Good day, ladies and gentlemen, and welcome to Honeywell's Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mark Macaluso, Vice President of Investor Relations.

Thanks Derrick. Good morning, and welcome to Honeywell's third quarter 2018 earnings conference call. With me here today are our Chairman and CEO, Darius Adamczyk 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, and we ask that you interpret them in that light. We identify the principal risks and uncertainties that affect our performance in our annual report on Form 10-K and other SEC filings. For this call, references to adjusted earnings per share, free cash flow, free cash flow conversion and effective tax rate exclude impacts from separation costs related to the spin-off of our Homes and Transportation Systems businesses, and U.S. tax legislation except where otherwise noted. This morning, we'll review our financial results for the third quarter of 2018, share our guidance for the fourth quarter and provide an update to our full year 2018 outlook. As always, we'll leave time for your questions at the end. So with that, let me turn the call over to Chairman and CEO, Darius Adamczyk.

Thank you, Mark, and good morning, everyone. This has been a very exciting quarter for Honeywell. In August we raised our full year earnings outlook by an additional $0.05, the fourth increase in 2018 driven by continued momentum throughout the portfolio. We completed the spin-off of Garrett Motion on October 1, and are in the final stages of completing our second spin of the homes and global distribution business Resideo. We also announced our acquisition of Transnorm, our Europe based supplier of warehouse automation solutions which I'll talk about more in a minute. Most importantly, we continued to deliver on our commitments to shareholders. We met or exceeded our guidance on all metrics. For the third quarter we delivered adjusted earnings per share of $2.03, up 17% year-over-year driven larger by strong operational performance. We drew organic sales 7%, impressive top line growth across aerospace, safety and productivity solutions and homes. And our long range orders and backlog were up 26% and 17% year-over-year respectively which positions us well for continued growth in 2019 and beyond. Our focus on maintaining our productivity rigor especially in inflationary environment was relentless this quarter. We generated 70 basis point of segment margin expansion, 20 basis points above the high-end of our guidance driven by sales excellence and strong productivity gains enabled by previously funded and executed restructured. We will talk more about the steps we've taken to address the impact of tariffs later in the call. We also continue to see improvements in working capital performance coupled with profitable growth which is driving increased free cash flow conversion. This quarter we generated $1.8 billion of adjusted free cash flow up 51% year-over-year excluding separation cost. Conversion this quarter was 119%, well above our long-term target. I'm particularly pleased with the progress we've seen…

Thanks Darius, and good morning, everyone. I'm going to begin on Slide 4. As Darius mentioned, we delivered another strong quarter consistent with the first-half organic growth was broad across the portfolio with about 65% of our portfolio growing 5% or more in the quarter, and over three quarters of the organic growth coming from increased volumes. A few highlights, commercial aviation OE grew 19% organically led by business aviation, defense and space grew 14% organically with double-digit growth in both the U.S. and international businesses, and safety and productivity solutions grew 12% organically led by Intelligrated warehouse automation business. The markets we serve continue to be strong and we continue to leverage our leading market positions, new product launches and investments in commercial excellent to drive profitable growth. We generated 70 basis points of margin expansion in the quarter while continuing our investments for growth and effectively managing the impact of inflation. A big part of our performance was driven by productivity enabled by our ongoing restructuring activities. This quarter we funded approximately $70 million in new restructuring projects aimed at improving our cost structure and optimizing our footprint and supply chain. The majority of our earnings growth $0.20 this quarter came from segment profit improvement driven by enhanced sales volumes and sales excellence across the company. We also realized the $0.05 benefit from share repurchases which resulted in lower weighted average share count of 752 million shares. This year through the third quarter, we've reduced the outstanding share count by more than 2% and have deployed more than 2 billion in share repurchases. Below the line items, we’re roughly flat for the quarter with higher pension income offsetting higher repositioning and other funding. Finally our effective tax rate of 21.9% was lower year-over-year which generated a $0.04 benefit…

