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Honeywell International Inc. (NYSE:HON)
Q3 2018 Earnings Conference Call
Oct. 19, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to Honeywell's third quarter earnings conference call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press *1 on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing *2. Lastly, if you would require operator assistance, please press *0. 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.

Mark Macaluso -- Vice President of Investor Relations

Thanks, Derek. Good morning and welcome to Honeywell's third quarter 2018 earnings conference call. With me here today are 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 at 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 identified any 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 spinoff of our Home and Transportation Systems businesses, and U.S. tax legislation, except where otherwise noted.

This morning, we will 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.

Darius Adamczyk -- Chairman and Chief Executive Officer

Thank you, Mark, and good morning, everyone. This has been a very exciting quarter for Honeywell. In August, we raised our full-year earning outlook by an additional $0.05, the fourth increase in 2018 driven by continued momentum throughout the portfolio. We completed the spinoff of Garrett Motion on October 1st, 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, a 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 largely by strong operational performance. We drew organic sales 7%, with 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 an inflationary environment, was relentless this quarter. We generated 70 basis points 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 restructuring. We'll 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, were generated $1.8 billion of adjusted free cash flow, up 51% year-over-year, excluding separation costs. Conversion this quarter was 119%, well above our long-term target. I'm particularly pleased with the progress we've seen, and am confident there is more to come as we enhance our capabilities through the employed of HOS goals. We are focused on improving working capital management at every level of the organization.

Lastly, as we've done throughout the year, we continued to execute our aggressive and disciplined capital deployment strategy, committing more than $4.5 billion to share repurchases, dividends, and acquisitions through the third quarter. That number includes the dividend paid to date, the Transnorm acquisition, and approximately $600 million in share repurchases in the third quarter. The pullback in the stock in the first half of October allowed for additional repurchases of Honeywell shares into the fourth quarter at attractive levels. As you saw, we increased our dividend by 10% in September, which is the ninth double-digit increase since 2010.

Our end markets continue to be strong, and we have a simpler, more focused portfolio following completion of the spins. As I said last quarter, we continue to execute well, as evidence by our sales margin and the cash performance, and we have significant balance sheet capacity to deploy. I continue to be encouraged by what I see in each of our businesses, and am excited for what I know will be a strong finish to 2018.

Let's turn to Slide 3 to highlight some of the recent exciting news in our businesses. In Aerospace, Gulf Air selected Honeywell's GoDirect efficiency software to reduce fuel costs and lower emissions across its entire 32-aircraft fleet. The software will provide Gulf Air with clear analysis and real-time insights that address all flight variables, allowing them to unlock savings beyond standard efficiency initiatives. Gulf Air adopts a growing list of airlines adopting GoDirect efficiency software, including Aer Lingus, British Airways, Etihad Airways, KLM, Lufthansa, and Turkish Airlines.

In Home and Building Technologies, Honeywell partnered with Dubai Properties to complete the installment of energy savings upgrade in all 11 Business Bay Executive Towers in Dubai. The project includes a fully digital building management system to moderate and control the towers' mechanical and electrical utilities, as well as fan coil units to integrate the software to provide visibility into electricity consumption. We anticipate the project will results in savings of 3.3 million kilowatt hours, or approximately $400,000 annually.

In Performance Materials and Technologies, Jizzakh Petroleum selected Honeywell UOP technologies for a new refinery capable of processing 5 million tons of crude oil per year. UOP will provide licensing and basic engineering design services that allow Jizzakh Petroleum to convert crude oil into high quality, clean-burning Euro V motor fuels. This is the 20th award for UOP's diesel hydrotreating technology and the 33rd award for its gasoline Unicracking technology in the last 10 years.

Earlier this month, we announced the acquisition of Transnorm, a privately held European warehouse automation solutions provider that specializes in curved conveyor systems that quickly and efficiently move products and packages for premium e-commerce and parcel delivery customers. Transnorm has an install base of 160,000 units, and a large and growing aftermarket parts and services business. The addition of Transnorm broadens Honeywell's Intelligrated product portfolio, and allows SPS to participate in the fast-growing European warehouse automation market, fueled by growth in e-commerce.

Clearly, a lot of exciting things are happening across the portfolio, as we head into the final quarter of the year. With that, I'd like to turn the call over to Greg, who will discuss our third quarter results in more detail.

