investing in growth opportunities that position our business well for the next phase of recovery. We're executing on our proven value-creation framework. It's the rigor you can expect from Honeywell, which will continue to consistently drive shareholder value. With that, Reena, let's move to Q&A.

Thank you, Darius. Darius, Greg, Anne, and Torsten are now available to answer your questions. We ask that you please be mindful of others in the queue by only asking one question. Ari, please open the lines for Q&A.

Thank you, Reena. The floor is now open for questions. We will now take our first question from Steve Tusa from JPMorgan. Steve, over to you.

Hey, good morning. Can you hear me okay?

Yes.

Great. Regarding the organic growth guidance for next year, do you anticipate growth in the first half or more of a situation like the fourth quarter? You mentioned that all four segments are expected to grow. Does this imply a slowdown compared to this year due to the first half? Could you provide some guidance on the messaging for the first half versus the entirety of next year in this context?

Yes, the short answer to your question, Steve, is that we do expect our first half to grow. The extent of that growth may depend on some supply chain challenges we've noted in Q4. We see some positive trends in semiconductors as we approach the first half of next year, which is encouraging. While the situation won't be completely resolved, it is expected to improve. For other components, especially in Aerospace and with some tier 2 and tier 3 suppliers, particularly in castings and forgings, we're less certain about the improvement timeline since those challenges emerged more clearly in Q3. Overall, we anticipate growth in the first half of 2022. However, we expect some headwinds in SPS due to what I call COVID-related impacts, particularly in Q1. These are evident in Q4 of 2021 and, to a lesser extent, in Q2 of 2022. After that, we should return to normal levels. The year 2022 is looking strong, with double-digit order growth in most of our segments, except for SPS, which has mid-single digits. Excluding the effects of COVID mask impacts, we would see double-digit growth there as well. The main constraint we currently face is the supply chain, but we believe Q4 represents the peak of those challenges. Lastly, it's important to note that this is a dynamic environment, with some positive and negative factors at play, so we will be monitoring the situation closely as Q4 progresses.

And that's why we have such a wide guidance range for the fourth quarter; $400 million of revenue range is wider than we're typically doing, and it's exactly for those reasons.

Does terrific mean reacceleration, specifically acceleration from 2021? That's just my follow-up. Thanks.

Well, I can say that we expect growth in the first half, and when we meet in January or February to discuss our outlook, we'll have a clearer picture. The backlog supports our expectations for growth, and our narrative hasn't changed since the end of the Q2 earnings report. The outlook for Honeywell in 2022 and 2023 is strong, and I see no reason to change my perspective. While we do face some supply chain challenges that are significant and likely understated in the market, we have factored this into our guidance for Q4. We are diligently working to address these issues. It's not just about pressing suppliers but also involves redesigning, looking for alternative products, and finding new ways to generate revenue. We have a solid strategy, but I want to emphasize that the challenges are significant and very real.

Our next question comes from Julian Mitchell from Barclays. Julian, over to you.

Thanks very much. Yes. Good morning. So maybe my question would focus on the revenue outlook in Aerospace, including the guidance for this year which has come down three quarters in a row now in that division. So just wanted to try to understand your level of confidence in when the defense and space piece will return to growth again. Is it early next year or towards the end of the year? And also any updates and thoughts on Commercial Aero aftermarket and how you think your own revenues will lag or move in line with the recovery in traffic because of spare parts and so forth?