Thanks Greg. The fourth quarter begins a new chapter for Honeywell. Our two spin-offs leave us in a even stronger position for the more focused and growth oriented portfolio in industry-leading businesses across attractive end markets. Each has multiple lovers to drive inorganic and organic growth as well as continued margin expansion. Our cash performance this year has been outstanding and there's still room for improvement. Year-over-year the free cash flow growth has exceeded 20% each quarter and our free cash flow conversion is also improved significantly. We are rapidly approaching 100% conversion as we demonstrated this quarter. Our financial condition is best-in-class by healthy balance sheet that provides us with significant capacity to deploy dividends, share repurchases and M&A. Our commitment to deploy cash both smartly and aggressively has not changed. Importantly, we have a strong performance culture. Our say will continue to equal our do, and are focused on continuing to outperform for our customers, our shareowners and our employees. We’re looking forward to sharing more exceptional results, as well as our 2019 outlook during our fourth quarter earnings call in late January. With that Mark, let's move to Q&A.

Thanks Darius. Darius and Greg are now available to answer your question. So Derrick if you could please open the line for Q&A.

[Operator Instructions] Our first question is coming from Nicole DeBlase from Deutsche Bank.

So maybe I’ll start with a couple of higher-level questions. With the benefit of such a global business that you guys have such as many different end markets, maybe you could just talk through what you’re seeing around the world particularly with respect to emerging markets and for hearing some concern from investors about potential project push-outs, slowdown and short cycle activity et cetera?

Yes, I’ll take that one. I mean certainly we’re seeing a little bit of China has to be the highlight and certainly Q3 was not as robust as some of the quarters that we saw in the first half. So you know there is - we did have some tougher comps that we expected. We had some challenges our air and water business which has been throughout the year. So I'm not alarmed yet, but certainly Q3 was a bit slower in terms of growth. I mean we grew the Chinese market but not at a double-digit pace that we saw earlier in the year. So that's probably my number one area to watch. I wouldn’t say I’m concerned about it yet but certainly an area of focus. On the flip side of the coin, U.S. was extraordinarily robust, think about 9% to 10% kind of a growth rate in the U.S. and was probably at the other end of the spectrum. We continue to be very bullish in the U.S. markets and I expect that to continue. And then sort of the rest of the global it was a little bit of a mixed bag. I mean some Southeast Asia business was good. We had a really nice recovery in our Latin American business that was really good to see that’s been our focus for business activities throughout the year and we see that coming back. Middle East was okay. India was a bit slower than we anticipated but we expect a pretty good recovery in Q4. So all in all I mean there is certainly some puts and takes, very encouraged by what we're seeing in North America with our focus on China as we head into Q4.

Thanks Darius that was really comprehensive. And I guess just shifting to capital allocation, just some thoughts as you head into 2019 maybe it was good to see Transnorm come through recently. But how robust is the pipeline and I guess if M&A doesn't come through as you expect is there scope to go higher than that 1% reduction in share count that you're kind of earmarking for 2019?

Yes, I think that's why we’re very careful to pick our wording in the press release so which is that - you should expect at least 1% share count reduction. The 1% is roughly measured with 3 billion that are already committed to but you spot on your comment is exactly right, that's the way we think about capital allocation. And depending upon what happens in M&A, we’ll potentially do buybacks. There are a couple of things that we think we could get done and announce maybe even as possibly in Q4 probably not close in Q4. So, but I never really count the M&A transactions until they are signed and done. So I want to monitor that quickly we have been in the market early in Q4 as we pointed out in the press release. I thought there were some attractive price points for us and continue to be, but yes - the framework you're thinking of is exactly the one we use, which is, we kind of toggle this between M&A and buyback. As I said, I would prefer M&A, but it's - as I said on multiple earnings call now, it continues to be a challenged environment and unfortunately it's kind of becoming the new normal. Although we were thrilled to pick up the Transnorm acquisition, and I think an attractive entry point, but from a price stand - but a really important entry point into Europe for our Intelligrated business. Not only is it a terrific acquisition on its own, it also gives us that really nice foothold in Europe, just an outstanding business.

