Mark Macaluso - IR Darius Adamczyk - CEO Tom Szlosek - CFO

Steve Tusa - JPMorgan Nigel Coe - Morgan Stanley Jeffrey Sprague - Vertical Research Partners Joe Ritchie - Goldman Sachs Andrew Kaplowitz - Citi Andrew Obin of Bank - America Merrill Lynch Julian Mitchell - Credit Suisse John Inch - Deutsche Bank Gautam Khanna - Cowen & Company

Good day ladies and gentlemen, and welcome to Honeywell's Second Quarter 2017, 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. [Operator Instructions]. As a reminder, this conference call is being recorded. And I would now like to introduce your host for today's conference Mark Macaluso, Vice President of Investor Relations.

Thank you, Cathy. Good morning and welcome to Honeywell's second quarter 2017 earnings conference call. With me here today are President and CEO, Darius Adamczyk, and Senior Vice President and Chief Financial Officer Tom Szlosek. As a reminder this call and webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com/investor. Note that elements in 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 principle risks and uncertainties that affect our performance and our Annual Report on Form 10-K and other SEC filings. This morning we will review our financial results for the second quarter, highlight some key wins across our business and share our guidance for the third quarter of '17. And our updated guidance for the full year and as always, we will leave ample time for your questions at the end. So, with that, I'll turn the call over to President and CEO, Darius Adamczyk.

Thank you, Mark and good morning everyone. Today, we reported another quarter of strong performance in each of our businesses either meeting or exceeding the sales guidance we provided in April. Organic sales growth exceeded the high end of our guidance range at over 3% and good results in all four business segments. Our performance in the aerospace after market continued and our U.S. defense business improved as we anticipated. In advance materials, when performance materials and technologies recorded another quarter of double-digit revenue growth driven by the continued adoption of our Solstice line of low global warming products. And in the Home and Building technologies, we exhibited strong revenue growth at approximately 4% organic. We also expanded margins by 50 basis points this quarter driven by commercial excellence and productivity leading to earnings per share that came in at the high end of our guidance range of $1.80 and up 10% from 2016 on a basis consistent of our guidance. Our second quarter tax rate was lower than initially anticipated and this enabled us to invest more than $115 million in restructuring and other projects that’s $90 million higher than we contemplated in the guidance. These projects start delivering cost savings for us later this year and ultimately result more than $150 million in run rate savings. Excluding this additional $90 million of restructuring funding in 2016 earnings from last year’s divestitures on a normalized for tax basis, earnings per share grew 10% year-over-year. I’m pleased of our continued performance especially organic sales growth momentum, which is a testament to the growth investments we made new technologies, platforms, production capacity and M&A. We are raising our full year sales guidance to a new range of $39.3 billion to $40 billion up 2% to 4% organic and again raising the loan of our earnings guidance today. 2017 earnings per share is now expected to be between $7 and $7.10. Tom will take you through the details shortly. Each of our businesses made significant progress in our key initiatives this quarter, and I’d like to provide some brief highlights. Let’s turn to Slide 3. In aerospace, our suite of connected aircraft offering continues to gain traction. We announced that GoDirect connected maintenance, which combines our connectivity, in depth product knowledge, and data analytics to predict when mechanic parts need to be fixed or replaced will be used on the auxiliary volumes [ph] of 60 of Cathay's Airbus A330 aircraft. The agreement was a result of a successful trial, which saved Cathay Pacific several hundred thousand dollars in operational and reactive maintenance cost per aircraft and reduced APU related delays by 51%. In Home and Building technologies, we launched the Lyric C1 Wi-Fi security camera, the latest in our growing line of do-it-yourself offerings that can help make them smarter and serve our faster growing segment of the market. The C1 can be setup easily using a Lyric app on your mobile device and it offers intelligent sound and motion detection. Since its launch last month, the C1 camera has already generated more than 1 million in sales and more than 80% of reviewers are recommending it. We are in exciting pipeline of other new products in Home and Building technologies, that will roll out over the latter half of the year. In performance materials and technologies, we announced the agreement to acquire Nextnine, a leading provider of CyberSecurity solutions for industrial sites. Nextnine has an impressive installed base of more than 6,000 sites around the world and is especially strong in the oil and gas, utility, chemical and mining manufacturing sectors. We are exciting about the combination of Nextnine of growing CyberSecurity business with Honeywell process solutions. Nextnine broadens our offerings for an installed base while complementing our broader offerings in connected plant. Lastly, in safety and productivity solutions, we introduced connected freight which was developed with Intel and third party Logistic companies. Connected freight can help shippers and logistic companies monitor a high value in perishable goods to prevent damage and loss. Sensor tags are fixed too pallets [ph] or packages and they send real-time information about the location and condition of critical freight while in transit. Our connected offerings continue to gain traction and feedback from our customers have been extremely positive. Our evolution as a software industrial leader is well underway and I'm encouraged by our progress. With that, I'll turn over to Tom to discuss our financial results in more detail.