Sure. Julian, I want to touch on a few points regarding Defense and Space. As you noted, we experienced a disappointing decline in Q3. However, it's important to consider that if we hadn't faced certain supply chain issues, which really became apparent in Q3, our results would have been better. Many of our Q3 and Q4 suppliers are smaller companies that reduced their capacity during the pandemic, and now we're seeing a surge in demand, not just from us but also from other players in the Aerospace sector. It will take some time to navigate through these challenges, but without these issues, we would have only seen a mid-single-digit decline in Q3. Unfortunately, we have more pass-through costs than we would like, and this increased significantly in Q3, which we need to address. Looking at our bookings for Defense and Space in early Q4 compared to the same time last year gives us considerable confidence for flat to low-single-digit growth moving forward. There's a possibility for improvement, but we don’t anticipate a significant downturn. If you remember 2020, we had strong orders and revenue in Defense and Space, followed by a decline due to reduced usage and stock adjustments by defense customers and distributors. We are hopeful about normalizing in 2022. Based on our current outlook, which could change, we anticipate flat to low-single-digit growth. Now, shifting to the commercial aftermarket, we see ongoing improvements and noted strong growth in Q3, which we expect to continue. We are still below 2019 levels, but progress is being made. With international borders reopening on November 8th, we expect increased international traffic, which should contribute to stronger aftermarket growth along with improved original equipment sales in both air transport and business aviation. Overall, the outlook for Aerospace in 2022 looks promising. Greg, do you have any additional thoughts?

No, I think you've got it.

Great. Thank you.

Thank you.

Our next question comes from Scott Davis from Melius Research. Scott, over to you.

Good morning, everyone. I hope you can hear me. Darius, can you estimate how much supply chain issues impacted your revenues this quarter? Do you have an idea about that?

Oh, yeah.

Darius, do you have an idea of how to differentiate between lost sales and delayed sales? How much of that will be an ongoing issue versus just pushed into the next quarter?

I can. Consider the impact in Q3 to be about $300 million, plus or minus, and keep in mind the Q4 outlook, which suggests an impact of $300 to $500 million. Regarding lost sales versus delayed sales, it's not a permanent loss. Some of our pass-throughs increased by $200 million to $300 million just in Q3, so it's not gone. We need to improve the efficiency of our supply chain, and that's what Torsten and his team are focused on. We don't view this as a loss since customers still require those products. I believe that when this earnings cycle is over, we won't be alone in experiencing some of the bottlenecks we're currently facing.

Thank you. Good luck, guys.

Thank you.

Our next question comes from Nicole DeBlase from Deutsche Bank. Nicole, over to you.

Guys, good morning.

Good morning.

Good morning, Nicole.

Maybe you could talk a little bit about how you're thinking about driving fourth quarter margin expansion despite at the midpoint revenue decline. And the reason I ask is just how are you driving cost-cutting in an environment where, I know things are tough, but you're also up against a very strong backlog with the potential for growth to really bounce back in 2022. So kind of how do you balance that against cutting costs for the short-term issues that you're facing?

First of all, Nicole, we are not cutting costs; we are actually investing this year, especially in businesses like Intelligrated, which are growing at unprecedented rates. One of the key operational highlights for Honeywell in Q3 is our pricing discipline. We believe we gained around 40 to 50 basis points of margin expansion through price cost improvements, which is evident in our margins. This reflects excellent commercial execution by our team, and they performed exceptionally well. Thus, this isn't primarily about cost-cutting but rather about effective commercial execution.

Yes, I would agree. I mean, if you think about it, Nicole, last year, obviously, we were in a substantial cost-cutting mode and our repositioning pipeline and the projects around that reflected it. This year, we always say that we continue the productivity playbook, fix cost power one, create operating leverage by growing sales and holding fixed cost flat as just a mantra of the way we work. And so to Darius' point, we're not doing massive cost cutting. We are being smart about where we're putting it back though, and we are using the things that we spoke about last year in terms of automation, in our digital capabilities to help us deliver. I mean, I'll be honest. The supply chain work they're doing, the Torsten and the team are doing are very much enabled by our Honeywell digital tools and capabilities, and some of the visibility that he's put into his own capabilities and supply chain to manage. So this isn't about cutting costs; it's about managing them properly. And we are investing back in the business, as Darius mentioned. But we're going to be doing it diligently. So I feel pretty good about the margin rate expansion. You would see the implied margin rate expansion is a little bit lower than what our guide was previously, simply because the sales numbers are down. So we have a little bit less operating leverage from an opportunity standpoint, but still very healthy margin expansion in Q4.