Our next question comes from Jeffrey Sprague from Vertical Research Partners. Please go ahead.

I was wondering if we could get just a little bit more help on the bridge. Greg, I think you said the guide reflects 16% to 17% pro forma growth for 2018. Could you just baseline us on what that implies for segment OP dollars in 2018 for Aero and HBT, as if the spins were out on a full year basis?

Jeff, in terms of the absolute dollars, I don't think we're going to highlight specifically those numbers directly. But the $0.31 represents, you could think about that as close to linear but not exactly because of the stub period that we got in homes, because we are getting only one month of the homes results in that $0.31. So, you could think about it as almost linear but not quite. I mean, that - we've got full fourth quarter high degree of profit that we're losing in December and November. The Resideo side is going to be a little bit less clear from that perspective. But it's - the $0.31 is close to linear but not exactly.

And then just on the $0.90, so it sounds like stranded costs would be an incremental headwind on top of that, if you could clarify that but is there any deployment of the spin dividends of $2.8 billion in that construct?

No, the $0.90 is just simply the lost segment profit, an after-tax basis and net of the reduction in our below-the-line expenses associated with the indemnity. As we talked about the $340 million of stranded costs, which we feel very good about our progress in terms of eliminating that so far, is not included in that number. And we'll update you more on that as we get into the January guidance and we finish the year out. You know, you can imagine that, as we said, we've taken out by the end of this year greater than 50% of that and we feel like we're in a good position, we're turning our attention from a spin perspective, from getting the deal done to the sustainability side. And we'll be a lot of focus on that but that is not in the $0.90 at this point in time. And in terms of the usage of the spin dividends, Darius talked about the capital deployment framework, and we'll utilize that as fire power for executing around that framework but it is not precisely included in any way in that $0.90.

I'm sorry, just one other for clarification. When you say net of indemnity, do you mean only kind of the $315 million or so that Garrett, Resideo, "OU" and then we've got incremental tailwind to get to that $425 million that you're talking about on lower asbestos and environmental?

Yes, no. Again, think about that as asbestos and indemnity for 2018 and the knock on effect of the 90% reduction on a year-over-year basis and those two particular line items. Obviously in the asbestos side, NARCO has nothing to do with that. So we have to take that out. But that's the way to think about it.

And Jeff, this is Mark. If I could, just to be clear, the caps, the $350 million cap that we cited in August, that is the cash payment cap, right. And so as we had said in August, the expenses whatever they are could be higher and that from a P&L perspective could be closer to the $0.40 we cited in the release. So, I think that's where you're getting tripped up, there's a $0.40 expense, separately there's an annual cash payment cap in respect of any year that's $350 million.

Yes, so that's when we gave the $0.40, again, that was a - call that a framework. But the actual value of what's going to be in the P&L may be higher or lower depending on how things go. And the $425 million known is reflective of where we see 2018 expense in those two categories.

Our next question comes from Josh Pokrzywinski from Morgan Stanley.

Just maybe to dig into PMT on a couple of questions. First, with the recent ruling out of SCOTUS on some of the HFC stuff, how does that impact maybe some of the trajectory for Solstice from here? And then, I guess a follow-up on that on some of the refinery comments.

Yes, it doesn't because as you may recall, that - despite that ruling there are quite a few states that are still adapting the HFO regulation and green house gas emissions. So, as of right now we don't see much of an impact yet. We're continuing to work with the regulatory bodies, both at the federal and the state level. And at the present time, we don't anticipate substantial impact and frankly a lot of the companies that we're working with are on that path anyway. And again, obviously that's only a U.S. issue. What was your second question on PMT?

Yes, I guess more broadly in - with some of the environment going on there particularly IMO 2020 and refiner starting to redeploy, I think UOP is set to have a good shipping quarter in 4Q, how much of that are you seeing in the business today versus may be extended visibility into 2019? Just trying to calibrate as refiners spend when it helps Honeywell specific.