Thanks, Darius. Good morning, I'm on slide 4. As Darius mentioned we achieved more than 3% organic sales growth in the second quarter. The guidance was zero to 2%. The momentum continued from the first quarter with all of our businesses either meeting or exceeding their sales guidance. Segment profit was $1.9 billion, that was up 6% excluding the impact from our 2016 divestitures. Segment margin expanded 50 basis points from 2016, that was driven by volume leverage and commercial excellence, as well as our continued focus on productivity and returns from previously executed restructuring projects. Earnings per share were $1.80, our second quarter tax rate was 21.3%, lower than we originally expected due to higher than anticipated employee stock option exercises. But this favorable impact was offset by provisions for additional restructuring projects beyond what we anticipated in the original guidance. These investments will drive further growth and productivity mostly starting in 2018. Excluding those investments, and earnings from our 2016 divestitures and normalized for tax to 25% in both periods, earnings per share was up 10% year-over-year. Our free cash flow momentum continues with strong operational performance in each of our segments. Year-to-date free cash flow was up 39% from 2016, despite approximately $300 million more in timing related income tax payments. Overall, it was another quarter of strong operational performance. Let's move to slide 5, to discuss our segments in more detail. Let me start with aerospace which delivered a very strong quarter in both sales and profit. Aerospace sales growth was 2 percentage points above the high end of our guidance. Strength in the commercial aftermarket continued this quarter with strong repair and overhaul activity, growing sales of retrofits modifications and upgrades, and robust fares demand in the air transport and regional segment. The business in general aviation aftermarket was also up, primarily driven by timing of customer demand. Overall, aftermarket sales grew 5% this quarter. The OE dynamics, we've talked about in the last quarter continued with market related weakness in business and general aviation and slowing shipments for the legacy air transport and air transport platforms, partially offset by growth in new platforms. Overall, OE sales were down 5%. Defense sales were up 5%, -- I'm sorry, defense sales were up 2% driven by deliveries related to the F-35 program, and sensors and guidance systems within the U.S. defense segment. This was partially offset by continued weakness in the space and commercial helicopter markets as we anticipated. In transportation systems, growth was driven by continued recovery of the commercial vehicles market demand especially strong for on highway turbos in the U.S., Europe and China. The China growth was driven by new regulations that restrict the weight of commercial vehicles spurring demand for turbo charger technology that can provide more power to smaller size engines. This is the trend we expect to continue for the remainder of 2017. Aerospace segment margin expansion of 140 basis points for the quarter exceeded the high end of our guidance driven by that higher sales volume as well as productivity, net of inflation and the favorable impact of the 2016 divestiture of the government services business. Home and Building Technologies performance was mixed with strong organic sales but lower than anticipated margin rate growth. HBT organic sales grew 4% at the high end of the guidance range driven by both products and distribution. Within products we executed several large smart meter program rollouts. We saw continued strong demand for clean air and water products in China and we delivered nice growth within our Home's business in North America. The sales growth acceleration and the products segment were also encouraging. Distribution continued to perform well with strength in both Honeywell building solutions and global distributions. Order were up 5% up in building solutions and backlog was up double digit, so we expect growth in this business to continue. Segment margin for HBT was below our expectations coming in flat for the quarter, we continue to see benefits from previously funded restructuring and our ongoing productivity initiatives but those savings were offset by unfavorable sales mix in the quarter. We had higher sales of lower margin products in smart energy and environmental and energy solutions and lower volumes in security and fire. In Smart Energy we're conducting aggressive value for cost, value engineering efforts and at reducing manufacturing cost. But our results from those projects have not materialized as quickly as we anticipated. We also saw margin pressure from a regional perspective as we had plus 20% growth in China and over 40% in some of the HBT businesses in China. But we saw weaker sales growth in other more profitable regions. Clearly not the complete result we desire in HBT but we're encouraged by the sales momentum and we're taking actions to address the profit performance including better material productivity and stronger commercial execution. Performance, materials and technologies had another very strong quarter with organic sales up 6%, the guide was 3% to 5% and 200 basis points of margin expansion the guide was 170 to 200 basis points. There was encouraging news throughout the PMT business, overall UOP sales were up single digits, mid-single digits, orders were up 40% and the backlog is up double digits. There was continued strength in UOP Russell specifically in the modular gas processing applications with six new units booked this quarter. We booked Russell units so far, this year and more than double the amount booked in the first half of 2016. The orders in other segments of UOP support a continued ramp up in organic sales volumes in the third quarter. In HPS, sales were down slightly but margins expanded significantly due to commercial excellence and productivity. We saw lower backlog conversion in projects business and lower demand for process, measurement and control products in Europe. This was partially offset by significant growth in the short cycle software and service businesses. HPS orders were up about 15% and the backlog is growing nicely. Advanced materials had another quarter of double-digit growth and margin expansion enabled by CapEx investments we made for our Solstice line of low global warming products. In May we started up our largest Solstice facility and the world’s largest automotive refrigerant plant, in Louisiana, which is meeting continue demand for our Solstice YF products. Sales in our Solstice business nearly doubled in the quarter. Margin expansion came in at the high end of our guidance range driven by productivity net of inflation, results from our commercial excellence efforts and the divestiture of the former resins and chemicals business in third quarter of 2016. We’ll lap this impact in the fourth quarter and as I mentioned, margin performance was particularly strong in HPS and the advanced materials business. In Safety and Productivity Solutions, organic sales were up 1%, safety grew 2% on an organic basis driven by our high risk personal protection equipment and gas detection offerings. The general safety business has been improving sequentially for the past several quarters and also return to positive organic growth in the second quarter thanks to sale and marketing initiatives as well as investments in our sales force. Workflow solutions also grew high single digit in the quarter driven by high demand for our leading Voice Enabled Solutions and double-digit growth in the mobilizer software business driven by large win in Europe. In sensing IoT, demand for sensing controls remain robust particularly in high growth regions. Intelligrated continues to deliver impressive results driving more than 30% this quarter, compared to the second quarter of 2016 when it was not yet owned by Honeywell and this was driven by large project awards with key accounts. We continue to see strong orders and backlog growth in Intelligrated, which as a reminder will begin to be countered in Honeywell’s organic sales growth rates at the beginning of September. Productivity products was down in the quarter driven by decreased North American sales particularly for the mobility business. Although we anticipated the productivity products will improve in Q3 and Q4, our more aggressive product launches will occur in the fourth quarter and will likely continue to see softness in the mobility business until early 2018. STS segment margins while below our expectations, were still strong expanding 90 basis points excluding the first-year dilutive impact from