Greg Lewis -- Senior Vice President and Chief Financial Officer

Thanks, Darius. 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 position, new product launches, and investments in commercial excellence 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 a $0.05 benefit from share repurchases, which resulted in a 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 were 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 consistent with the outlook we provided at the beginning of the quarter. All told, we delivered adjusted EPS of $2.03. This figure excludes the net impact of an approximate $1 billion favorable adjustment to the 4Q17 tax charge, and approximately $233 million in spin-related separation costs in the quarter. Those include $117 million of tax cost incurred in the restructuring of our various legal entities in preparation for the spinoffs. You'll find a bridge to 3Q18 adjusted earnings per share in the appendix of the presentation posted on our website.

Finally, we generated adjusted free cash flow in the third quarter of $1.8 billion, up 51% versus prior year. We continue to see marked improvements in this area, with stronger cash flows and better conversions enabled by a 0.6% turn improvement in working capital versus the prior year. This strong cash generation was most prominent in Materials Performance and Technologies and Safety and Productivity Solutions. Overall, another strong performance across the board consistent with our prior quarters.

I'm now on Slide 5 to review our segment results. The growth we saw in Aerospace last quarter continued, as we benefited our strong positions on winning platforms in a robust demand environment. We delivered sales growth of 10% on an organic basis. Commercial OE sales were up 19% organically, led by engines, avionics, and auxiliary power demand in business and general aviation, air transport deliveries on the Boeing 737, and Airbus A350, and lower customer incentives, which added roughly 1 point of organic growth to Aerospace in total for the quarter.

Defense and Space grew 14% organically, driven by U.S. DOD spares volume, robust centers and guidance systems demand, and higher volumes on key programs, including the F-35 and CH-47 Chinook. The Aerospace aftermarket grew 6% organically, primarily driven by strong airline demand and maintenance service program activity in business aviation. As a reminder, this was the last quarter that transportation systems, now a publicly traded company called Garrett Motion, contributed to our Aerospace business, and TS sales were up 7% organically in the quarter on continued growth in light vehicle gas turbos in North America and Europe, driven primarily by new launches.

Aerospace segment margins expanded 80 basis points, driven by higher defense and aftermarket volumes, commercial excellence, and lower year-over-year customer incentives. In Home and Building Technologies, organic sales growth was 3% for the quarter. Homes grew 5%, driven by continued strength in ADI global distribution, and residential thermal solutions rose in the Americas and Europe. Buildings grew organically 1%, driven by continued commercial fire product strength globally, demand for our Tridium building management platform and the connected buildings business, offset by declines in our air and water business, due to low demand for air purifying solutions in China.

HBT segment margins expanded 10 basis points, driven by commercial excellence and material and labor productivity, including benefits from previously funded and executed restructuring. This was largely offset by the impact of inflation and unfavorable mix. HBT did experience some short-term supply chain challenges and transition impacts related to the Resideo spinoff in the quarter. As you know, the Homes business was not a separate entity within HBT before the spin, and the separation, as expected, was complex, with some significant changes in our organization, our systems, and our manufacturing footprint. With the Resideo spinoff slated for October 29, we anticipate that we'll be able to address most of these challenges within the fourth quarter and get off to a good start in 2019.

In Performance Materials and Technologies, sales were up 4% on an organic basis, driven primarily by growth in advanced materials and process solutions. Organic sales growth in advanced materials of 6% was driven by a significant demand for Solstice, low global warming products. Process solution sales were up 4% organically, driven by continued demand in our short-cycle businesses, principally in software, field devices, and maintenance and migration services.

UOP sales were up 3% organically, driven primarily by growth in engineering and new catalyst units in China. PMT segment margins contracted as we previewed, driven by unfavorable mix in UOP, and we continue to expect that to turn around in 4Q, as we had previously communicated.

Finally, Safety and Productivity Solutions delivered another outstanding quarter, with organic sales up 12%, driven by broad-based growth across all lines of business. Intelligrated continues to outperform, growing consistently at double digits, driven by strong orders growth and major systems and a robust backlog of new wins fueled by growth in e-commerce. We saw continued demand for new Android-based mobility product offerings, as well as for service and scanning applications in the quarter. We also saw double-digit growth in our legacy sensing business. All in all, organic sales growth was 16% in our Productivity Solutions businesses.