Yes. I mean, typically refiners got to wait till the last moment. So a lot of that investment, so that's what sort of surprised us. So we expect 2019 to be a good year. But the numbers speak for themselves of UOP backlog up double digit. That gives me a good side strong booking rates. Sort of the margin challenges that were evident in Q3, we very much expected, we communicated those in Q2. We knew that they were going to be dilutive. But by the way, that reverses in Q4 based on the mix of products that we ship. So, overall we're very bullish on UOP and what they're going to do. And like I said, at the end of the day I look at the numbers and when I see backlog up double digit like it is, I'm very encouraged as we head into 2019 and beyond.

And then just one quick one for Greg on free cash. I think you guys talked about a lot of moving pieces on the pension side and then on the indemnity side, maybe some P&L head that doesn't come quite through on the cash payments. How should we think high level about free cash conversion for 2019 inclusive of the spins in the moving pieces there in?

Again, I think you should think about cash conversion next year as approaching a 100%, even expense. We feel like we're getting into that neighborhood this year. And with the continued opportunity that we do have in working capital, we made really nice stride as I highlighted, 0.6 of a churn improvement year-over-year. And this quarter in particular was sequentially better than last quarter by 2x to 3x as well. We feel like we still have more opportunity to go. So, we're still going to be targeting something plus or minus a couple of points to a 100%, as that number will move a little bit over time depending on specifics but we feel very good about our ability to live in that range.

And Josh, I think we're extremely proud of what we've been able to achieve on the working capital side. If you recall couple of years ago, I've made this a priority for the business for us to really monitor the balance sheet as much as we monitor P&L statement. And with this kind of a growth rate that you're seeing, 7% top line, our working capital is now more than $600 million. I mean, that's - I'm very proud of the Honeywell team in terms of what they've been able to accomplish on that perspective and it's coming through in our cash performance.

We'll next move to Steve Tusa from JPMorgan.

Darius, never heard you this excited. It's a bit of a change, we would have expected it from Dave but you've been a little more balanced. So, good result.

If Michigan loses tomorrow, I could be more excited, but you know…

So, just on the orders, you kind of threw out defense, you threw out the HPS orders, Intelligrated obviously. When you think about kind of the long cycle businesses, what were total orders up for the long cycle businesses for the quarter kind of in total or if you just want to kind of list maybe a couple ones we didn't hear like UOP or something like that I don’t know what were total orders up for long cycle businesses?

Yes, to give you a specific they’re up 26% year-over-year. Our backlog is up 14% for long cycle and then just to give you a couple of the specifics, HPS projects up 27%, HBS projects up 22%. Intelligrated was actually flat but keep in mind they are up 40% year-to-date so this was tough comps. We’re not - trust me I’m not worried one bit about the growth in the Intelligrated businesses. So that’s why I’m pretty excited today I mean when I always worry about tomorrow and when I see those kinds of numbers come through, I have good reason for optimism. And I think it points to a very bright 2019 and beyond.

And just kind of attacking kind of the base question in a little bit of different way and again this is nearly just kind of like math on actuals. Just using the kind of prior arrow guide of about 3.7 billion and stripping out kind of $500 million number last nine months or for the year for Transport, gets me down to kind of around 3.1. Is that kind of the right arrow pro forma roughly I mean that's just basic math on what you got and already given.

I think you’re in the neighborhood.

And then just for HBT kind of similar math gets me to around 1.1 type of number - do that sound right?

Let us check that one and make sure that one is obviously a little bit less precise given the Homes building split but we’ll come back to on that one particular.

And then just one last one for you - the restructuring next year is a little bit higher than I would have expected. I don't view that as necessarily negative, but what is when all is said and done given that it seems like everybody is wants to ignore restructuring in other companies these days. What is kind of the normal run rate restructuring number for you guys in this kind of new constructs going forward do you think longer-term?