M&A. This was primarily driven by continued productivity and restructuring benefits and was partially offset by investments in our commercial excellence as well as lower volumes in the mobility business. This shortfall for our expectations was primarily driven by lower than expected volumes in productivity products, accelerated investments related to the go-to-market strategy shift for the retail business as well as the new product launch investments I mentioned. Slide 6, is a walk of our earnings per share from second quarter of 2016 to the second quarter of 2017. In the second quarter of last year earnings from our 2016 divestitures were approximately $0.05 per share and we exclude those amounts from our 2016 baseline, consistent with our guidance framework. For comparison purposes, we have also normalized the tax rate for the second quarter 2016 to the 25% effective tax rate we initially assumed in our ‘17 guidance the impact of which was minor. Segment profit improvement resulted in $0.11 increase in earnings per share and all of our segments are contributing to the growth. Other below the line items principally lower interest expense as a result of the debt re-financings we did in 2016 as well as higher pension income accounted for $0.05 improvement to earnings per share bringing it to the $1.80 right at the high end of our guidance and up 10% year-over-year. As I mentioned earlier, our second quarter tax rate was lower than anticipated at 21.3%, principally the result of higher than anticipated stock option exercises which resulted in $0.09 earnings per share benefit. Conversely, the additional restructuring provisions that Darius and I mentioned reduced earnings per share by similar $0.09. On average, the payback of these projects is under two years and overall, they'll generate more than $150 million in run-rate cost savings. The pipeline of funded but unexecuted restructuring projects is robust at more than $300 million and will continue to drive returns as the projects are executed. Let's turn to slide 7, to discuss our expectations for the third quarter. In aerospace, reported sales are expected to be down 2% to 4% primarily due to the impact of the 2016 divestiture of the government service business and organic sales are expected to be flat to up 2%. Within commercial OE, we expect strong air transport deliveries for new platforms, partially offset by the impact of declining shipments on legacy platforms. We anticipate a tailwind from customer incentives which will improve our sales and segment margin in the third quarter. And as we've mentioned, we do not expect the recovery in to business jet OE market until closure to the late 2018 or 2019 timeframe, but we do anticipate modest growth in the business aviation aftermarket on continued R&O activity. We also expect continued strength in the air transport aftermarket driven by retrofits, modifications and upgrades, as well as by the typical seasonal demand. The commercial vehicle market should continue to recover, driving modest growth in transportation systems. Growth in light vehicle gas continue to be driven by demand in high growth regions. Aerospace margin should expand significantly this quarter driven by the OEM incentive tailwind, improving volumes and the continued benefit from prior year restructuring projects. In HPT, we anticipate organic sales of 1% to 3% and reported sales growth to be slightly lower so flat to up 2% due to the impacts of foreign currency translation. In the second quarter, there was gradual month-over-month sales growth improvement with good momentum exiting the quarter and we expect those strong trends to continue. Within the products business, we'll have additional large smart meter program rollouts principally in Europe and anticipate continued demand for air and water products in China. In distribution, the strong orders and backlog trends in building solutions combined with the commercial excellent initiatives and growing scale of our global distribution business will continue to contribute to growth. HPT segment margins are expected to expand 10 to 40 basis points driven by cost reductions from prior restructuring actions, ongoing commercial excellence and productivity initiatives. These will be partially offset by the continuation of the headwinds from the unfavorable product mix I mentioned earlier. In performance materials and technologies, sales are expected to be down 6% to 8% on a reported basis primarily due to the impact of the 2016 spin off of resins and chemicals business. But on an organic basis, we expect PMT to grow at 7% to 9% driven by conversion to sales of our strong backlog. UOP is expected to deliver more than 20% growth driven by strong licensing sales, continued strength in the modular gas processing business and demand for hydro processing catalyst. We expect strong growth across the entire HPS portfolio but primarily in our life cycle solutions and services, deal products and combustion businesses. In advance materials, we expect mid-single digit growth fueled principally by softness [ph]. PMT segment margins are expected to expand 130 to 170 basis points driven by commercial excellence, productivity and the favorable impact of the resident and chemicals divestiture. In safety and productivity solutions, sales are expected to be up 2% to 4% on an organic basis with reported sales increasing about 20% to the impact of sales from the Intelligrated acquisition. The fourth quarter is the first full quarter of Intelligrated organic sales. In the safety business, we expect further recovery in general safety products and a gradual improvement in the retail channel as our go to market transitioned from a distribution model to a direct sales model is executed. Growth in productivity will be driven by a robust order pipeline in the workflow solutions and continued strong demand for sensing controls. SPS margins are expected to expand by more than 150 basis points excluding the first-year dilutive impacts of M&A. This is driven primarily by benefit from last year restructuring projects, the higher volumes as well as the results from our ongoing productivity efforts. So, the for the company in total organic sales growth is anticipated to be 2% to 4% with 120 to 160 basis points of margin expansion leading to earnings per share of $1.70 to $1.75 that’s up 13% to 16% year-over-year again that excludes divestitures and its normalize to the third quarter tax rate of 26%. To the extent our tax rate is lower than 26% like we did in second quarter; we intend to undertake additional restructuring projects. Let's move to Slide 8, as we previously mentioned we're raising the low end of our full year EPS guidance by $0.10, so the new range is $7 to $7.10 that’s up 8% to 10% and again that excludes the divestitures and last year's debt refinancing charges. We're raising our full year sales guidance to $39.3 billion to $40 billion. Sales are now expected to be up 2% to 4% organic driven by higher volumes. In terms of our segments, PMT organic sales growth guidance is now 5% to 7% for the full year. SPS reported sales growth guidance is now 18% to 20% and the low end of aerospace's sales outlook is up slightly since the last quarter. From a segment margin expansion perspective, we remain within the initial guidance range of 70 to 110 basis points. We have lowered the full year margin guidance to both HPT and SPS and increased the margin guide for aero. In SPS we still expect strong operational margin performance consistent with our previous guidance. Overall there will be puts and takes across the businesses but we’re confident in our ability to deliver our full year margin expansion guidance and we remain focus on executing for the remainder of 2017. There is no change to our full year free cash flow guidance, the first half free cash flow performance was good, showing a 39% performance year-over-year and we're focused on continuous improvements in our execution across the organization. Let me turn to Slide 9 for a quick wrap up, we had a strong second quarter with higher than anticipated organic growth, continued margin expansion and good performance in all segments. The trends we've seen in the first half of the year are expected to continue leading to third quarter earnings per share that are expected to be up healthy double-digits. The entire organization is focused on executing various key priorities, which as you will recall include improving organic sales growth, maintaining our productivity rigor, becoming a best-in-class software industrial company and continuing to aggressively deploy capital all the while continues to make significant investments in Honeywell’s future. With that, let’s move Mark to the Q&A.