Within the Safety business, organic growth was 6%, with strong demand for new gas and general safety products. Additionally, the SPS China and India business delivered another quarter of more than 20% growth in sales. Strong segment margin expansion of 150 basis points was enabled by commercial excellence, higher sales volumes, and productivity and repositioning benefits.

Now let's move on to Slide 6 to discuss our outlook for the fourth quarter. The fourth quarter preview reflects the absence of Transportation Systems for the entire quarter, and the anticipated completion of the Homes spin by the end of October. So only one month of operating results for Homes is included in our guide. You will see this reflected in the updated full-year outlook as well.

Throughout the year, we have seen strong long-cycle order rates and a growing backlog, which in combination with our short-cycle momentum, we expect will generate 5% to 6% organic sales growth in the quarter. We expect that segment margins will expand between 60 to 80 basis points, reflecting a quarter-over-quarter and year-over-year margin improvement in PMT and SPS, as well as margin accretion from the absence of our two spun businesses.

We anticipate adjusted earnings per share of $1.85 to $1.90, which excludes the segment profit contribution net of tax from Garrett for the full quarter, and Resideo for two months, as I mentioned. It includes the benefit of the indemnification agreements we have with both companies. Removing the after-tax segment profit contributions from the spins in both periods, fourth quarter EPS adjusted is expected to be 17% to 20% up.

Expected EPS growth will primarily by driven by strong segment profit growth. Other key elements include lower share count due to the more than $2 billion in share repurchases we have done through the third quarter, and higher pension income, offset partially by a higher effective tax rate for the quarter at approximately 22%.

This outlook incorporates our estimate of the tariff impact for what is enacted and known as of today. We continue to work those plans to address the impact, if any, from any potential tariffs that have been discussed but not enacted.

Turning to the segments. We expect continued strength in Aero Commercial OE, in both air transport and business aviation, and in the aftermarket driven by flight hours growth. We continue to expect mid-single-digit aftermarket growth in the fourth quarter, and we expect that the momentum we have seen in defense will continue, driven by demand for sensing and guidance systems, and spares volume into U.S. Department of Defense programs. This is supported by orders growth of more than 40% in the third quarter, and backlog growth of more than 30% as well.

Our outlook for Home and Building Technologies for the fourth quarter reflects only one month of operations from Homes, and a full quarter of the remaining Buildings businesses. We expect continued strength in Homes from ADI global distribution and home products in the month of October, and flattish growth in Buildings for the quarter. For Buildings, we anticipate continued strength in the fire business, where we have been growing mid- to high-single-digits, offset by slower energy conversions in building solutions, as we've discussed previously, as well as declines in China air and water. The team is launching new Buildings products, and we do expect growth to accelerate into 2019.

In Performance Materials and Technologies, we're anticipating healthy growth in each of our businesses, with UOP likely the strongest driver of demand across equipment, engineering, and catalyst. UOP's long-cycle backlog is up more than 10%. We expect continued short-cycle demand in process solutions software, and service offerings, a trend we have seen throughout 2018, supported by 11% orders growth in the third quarter.

In Advanced Materials, we expect continued strength from customer adoption of our Solstice low global warming products and fluorine products. Given the anticipated strength and refining catalyst reloads, coupled with continued strong margin expansion in process solutions and advanced materials, margins in PMT will be up sequentially and year-over-year in the fourth quarter, as we had mentioned previously.

Finally, in Safety and Productivity Solutions, the story remains robust in the fourth quarter. We anticipate broad-based strength across all of the businesses, led by Intelligrated Safety in China and India. We are really pleased with SPS' performance this year, and expect it to continue into 2019.

Now let's turn to Slide 7 to walk to the bridge to our full-year EPS guidance. Slide 7 presents a walk of the moving pieces in our earnings bridge for the full year. In August, we raised our guidance to $8.10 to $8.20, based primarily on a stronger outlook for the second half of the year, with a small contribution from our change in asbestos accounting.

With the performance in the third quarter of approximately $0.03 above our expectations and anticipated strength in the fourth quarter, we are raising the low and high end of our full-year guidance before consideration of the spins to an updated range of $8.22 to $8.27, which is a raise of about $0.10 at the midpoint. The expected dilution for three months of Garrett's earnings and expected two months of Resideo's earnings will be approximately $0.31. There is an approximate $0.04 contribution from the spinoff indemnification agreements related to Honeywell's legacy liabilities, which nets the spin impact to about $0.27.