Yes I don't know if there is such a thing as normal number. It is dropping significantly year-over-year by more than $100 million. So it’s coming down some of it is measured with slightly smaller Honeywell. But we still have as you recall back the EPG one of the things we have plenty of runway for and what Torsten's number one mission and you head integrated supply chain is to really reduce our fixed cost base. So that's where most of that funding is going to be going next year and it's a fairly substantial change in terms of the cost structure of Honeywell. And A) reducing it and B) making it - converting it from being much more fixed oriented to variable oriented. So we’re going to need some continued restructuring funding, I don’t know if I can give you sort of a normal number. I would think that it still going to be elevated at kind of the levels we projected for 2019 and probably for 2020 and probably after that come down a bit more as we get some of that heavy lifting done. So that's the way to kind frame it up and think about it.

We'll next go to Scott Davis with Mellitis Research. Please go ahead.

Hi, it’s not much to pick on for sure but one of the things that was thrown out there when you're doing the spins was potentially doing buildings with the resi business and you didn't - you kept all things. But what gets you excited about buildings turning, I mean this is long been really kind of a three percentage growth business not really much better than GDP probably not better than GDP. But you said in your prepared remarks some new products and things like, so give us kind of sales pitch if you will on why you kept that business?

Yes, first of all let’s start with connected buildings. I think our technology offering in connected buildings is maybe as further along than any of the other connected. I mean we have ready to go technologies that we're currently offering and selling and you heard an example of that in our pitch this morning. So I'm very excited that we really need to be much more commercially savvy to really clearly explain to our customers what that will do for in their building in terms of energy consumption, comfort, security, well-being of the occupants and so on. So I'm very excited about their technology and it's not futuristic it's here now. I think we just got to get through the commercial challenges that we’re facing. Number two, the market dynamics between the resi and the commercials are very different. The competitors are different, I feel good about our position, I feel good about the installed base we have. I think it's a business that can and should do more. Three, as I think we also have to remember that we created this Homes P&L from scratch, I mean think about this Scott, I mean we did more than 20 manufacturing transitions in a course of the year. If I didn't have that kind of hard deadlines that we’re going to get this done in a year that would probably taken three. So that team has been done a tremendous job in executing that kind of heavy lift and I think they performed pretty well given that kind of a distraction. So - now that that’s basically behind them, I’m going to modern it I’m continue to be optimistic about what we’re doing. I was with Vimal Kapur and his team earlier this week and they got their hand on the post, and I think that could be a very successful business for us.

Transnorm seems interesting but I don’t know the company very well I mean can you just give a little bit sense of what other than the installed base that you are getting I mean what you’re getting from a standpoint of technology, is that something you can the synergies at least within Intelligrated is that something you can take more Intelligrated Europe and more Transnorm with U.S. or does it not work that way?

No, it doesn’t work - is in fact in Intelligrated was a customer of Transnorm so we know the product it is IP protected. It is actually technology differentiated as a high aftermarket services component which I always look for in any business. It has a very enviable position in Europe and frankly I was looking for beachhead to land in Europe Intelligrated. We’ve been spending a lot of organic dollars what I call just part of their R&D and sales and commercial build-out to have a broader presence in Europe. Our U.S. customers' has been asking us to really have a broader presence in Europe and I frankly wanted to add a business that gives us a much broader foothold. On top of that, I really like the business. We were able to pick it up what I view is a very appealing price in this kind of a market environment that we're in. We’ve differentiated technology and IP protection. So, I think it's I’m thrilled and as you know Scott I really like the warehouse automation space.

Our next question comes from Andrew Kaplowitz from Citi.

Darius, Aerospace has continued strength in here this cycle and obviously you do have more difficult comparison to 2019 but it’s hard not to notice the momentum that Honeywell has given it share on the new business jet platforms that are coming to the market. You've talked about connectivity, defense obviously strong. So as you look at the continued product rev in 2019, does it seem like the visibility here toward call it above normal cycle growth and Aero was higher than usual in 2019 and maybe beyond?