Thanks, Tom. Both Darius and Tom are available to answer your questions. Cathy, could you please open the line for Q&A?

[Operator Instructions] And we’ll go first to Steve Tusa of JPMorgan.

So just a question on the ACS related businesses, in HBT obviously the margins had been a little bit weak there and even in the HPS business, Darius can you talk maybe about the volume of kind of investments you guys are putting to work there. I mean any kind of color on -- is this -- I know investments usually are not discretionary per se given competitive pressures out there, but maybe some degree of magnitude around you know what your -- what kind of money you’re putting to work there, I think that’s first question. I have a quick follow-up.

Yes, I mean, I think, clearly we are investing both in R&D [ph] and really reallocating our salesforce as well, because frankly, we’ve had some places where fundamentally we under invest and I think as a matter of fact I would say in our developed markets we under invest in terms of sales force and in HGR although we've had very aggressive investments, we also want to make sure that those investments are paying off and they are, because by the way as I look at what happened in HBT in Q2, part of the issue here is the mix and just to give you a couple of facts, our China, EVNS business was up 45% in Q2 and that’s a little bit part of our margin mix challenge that we had here in the quarter, but overall continue to be very bullish. The other thing is that we are working on this what I call kind of second tier value offerings for ENS and HSF as well as investing in our DIY platforms that’s how characterize most of investments.

Is there a degree of kind of margin pressure that’s happening today that can kind of spin back into the numbers as growth come through? Is that kind of like of a step up or just anyway to somewhat quantify that?

I mean think you know obviously [indiscernible]. I think that some of it is a mix and some of it’s we got to do a little bit better on couple of elements. You know the two places I found too is I think we have an opportunity to drive material products really. I have higher expectations there and the second one is around prices and commercial excellence, because I think frankly some of those areas that we haven’t done as well as we could have. Having said that, I think overall, it’s a pretty positive story, because as you look at our markets, we grew faster than our markets particularly on the residential side. So all-in-all, yeah, I’m slightly disappointing by the margin rate but we have some actions that Terence and his team are working and I don’t want to also forget about our 4% top line growth with tremendous growth in China just well north of 20% for HBT.

And that could be an '18 story, is that improvement? '18 story?

Yes.

Okay. And then one last quick one. One last one on free cash flow, normal seasonality kind of get to you north of where you're guiding to. Is there anything that's kind of reverses in the second half that suggested it shouldn't kind of track a more normal seasonal trend for the second half Tom?

No, I think we're fine on cash. When you draw the market at the end of the first half overall conversion is right aligned with where we were last year. But in the second half some of the initiatives that we've got going are going to drive that strong performance. Frankly, I think, we should do better than overall 5% to 7% and to your point on the first half growth. But we've got a little bit of a track record of not necessarily being entirely accurate on our cash forecast and so we want to be sufficiently conservative as we head into the second half, big effort for us.

Yes, Steve I'll just point out that, we've had some headwinds both in the first half on cash [indiscernible] well north of $300 million and then we got some more coming in the second half. So that's why I think -- but by the way, that's how we selected on our outlook for the year, and that's why it may seem like we're being a little conservative, but we've got some real headwinds.

Next, we'll go to Nigel Coe of Morgan Stanley.

Thanks, good morning guys. Just wanted to get back into HPC and I think the moving parts there were pretty well known. But obviously foreign securities a bit weaker versus particularly on average. So, I'm wondering do we have visibility on some improvement in that in the second half of the year. Is that more of an '18 story? And then the second part of that question is I think this is the first time in you've called China as a below feet average margin geography, maybe I'm wrong there, but what is the path towards getting China margins back towards feet average or better?