And just to add to that, Greg, this is an important point. Honeywell digital kind of has two elements. Number 1 is, it helps us to operate the business better, and Torsten and his team have done a great job instrumenting, exactly how do we uncork some of these bottlenecks that we're seeing. It's not perfection; it's not that we're going to completely avoid it. But I think we're doing a nice job. And second of all, which is continue to drive productivity, as Greg pointed out, through automation. Automation is a big lever for us and one that frankly, we're using aggressively both in our manufacturing facilities but also in the office. And it's been enabling us to drive productivity.

Thanks for the clarification, guys. Super helpful.

Yeah, thank you.

Our next question comes from Jeff Sprague from Vertical Research. Jeff, over to you.

Thank you. Good morning, everyone.

Good morning.

Hey, good morning. Sort of a related question. Darius and Greg, one of the other themes out of earnings season so far is kind of the double-edged sword element of backlog. In other words, things not priced in the backlog for the current inflationary market. Given that you've run with relatively large backlogs, I just wonder if you could address the profitability in your backlog. Do you have inflation protection in any particular headwinds we should think about as that backlog converts?

That's a great question, Jeff, and we've considered it. You're correct that with an aged backlog, it's crucial to be cautious. If we don't revisit and adjust our backlog pricing, it could lead to issues. We're actively working on this because, as you can see, steel has increased by 198% year-over-year, nickel by 25%, copper by 46%, and aluminum by 66%. These are significant increases. In all our businesses, especially the long-cycle ones, we're making efforts to reprice some of our backlog. This is necessary considering the labor inflation we are also experiencing. It's part of our strategy and something we've been focused on.

Okay. Thank you very much. Our next question comes from Josh Pokrzywinski from Morgan Stanley. Josh, good morning and over to you.

Hey, good morning, everybody. So I guess one question for Darius and Torsten since he's on the line as well, how's that $500 million of supply chain that you guys talked about at the 2019 Analyst Day looking? You're probably looking at the composition of that a little differently today, just given how much has changed. And then just a smaller follow-up, how do we think about the cadence of UOP catalyst shipments from here? Those look pretty solid in the quarter.

Let me begin with the UOP question and then I'll pass it to Torsten for the rest. UOP's bookings continue to be very strong, as evidenced by our revenue and booking rates in Q3, which gives us a positive outlook. It's also worth mentioning that HPS tends to follow UOP by a 12- to 18-month cycle. This implies that as UOP leads, HPS will follow, providing another indication that we can expect a favorable impact on HPS in about a year or year and a half. We've previously analyzed this typical lead-lag cycle. Not only is this promising news, but it's clear that the world is in need of more energy. While some of this need will be met through renewables, a significant portion will still come from hydrocarbons. Therefore, we believe the global energy landscape is currently facing a shortfall, which will drive a reinvestment cycle in both renewables and hydrocarbons. Now, I'll hand it over to Torsten.

Yeah. I mean, the $500 million there split primarily between our short-cycle business, especially in SPS and HBT, and the long-cycle business in Aerospace, so that's what we are seeing. We first saw dramatic impact on the short-cycle business. But now, in Q3, we saw that supply shortage is not ticking in also the long-cycle and the Aerospace business. But the majority sits primarily in the semiconductor-related short-cycle business.

Okay. Thanks, Darius.

Thank you.

Thank you very much. Our next question comes from Deane Dray from RBC Capital Markets. Deane, good morning.

Yes, thank you. Good morning, everyone.

Hey, Deane.

Hey, Deane.

I want to circle back on a topic that Josh raised, and just the idea of UOP leading HPS and it just begs the question about the oil and gas industry, Capex cycle. It's really been slow to recover here. But now with that spike in oil prices, what's your expectation on the release of new projects? Even as simple as MRO has still been lagging as well, but what's your outlook there, please?