Well, we continue to be bullish in Aero and as you look at our backlog position there's no reason not to be. But you know your initial point is right to which is our comps get a little bit tougher given the kind of growth rates that we seen. If you look at - a little more details of the numbers the two that really pop out at you especially here in Q3 is one is the growth in the business jet market. That's been - that hasn’t been a high-performer for quite awhile I mean and now it starting to really pop as lot of the new platforms are being introduced into the marketplace. And two the used equipment inventory is down, I mean it’s down substantial which is always a good time and a good sign in terms of new equipment sales. And defense and space, defense is continues to be very strong. We don't think that that's going to change as we head into 2019 potentially it could be a slight down arrow in terms of OEM momentum I don't really expect that to be the case, but that maybe the only place where I’m a little bit nervous. But all in all, I continue to be pretty bullish on the aerospace segment because all three of these tracks that we always kind of talk about which is the commercial, the business jet and defense are all kind of pointing either strongly up or up. So 2019 looks very promising based on what we’re seeing today.

And maybe Darius or Greg, you mentioned the tariff impact so far but manageable. You continue to work to mitigate all the tariff impacts. But maybe could you elaborate in your comments, I think Greg you said the tariff impact in 2019 could impact margin. How much more ability do you have to price increase in tariffs? You talked about changes that you might make, you talked about sort of looking at your supply chain. So maybe more color there if possible?

Yes, so, in our last discussions we talked about the fact that what we're seeing in 2018 in terms of pressure was in the $10s of millions. And as you bring List 3 and List 4 into play and you layer that on over the entirety of 2019 that starts getting into more like triple digits, $100s of millions. And we still feel good about our ability to price in the market. And we've been successful and continue to take aggressive approaches in that regard. And then as it relates to changes in supply chain, we talked about the fact that we're local-for-local and that's been very helpful for us but we are making a few small moves. You're not going to see us make big overhauls to the supply chain but there are certain spots where strategically we are going to make a couple of changes in those flows. So, again, the challenge the hill gets steeper but the level of rigor and attention to this has been at a very high level for the last eight months and is going to continue as we go into 2019. The pressure comment is, as you know when you price in the market and you price cost up, so revenue goes up and margins go up by a commensurate amount. But that's just a pressure on your margin rate. So that's really what I was referring to there, not so much that we're not going to be able to cover the profit impact of the inflation itself, but it's just that inflationary environment with pricing turns into a margin expansion challenge on the upside.

And if I could just add, I think there's a lot of unknowns, right. I mean, you have List 3, which potentially that - that rate goes up at the end of the year and then you have a potential List 4, we have timing which isn't particularly clear. So, there's a lot of - there's a lot of unknowns here. We're working through all the norms and I feel very confident in the process that we're building in our - all of our businesses are all over this in terms of taking any and all levers they can. But still a lot of unknowns in terms of what's going to happen at the end of the year, what's on List 4, the level of List 4 and timing. So, we're prepared, we're ready to act and we're trying to mitigate the best we can.

Our next question comes from Sheila Kahyaoglu from Jefferies.

Darius, it seems you're building a very focused Aerospace Company but maybe in a more measured manner. Just looking at Aerospace post Garrett, it looks to be somewhat accretive to margin and maybe eliminate the business that wasn't a perfect fit within that group. What sort of opportunities arise for the Aerospace segment in terms of profitability and maybe how are you thinking about the rest?

Well, I think the Aerospace Group has been very good at a couple of things, especially last couple of years. Number one is, they're certainly continuing to drive productivity and becoming much more efficient. There's a high level of expertise in terms of what they can accomplish, and I think they're far from done. So, there's a further opportunity to do that. Number two is, they're much more installed base focus in terms of the upgrades, enhancements, software enhancements and so on, which obviously continue to build accretion to the margin rate. And overall I like how their team is executing. They had a great wins in lot of different platforms and the execution is strong and I particularly like the progress on the commercial side of the business. And connected aircraft continues to be a very big opportunity, which we realize longer term. And I pointed this out, we look for a 25 plus kind of a margin rate. We think that that's very possible in that business and we're going to continue to make much forward as Tim and the team continuing to make progress there.