Yes, I think as any kind of high growth age geography its slightly diluted to the overall average. And obviously when you blend it in at a 45% growth, it has an impact. In terms of margins, we think we're with those pretty aggressively appearances all over this both on the productivity side as well as the commercial excellence as we have some opportunity with some new products coming. So, I expect some level of recovery and we are going to grow margins in that business this year. We're probably a little bit aggressive initially and that's why we had some puts and takes in the overall Honeywell portfolio. That happened to be one of the takes. But we expect growth there, the margin growth for 2017 and further enhancements for 2018. And I can also tell you that, a good portion of the structuring funds that we allocated in Q2 went to HPC.

Okay, that's helpful. And then a question for Tom on the hedging and given the weakness in the dollar we have seen continuing through 3Q. So, the way I understand, it's helpful to topline, it's harmful to EBIT so there is a bit of margin pressure. So just looking at your unchanged segment guidance for the year, I'm wondering if volumes on margin has been offset by another threshold FX or may be some material but maybe you can just clean that up, and then where do you stand on hedging for '18.

So just for 2017, Nigel it will be more or less about three quarters are more locked in on FX rates and as you know our hedging program is intended when you consider all the aspects of it, the net result is to hedge the operating income and not necessarily the topline, definitely not the topline. So, our top line will definitely flow as the FX flows and so, if you see the euro strengthening as you have over the last few weeks, our topline should improve. However, our margin rates, our margin dollars are more or less locked in from also the major currencies as for the year given the hedging that we did at the beginning of the year. So, if you start to see a strengthening or weakening second half that’s not going to have a material impact on our margin rates themselves given that we've had to lock the rates in. So, 2018 we're taking a similar approach, we don’t necessarily disclose all the positions but we're keeping a strong eye on the currencies where we have major exposures euro of being a big one and taking risk off the table as we see the opportunities arise.

We will now take a question from Jeffrey Sprague of Vertical Research Partners. Jeffrey Sprague : Couple of questions, first on Intelligrated and the growth that you're seeing there, would this all still be associated with what they had in the pipeline and the order book at the time of the deal or is there some kind of Honeywell benefit that’s starting to show up in your results, that’s the first question.

The answer to your question is no, this was not there at the time of the deal, the pipeline is grown substantially and certainly there is an inherent Honeywell benefit, I mean frankly the Honeywell brand is really well known throughout of the industrial and logistics world and its benefited from the current relationships that we've had and as you recall the premise behind this business going into SPS is our scanning and mobility business its strongest vertical is transportation logistics. So, there is a lot of benefit in terms of cross selling and leveraging that sales force to generate leads for Intelligrated, so we're certainly seeing the benefits from that and that pipeline Intelligrated is extraordinarily robust. Jeffrey Sprague : Right and then just on speaking about PNC margins and a lot going on there with you HPS, but we're just thinking about how slows this ramp. Can you give us some sense of how full utilized the new factory or factories are and kind of what kind of operating leverage we could expect flowing as you ramp up post this year?

Yes, the new factory, the Apollo factory that Tom referred to, it's not fully utilized yet, that just came online, it started up in May. So, I think about 50% like utilization which is kind of normal at this stage because it's still ramping up. There is more leverage there to come and we’re going to be shifting our supply a bit from an externally sourced and so on to more internally produced obviously that’s been accretive which is good news. So, the short story here is that there is more leverage to comment. As you saw Jeff really, really nice story in TMT, I mean it’s both in terms of orders, leverage under revenue and Solstice continues to deliver. And strong backlog too, I mean we had a nice backlog, we had in the second half of the year in all the businesses. Jeffrey Sprague : Right. And just one another quick one, Tom, can you just put a finer point on what the variances Q3 versus Q3 and the aero incentives either in dollars or margin?

Yeah, it’s about I say 50 basis points margin impact year-over-year and as you know that the 2000 overall incentives for the year are going to be probably 40 to 60 basis points down on most of that coming in second half and most of that being in the third quarter. So, this is where you will see the biggest impact and that’s why those aerospace margin rates for the third quarter will be so robust. I mean they’re already robust without the incentives. I mean but up to 300 plus of improvement is pretty strong. I think the other [indiscernible].

Right now, we’ll go to Joe Ritchie of Goldman Sachs.

So, hey Tom may be following up on that point right there on the OEM incentives, it’s interesting, when you take a look at your organic growth guidance for 3Q in aero, the surprise, that it wasn’t a little bit higher because you do have the benefit from OEM and you have a pretty easy comp. So, is there any what -- what’s kind of offsetting that in 3Q or is it just kind of like a conservatives 3Q guide?

Yeah, I think we want to build up some momentum here, we had a strong commercial aftermarket 5% in the second quarter and we kind of want to see that momentum continued. I mean that, that we sort of factored in low single digits for third quarter, I think the defense in space we got a comparable quarter-over-quarter. The incentives do come through and if they do -- I mean that they will come through, if the aftermarket comes through like it did in the second quarter we should be definitely at the high end of that 2% organic if not pushing higher.

Joe, I would like to just add, I think the mix is such that we kind of know the visibility on [Indiscernible] we know what that looks like and so when we are actually getting much more into the shorter cycle business for aftermarket especially on the VGA side. So frankly we don’t have as much visibility as we normally in aerospace, because that’s what we are counting and as Tom pointed out we want to kind of see that rate of aftermarket activity both on the ATR and DJ side maintain, let the guidance be where it is.