Yeah, I think this is becoming fairly obvious, and we all read the same articles and see what's going on, which is there's going to have to be a reinvestment cycle. As much as we all want sustainable and renewable technologies to take over sort of energy needs tomorrow, it's probably going to be a little bit of a longer-term journey. And it's very clear to me that there's going to be a reinvestment cycle. We're seeing a good reinvestment cycle when I call some of the shorter project refurbishment, focused on the installed base, but we're strong believers there's going to be fairly strong reinvestment cycle in '22 and '23 here. I think that's necessary. So we're bullish on that segment. And certainly the price of oil, price of gas support that kind of investment. I mean, when you look at gas and oil, they are very, very attractive levels. What we need now is some level of stability. So that's good. But let me give you a couple of other specific data points, Deane. Our renewable fuel orders this past quarter were up 86%. And I think we forget sometimes that we just characterize UOP as oil and gas. It is not just oil and gas, it has an incredibly strong Green Fuels portfolio, which is winning in the marketplace, where we can see an 86% growth. Also, some of our energy storage controls orders were up 64% this past quarter in our HPS business. So those are just a couple of data points for you that we are very excited about the energy future. We have a portfolio that's going to play on it. Having said that, there is going to have to be a reinvestment cycle and in what I call the all-energy infrastructure.

That's really helpful. Thank you.

Thank you.

Our next question comes from Joe Ritchie from Goldman Sachs. Joe?

Thanks. Good morning, everyone.

Good morning, Joe.

When I look at your performance in terms of growth and the backlog of orders, HBT appears to have the most significant discrepancies. I would appreciate it if you could elaborate on whether these issues are related to specific components, labor, and which regions are facing these supply constraints. Additionally, when do you expect these issues to improve so that growth can accelerate?

The electronics shortages are particularly severe in this area. Specifically, the Fire business relies on certain semiconductors that are in very short supply. Doug Wright and the supply chain team have worked hard to increase capacity from other distribution points. They have also undertaken significant re-engineering to incorporate alternative chip sets into some platforms. This situation is closely linked to the ongoing capacity expansion in the fabrication industry. We expect to experience this more in the fourth quarter and into the first half of the year compared to other businesses. However, this issue will eventually be resolved. It's not a vast number of parts; rather, it's a manageable number in the tens.

Okay. Thank you.

Our last question comes from Sheila Kahyaoglu from Jefferies. Sheila, over to you.

Good morning, Darius and Greg. And thanks for fitting me in.

Good morning, Sheila.

Good morning, Sheila.

You guys noted it to an earlier question too. Defense is down mid-single-digits because of the supply chain issues. Maybe could you parse that a little bit about how much of that mid-single-digit decline came from U.S. DoD O&M budgets declining versus international programs? And somewhat related to that. Margins are still growing pretty nicely despite the supply chain issues and the OE growth in the quarter in Aero. So is defense materially lower, or was there better pricing in the segment?

Sure, I'll start with the last question. The operating leverage we are experiencing across the portfolio, particularly in Aerospace, is significant. We highlighted our cost reduction initiatives last year, with Aerospace being our top focus. PMT also saw a considerable decrease in fixed costs. The nearly 400 basis point improvement in Aerospace is largely due to this operational leverage, despite only a 2% growth in revenue. Regarding the division between U.S. DOD and international markets, the demand has decreased for both segments as we adjust following last year’s pre-buying activities. Additionally, the supply chain challenges we are facing are primarily affecting many mechanical components. However, I anticipate improvements in the Aerospace supply chain as we approach the fourth quarter and early next year. Torsten, would you like to add anything?

We've observed this trend in 2018 and 2019, and we were able to achieve growth of 18%, 19%, and 20% year-over-year. This growth is expected to begin in the next few quarters.

Great. Thanks so much.

That concludes today's question-and-answer session. At this time, I would like to turn the conference back to Darius Adamczyk for any additional closing remarks. Darius, over to you.

I want to thank our shareholders for your ongoing support. We delivered strong third quarter results and we continued to navigate effectively through uncertainty while gaining traction in key strategic growth factors and positioning ourselves to capitalize on improving key end-markets. Thank you all for listening and please stay safe and healthy. Thank you.

Thank you. This does conclude today's conference call. You may disconnect at this time. Have a wonderful day.