We'll next go to Andrew Obin with Bank of America Merrill Lynch.

When was the last time that U.S. grew faster than China for you guys?

It's a very good point. It's been a while but it's interesting how the global markets are evolving right now. And as I look into 2019 kind of an early take is, I think U.S. is going to be a very robust market again. Now, there's a lot of moving pieces in the geopolitical environment right now but right now it continues to look strong.

And I guess a follow-up question on that. How does your strategy, you had a strategy really focusing on high growth regions, U.S. going to be a key market but not really a growth market; how are you thinking about capacity availability in the U.S., for example, some of your competitors are talking on process specifically in our shortage of engineers, they're sort of at the limit not really able to take more project, and are we seeing contagion from China in high growth region? So, just a follow-up question.

Yes, I mean, I think I'm very encouraged and thrilled to see that kind of growth rate, GDP growth that we're seeing in the U.S. I think it's been terrific. But as you look at, overall if you look at the GDP growth in some of the high growth regions, over the long term they're still likely to be higher than the U.S. I mean obviously U.S. has increased its rate but so our high growth focus strategy I think is still spot on and needs to be. And we're going to stay committed to growing in high growth regions as well as the U.S. In terms of investment and profile and so on, I mean, I've always said all along that I believe in being local-for-local, meaning that I want to be able to serve North America from North America, I want to be able to serve China from China and Europe from Europe. To me that just makes perfect sense. I want to have people that have a mind set for their local markets both from R&D, manufacturing, sales, marketing, all these perspectives. And now as we kind of restructure and looked at our fixed cost base, that's exactly the model we're going to. We're pretty mature along the path already. But the short story is, to the extent I continue to see this kind of a growth in the U.S., we're obviously going to be continuing to invest in creating our capacity here in the U.S. to make sure we properly serve the market. And based on what we're seeing this year, we're going to be investing in 2019.

And if I could slip one more, you sort of highlighted that productivity was a contributor to strong cash flows, it's just very impressive that despite very robust growth this business is generating working capital. What about the business model that enables this generation, is there a pay back or this is a kind of business that can actually generate robust cash flows as it grows?

Well, I think it can. Number one is, sort of the business profile and the timing of payments particularly for projects business, they are very favorable. Number two, they've done a terrific job in managing their working capital. It's a point of focus and emphasis. Three, and this is something we've done across our business, which is, we're really looking in standardizing some of terms and conditions. That's been frankly I would say it wasn't sort of cleanest structure that we had and now we're really standardizing and cleaning that up and it's generating benefits. And it's not just for us, yes. It's really true of all of our businesses. So, a lot of things moving in the right direction there, certainly for SPS, but all of our businesses as well.

We'll next go to Nigel Coe with Wolfe Research. Please go ahead.

So just more of a comment than a question. You got two same prices this quarter. So, you seem like you're in good shape to manage the extra inflationary pressures from tariffs. But you're the only to potentially for - the companies that are so far. So, I'm wondering, are you sort of working on the base case assumption that the 25% goes in place in January and that we get less full and are you taking preemptive actions to anticipate and get ahead of those potentials?

Yes, I mean the short answer is, yes. I mean, we are getting ready. I'm not saying we now started pulling the trigger on all those actions but I think always the way we kind of think about things as we always have to assume the worst case situation and then be prepared. We haven't pulled all the levers for the 25% yet, but we're going to be ready and we're assuming that that will happen. Frankly we think that that probably is obviously increasing as more time goes by and we have to be ready. So I would say not all the levers have been pulled yet, but we’re certainly preparing them and feel very good about our ability to mitigate all and most of that impact.

And then quicker follow-on, going back to free cash flow because to my mind that was the real highlight and a great quarter. You call out SPS and that PMT as particularly strong contributor of cash. Is that because Aero and the HBT were with the spins we're introducing quite a bit conversion or was there some catch-up here I mean maybe any commentary in terms of free cash conversion by business would be helpful?