Got it. Okay. And then maybe just on up on Steve’s question from just a little earlier, but asking it slightly differently. I guess if you think about all the restructuring actions that you guys have taken the pull forward in 3Q last year, it is now restructuring this year in 2Q. It’s nice to see the growth uptick, but I guess maybe if you could just kind of comment on what you're seeing competitively in your ability to hold the cost benefits into your margins and how much you're actually having to utilize to actually offset potentially a competitive pricing environment. I think any color around that would be helpful.

Sure. I mean it's a couple of points. The first one is, we definitely are seeing the benefits of restructuring come through. And that's certainly there. I think might be your questions talk more on HPC and yeah, it is a competitive environment. However, we also have a very strong competitive context position there. And we're seeing that in our growth rates in particularly in high growth regions but also in the end. So, part of its mixed, but part of it is we got an opportunity to do a little bit better, like I said on a mature productivity side, commercial excellence and so on as well as some new product launches that we're doing and kind of offering having the Honeywell premiums here as well as the values here, as well as expansion DIY. So, there is some now help things that we're embarking upon and were started in Q2 and I expect to see some benefit of that towards the end of this year and even more so next year. So yeah, it's a competitive environment, but given our brand, product positioning, overall value to customers, I'm bullish and how we're going to perform here.

Okay, thanks guys.

And now we will go to Peter [indiscernible].

Tom, you mentioned briefly on PNP on the backlog. Do you ex kind sold this, how is backlog holding up or what kind of visibility do you have? Can you give us little more color there?

Yes, it's really strong. When you look at both HPS as well as UOP, I mean they are both north of 10% -- I'm sorry, in total they're north of 10%, UOP is pushing 20%, HPS as I said strong momentum. And we think that’s going to continue. When you look at the character what's in UOP, its particularly encouraging because you see it across all of their product lines which means that it's not just an aftermarket where getting catalyst sales, but we're getting the full gamut of things. The engineering, the new projects, the equipment. And that means that there is more investing going on than we had seen over the course of last year. So, the good prospects and good character comprehensive character backlog across the UOP businesses. And HPS, same thing. I mean even more skewed towards the higher profit service side for HPS. I mean that’s pushing 10% up, and then one reason the HPS backlog isn't where UOP one is, in terms of double digits is that we've been carrying and we've been very successful in some of these megaprojects in HPS. And as you execute those and they came out of the backlog obviously you see the impact. Those projects carry a lot of third-party content however. They're not necessarily the most profitable. But they do an installed base and we find them overall to be very attractive long-term. So, when I look at HPS backlog even though it's mid-single digits growth, the character of it from a profitability perspective is quite different than that you would thought a year ago, or you would have seen it a year ago.

If I could just add even more color because we're very pleased with what we're seeing there, if you think about backlog for all of the PMT up double digit, think about order rates for PMT for Q2 up north of 20%. And the best part Q3 outlook, high single digit outlook for order rate. So, we’re really, really pleased how that business is performing and this is going to get maintain and that time momentum is out there for us.

Thanks, and just a quick unrelated follow up, on the [indiscernible] weakness, Tom it just sounds like it's been a lingering issue for a long time but it sounds like things have gotten worse on the OE side? Any color there would be appreciated.

No, I mean, when you look to go back 18 months or couple of years, you're seeing heavy double-digit declines on the DGA OE, remember in the fourth quarter we're --second half we’re down over 30% on the OE side. Those declines have moderated, was mid-single digit decline in the second quarter for the BGA OE business and we kind to expected to moderate around that. I mean the orders can be a little bit lumpy and the timing doesn’t necessary correlate to what our customers would report for their shipments. But I'm not going to say we've seen the bottom but the rates have declined are significantly less than what they were a year ago.

We will now move to Andrew Kaplowitz of Citi. Andrew Kaplowitz : You did make an acquisition in Q2 but acquisition activity has still been relatively quiet and you’ve talked about valuations in the past being pretty high and maybe waiting for tax reform. Do you expect to have a big ramp up in M&A activity in the second half of this year and if not, do you end up buying that more stock? I mean how should we look at capital allocation in the second half of the year?

All right I would say that the pipeline is very active and probably has three to five things we're looking at very, very seriously. But, we're going to continue to be cautious buyers and I think part of it is just the discipline around purchase price, there is certainly things out there that we're very interested in but sales have to come at the right price. So hopefully, I cannot guarantee what will happen, but hopefully will have some additions to the portfolio in the second half, we certainly have some interesting properties that we’re closely examining. But it also has to happen at the right price, so we will see what happens and we're not -- I think the tax environment regime, I think there is more uncertainty in that now than may be even before, so I can't let that sort of rule the business and I'm not going to hold that up, I've indicated before we have a slight reference for overseas M&A, versus domestic, but certainly we'll look at anything. So, we'll see what happens. And then in terms of share buyback as I indicated depending upon what happens on the M&A front and we’re going to be looking to add as a lever as well. But I'm not sure we really exhaust those possibilities first and I'm still hoping we will have a little more clarity on the tax front, maybe even before the end of this quarter.

And Andy just to add for a little bit of dollar on that, you remember Gary has said at the Investor Day that from a capital allocation perspective, U.S. we would look to deploy $5 billion this year, between dividends, share buybacks, and M&A. The dividend is more or less understood to be about 2 out of that 5, that means $3 billion between share buybacks and M&A. So far, we done about $1 billion of share buyback and so we’ve got a couple of billion less and Gary says we are going to watch that. So, that’s the $5 billion in the U.S. outside the U.S. and as we said at a time there is close to $10 billion of capacity is ready to be put to use immediately, let alone excluding even the leveraging capability. So, I think we are on track on both fronts but I don’t think there is an impending rush of deal that you are going to see after we get off this call. So, we’ll keep you guys in the loop. Andrew Kaplowitz : All right. Thanks for that, guys. I mean there is commentary around your productivity products business suggest that and maybe your new product rollouts there have been maybe slower than you thought or at least not quite as effective. Can you talk about your confidence level on turning around that business as you turn the portfolio here?