Yes, I’ll start and maybe turnover, I think you nailed I mean from an HBT perspective when you have to do two spins and you have do this many transitions, there is some level of inefficiency particularly in the inventory situation because you were doing a lot of plant separations and so on. And as I stated before I think the team has done just an incredible job to get us ready. Aero they have done a great job on receivables, payables and so on but inventory is still an opportunity. I think we all know about some of the challenges that the aerospace supply chain is facing so there is probably further gains to be made there. But they've done really nice job. And then SPS has been tremendous across the board whether we talk about all three elements of working capital advances and so on. And then PMT really picking up the pace particular in receivables they got lot of pass-throughs that are now coming in and really nice momentum in building into Q4 and we think that there is even more upside there.

Yes Aero is up so they had a good performance to, I think they just have a head start in terms of the disciplined aspects as Darius talked about with things like terms and so on. So, in many ways we’re actually modeling a lot of the aerospace processes and behaviors and what we’re trying to do elsewhere. So you should definitely not take that comment as Aero is not doing well they actually are growing their cash flow quite nicely also.

And our final question comes from Julian Mitchell from Barclays.

Maybe just a quick question on the HPS, I think in process you talked about a lot of the strength still being a short cycle driven. So just wondered what you're seeing in terms of Greenfield projects large orders there is obviously see some movement in the LNG area, but maybe some offset from a macro uncertainty on large projects in general. So maybe just how you see the Greenfield demand?

Yes, I mean Julian I think the highlight number for me for HPS is projects. We’re up 27% year-over-year in Q3, I mean that's - I think that number speaks for itself. So it's a very impressive number, it gives you an idea that that business continues to win in the marketplace. And I’m very bullish that’s couple on top of the short cycle growth, they are particularly in services and our software businesses, and overall it continues to do very well. So, there is not really much other than good news coming from the HPS world.

And then my last one would just be around buildings, you talked about the expectation of an improvement in growth there in 2019 and probably beyond. Do you anticipate needing much of a step up in R&D or CapEx or M&A to help drive that growth or you think the run rate of investment is sufficient right now?

Yes, I think in R&D I think it's - I would say it’s not necessarily a need to increase the R&D level but really to streamline and optimize debt investment around things that really matter. I think that there's frankly - there is a little bit of an opportunity around that area. And Vimal and team are making sure that we’re investing in the proper things and really on things that move the needle and not kind of the incrementalism which require a lot of investment that really don't generate great returns. I think it's certainly an area of opportunity but I think some of their really high performing businesses like fire which have continued to do very well it's not all bad news. And I think there are a lot of good things going on and the buildings part of the portfolio ready. But certainly like in any large business there is couple things we also need to improve. So I'm very confident that that team is going to get it done.

And just again back to the spin taking away the distraction of having to split the company in two fundamentally, that took the effort of the entire organization to go do and now having that done. They’re going to have a lot more time and attention to be able to drive some of that growth as Darius highlighted which we feel very good about the end market and our position there. So it should be good.

Yes, and just to echo what Greg said. I think we all probably underestimated the amount of time effort and organizational focus it takes to do two spins at the same time particularly when you really are creating a new P&L called homes. So I am thrilled with the execution that the team is exhibited.

Yes, I mean you talked about the supply chain changes but we also - we had the clone ERP systems. This was definitely a heavy lift to go do so that team did a great job.

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

Thank you. Before I end I want to thank the Honeywell employees and leaders that will begin new careers at Garrett and Resideo for their contributions to the company. Both businesses are starting with strong foundation, a great heritage and I'm confident both will be very successful. We look forward to watching their accomplishment as new public companies. I have full confidence that the strong performance Honeywell will deliver for our shareowners in the first three quarters of 2018 will continue through the year-end. Our order rates are strong, our backlogs are growing and we're realizing the benefits of our continued efforts to drive software and connected growth, productivity, commercial excellence, and improve free cash flow. It is an exciting time to be at Honeywell, and we look forward to sharing more on our progress as we head into 2019. Have a wonderful weekend.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.