Yes, I think the one thing that’s important as you think about SPS, I think it's important to put in context where the issue is, the issue is in one business and one segment of the business called mobility and it’s even more regional than that which is called North America. As I pointed out, the issue on the last call which is you know sort of our array of products in the Android, at the Android operating system, frankly we’re not, where we need to be in terms of our range and offering. We did launch a good product in Q2 which will help I don’t think it’s the full solution. The team has very robust launch plans, but frankly those won’t happen until about Q4 of this year. So, we’re expecting some improvement in the second half but really full improvement will really happen in 2018 as all those products come to the market. Although, I will say, we are encouraged by the product launch that they did in May, we don’t really have a lot of that revenue yet generated from those offerings. Andrew Kaplowitz : Thanks, guys.

And now we will go to Andrew Obin of Bank of America Merrill Lynch.

Good morning, good to see a little bit of green on my screen today. Just a follow up question on China, is the mix in China changing, because historically my understanding is that China was more profitable, but you have been talking about a big push in consumer area in China. Is that something that is impacting margin?

China is still very attractive and very profitable. The product segments that happen to do especially in HPT this quarter was sort of a mix which is -- we mentioned slightly delimited with the overall HPT rate. But overall, we are very, very pleased with the China profitability and overall on a Honeywell basis, it compares to our overall margins and where we are seeing the kind of growth we are seeing, that’s a great thing for us and we are very bullish there and I think, if I could point to a market that I was extraordinarily pleased with in Q2, that would be it, our China growth was spectacular.

Yeah just to accentuate that a little bit, the GDP -- whatever the right GDP is for China say its 7%, I mean every one of our business was well north of that. Aerospace is doing fantastic on the [indiscernible] side, TS has got new launches taking advantage of the quality opportunity with their HPT and a lot of new products particularly air and water up double digit, safety and productivity up double digit, and PMT up double digit, I mean you'll see HPS in fact all of them were just outstanding in China. We get more momentum there, and we leverage the capacity and we have from a production perspective the profitability continues to grow. And it's already very healthy.

And China and his team have always had a very and I think Honeywell have always have a very sophisticated view of China. We're getting a lot of questions from investors about Chinese growth after this big party congress they're going to have in October, November. What are your guys sort of framework for growth in the first half of 2018? Some people tell us growth will slow down, some people tell us they'll try to save face and so the new team will see good growth as well. What are your insights?

Yeah obviously it's very important for the Chinese economy to do pretty well until that November timeframe. But overall, we continue to be bullish on China. I think whether this pace is maintained or something slightly lower than that, I don't think that changes our calculus as it relates to China because we expect growth there to be both five times what it is in some of our DM markets. And we're showing those kinds of numbers. And by the way, as Tom talked double digits, its not10%, I think as a number that's well 2X times that number. So, we have the right momentum, we have the right presence, we're very comfortable with our strategies in terms of what we're doing [indiscernible]. and I still think it's maybe early innings for us in terms of building out our China business and actually using it more as a hub for a lot of the other economies. So, I continue to be optimistic whether it's going to get better or slightly worse. The business changed our investment profile and our bullishness overall on the market.

And now we'll take a question from Julian Mitchell of Credit Suisse.

Hi, good morning. Just a first question around the transport piece within aerospace. The growth there was around 1% or 2% in the first half. I think just in commercial vehicles recovering a bit, but the automotive side maybe softening. So maybe talk a little bit about what you're seeing in automotive specifically, how you think that plays out in the second half. And how you're thinking more broadly about the growth outlook for transport?

Yeah. Have to about automotive. Again, automotive grew, that business grew for us this past quarter. It was bit of an interesting mix, diesel was down and was down high single digits, but more than offset by growth in gasoline, growth in commercial vehicles and high growth regions really, really pick off. I talked about China again, but again a great story, you talk about double digit growth in China. We grew over 40% there, in Q2. So, a really nice growth rate and we're really well positioned globally, so even though some of our markets in U.S. and Europe were down slightly they were more than offset by our presence and our growth in HGR, so really nice positioning of that business and we continue to be very, very bullish on its outlook. Even a country like Brazil grew well double digit, so nice story.

The other thing I would add to that, Julian is the -- some of this is just timing related as we complete platforms or our customer are OE customers, discontinued platforms that we're on, that can have a short-term impact on rates and we've seen a couple of platforms that come to completion in the second quarter but as you know our win rates, our new platforms for the business has been in an all-time high, I mean we think we're pushing 50% of the win rate on new platform. So that will start to come through as well, so I wouldn’t read into the 1% as indication of any challenge, we're in pretty good shape on transportation.

Understood thank you, and then my second quarter was really beyond SPS and sort of the platform outlook there within warehouse automation and logistics specifically. You had Intelligrated now within the portfolio of the nine months or so. You think you're in a position now having integrated it well today to further M&A in that warehouse arena or you are pretty satisfied with the market share and the offering you have right now.

We certainly like the space, if there is the right acquisition there, we have we certainly look at it, it's an interesting market for us, we do have a strong presence between our scanning and mobility business, between Intelligrated, even our industrial safety and safety gears as that we sell into that market although together and create a very coherent and valuable proposition for our customers. But certainly, look at some other segments, there is something of interest there, so we will see what happens.

I think the warehouse automation space is going to be really nice one for us to continue to invest. And you got the building blocks but there are lot of both agencies geographically as well as software wise that really, we can enhance the model with. So, we're excited by what we're seeing.

We will now take a question from John Inch of Deutsche Bank. John Inch : Is there a way to qualify and may be quantify possibly the impact of sort of relatively stable crude prices here, do you guys have a decent amount of direct and indirect exposures and I'm just curious if, how Tom and Darius you would think about that or articulate that?

There is a lot of directional movement, one-minute U.S. inventory was down and you know today not such good news there is talk about Saudi holding back production, every day there seems to be sort of a different data point which has an impact on oil prices. But you know the punch line for us is that, something north of 40 and if we get some stability like we've had then things are fine, if price of oil drops below 40 and stays there for a bit that would concern me. You know we’ll see what happens, there’s is a lot of moving pieces between continued expansion of the U.S. shale production, between what OPAC is going to do with, what’s Libya and Nigeria, what are they producing, what’s Iran going to do. So, there is a lot of moving pieces here, it’s hard to say for exactly what decisions are going to be made. I think this next OPAC is going to be very, very important one, in which case we can set some directionality. But overall as of right now and as you can see from our order rates for both HPS and UOP, the market is good and the activity is very good, very good second quarter and we are bullish on the third quarter as well.

I think those portfolios have proven to be fairly resistant to massive movement in the oil prices. And what I mean by that is, if you look at what the nature of where we participate, I mean we are in the midstream and downstream, all of exclusively in the downstream for UOP so refining and petrochemicals. I mean those are areas that stood up very well, in the when oil was down at all-time low. HPS a little bit more midstream, but still I think the positioning of our portfolio makes them fairly resistant, I mean not immune, not trying to put that out there, but [indiscernible]. John Inch : Yeas, and Tom you went through them when oil was crashing right, you went through a fairly elaborate exercise to sort of basically pitch for the resilience of portfolio, I’m just trying to understand we had semi-reasonably stable oil prices and we’re seeing some sort of net tailwind that maybe if oil stays here anniversaries next year so the benefit you’re getting this year maybe dissipates a little next year. I don’t know, I’m just trying to put this into a context, that’s all?

Yes, I mean I would see that where the markets comeback this year, it’s unquestionable, but I don’t think it’s come back in a big kind of fashion, I would say the HPS and UOP teams are just doing very, very well in terms of their performance. I mean the kind of booking rates that they’re getting and we’re seeing, I haven’t seen for anybody else, so I am very pleased with how they're performing but I definitely think that provided the oil price stay stable or maybe upticks there could be a bit more tailwinds here to come. So, I’m optimistic and the pipeline that we have in terms of our [indiscernible] makes me optimistic. Now that could change, but right now, I’m fairly bullish on the market. John Inch : Yes, makes sense. So, then just as a follow-up Darius the portfolio review, are we still, no one has asked about it, you didn’t really talk about in your prepared remarks. Are on track for some sort of a presentation announcement, I think you said by this summer, and I just want to clarify, it's not going to be in the last week of August is it, I mean by summer do you mean, when you get back from Labor Day?

I just want to make sure everybody is on holiday. We are still targeting what I said was late summer, early fall, we are very much tracking to that and that’s what I anticipate to have some further clarity here on the portfolio. John Inch : Right, so don’t change the date and time just yet.

No, I think it stays the last week of August. Relax, the beach is nice.

And for one final question that will from Gautam Khanna of Cowen & Company.

Yes, thank you. Many of my questions have been answered. But I did want to ask at Paris Air Show and over the last couple of quarters, Boeing has talked a lot about penetrating the service business and they cited avionics as one of the areas that they're trying to get more share of in the aftermarket. And I just wanted to get your opinion on what form do you think this take, so this is more of an opportunity or is it a risk for Honeywell longer term? And how do you guys approach this potential change in the marketplace?

Yeah. I'm not really sure yet, because we haven't seen some of those planes, yet we're allowed by Boeing. Boeing is a very well respected within the Honeywell as a customer, partner of Boeing, a number of things, they're great customer and we're going to do whatever we need to do to support them as a customer. In terms of exactly what's going to happen and how they're going to be going after their services business I think that's yet to be find out. So, to me there isn’t that clear whether it's an opportunity or a threat. I will tell you that our connected aircraft which I think is something about [ph] to Boeing and a lot of the other OEMs. It's something that's picking up pace very, very quickly. I talked about the connected ATU in my opening and that's giving tremendous traction of customers. And by the way that's only the beginning in terms of our offerings for connected aircraft. We have many, many more coming. So, I think that that's complementary towards Boeing -- and some of the OEMs. So overall, I'm very positive on our continued strong relationship with Boeing going forward.

Ladies and gentlemen that concludes today's Question-and-Answer Session. At this time, we like to turn the conference back to Mr. Darius Adamczyk for any additional or closing comments.

Thank you. The second quarter was another strong one for us with strong organic growth, margin expansion and continued free cash flow momentum which is up nearly 40% on a year-over-year basis. And we're able to undertake some sizable restructuring projects that will benefit our future performance. It was not a perfect quarter and we have several opportunities that are well within our control to improve. There is a lot more upside for Honeywell and we'll continue our focus on improving organic growth, maintaining our productivity vigor, becoming a best-in-class software industrial company and aggressively deploying capital. We also remain committed to investing in our future and we're looking forward to sharing more great results in October. On behalf of the entire Honeywell team we wish you a pleasant and relaxing summer.

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