As a reminder, on a go-forward basis beginning in the fourth quarter, 90% of the expenses net of recoveries related to the covered liabilities will be reimbursed by Garrett and Resideo. When we take into account the estimated dilution from the spins net of the indemnification agreement reimbursement, our new range of adjusted EPS is $7.95 to $8.00 per share. That equates to growth of 16% to 17% for the full year, removing the segment profit contributions from the spins in both periods. Our guidance continues to reflect a weighted average share count of 754 million shares, and an effective tax rate between 22% and 23%.

Now let's turn to Slide 8 to summarize the details of our full-year guidance. We have seen significant momentum throughout the year. On the left side of the page, you see the original guidance on our key measures, which we provided back in December. In the middle of the page is our latest guidance reflective of the strength in our end markets, three quarters of outperformance, and the dilutive impact from the fourth quarter spinoffs.

We now project organic growth of about 6% for the year, which is 2 points higher than the high end of our original guidance; a segment margin range of 50 to 60 basis points, which starts at the high end of our original range; adjusted EPS of $7.95 to $8.00 per share, which is $0.40 higher at the low end, and $0.20 higher at the high end of our original range; and adjusted free cash flow of $5.8 billion to $6.2 billion, which is substantially above our original projections and represents conversion between 97% and 103% for the year, all representing very robust performance.

The difference between our reported and organic sales growth is 3 points in our guidance. We anticipate an approximate 1-point impact from foreign currency translations, offset by an approximate 4-point impact from our two spinoffs.

On the segment guide, Aerospace and Home and Building Technologies reported sales figures have been revised to reflect the lost sales and segment profit from the spins. In Aerospace, we also narrowed our organic sales outlook to the high end of the range, based on the strong performance to date and our strong backlog. We have narrowed the PMT sales guidance to the midpoint of the previous range. PMT's margin guidance remains the same.

In SPS, we raised our organic sales guidance by 2 points on the high end to 10%, and raised the segment margin guidance to a new range of up 120 to 130 basis points, or 20 basis points improvement on the high end. This business has performed well all year long, and we expect a strong finish based on the order rates, the backlog, and the momentum in our short-cycle products businesses.

As you can see, our current guidance is significantly higher than our original guidance, and accounts for the 2018 solution from our two spinoffs in the fourth quarter. As Darius mentioned in his opening, we have delivered substantial operating results while executing a major portfolio change.

Now let's turn to Slide 9. We wanted to provide a little bit of preliminary framework for 2019, given all the moving parts with the spins, the liability indemnity, and other below-the-line items. First, starting with the macro environment, we feel very confident in the strength of our end market. We see continued demand in growing industries, including e-commerce, which we address with our warehouse automation offerings from Intelligrated, and soon to be Transnorm; commercial aviation, where we have a strong position on the right platforms that will lead to healthy aftermarket growth; defense, where we see robust budgets and clarity on defense spending for the year ahead; and process automation, where we expect to see an eventual pickup in large projects, coupled with continued demand for software and services.

As we said last quarter, we're proactively managing both the direct and indirect impacts from the Section 232 and Section 301 tariffs, and are making necessarily changes now for the additional tariffs enacted under List 3, as well as knock-on retaliatory impacts, if any. While we are hopeful there is ultimately a resolution to the situation, we're planning for the worst and making structural changes, including modifying some sources of supply, seeking alternative sources, and taking our commercial actions as necessary to position us for 2019 and beyond.

Given that, we continue to expect inflation to accelerate within the business, and we are working to minimize those impacts with the help of our procurement, marketing, and commercial excellence teams. We expect the impact to be minimal and manageable in 2018, as we've previously discussed, but now anticipate that the impact to 2019, prior to mitigation actions, will be significant. We have established a robust MOS across the company to ensure that we stay ahead of the situation though, and we'll continue to rigorously address any cost increases throughout our supply chain, and adjust prices as necessary. It is our expectation that we'll be able to effectively manage the situation, and still deliver strong results as we have done throughout 2018. Though as you know, this will put some pressure on margin rate expansion.

Moving on to our spinoffs. We estimated the total associated stranded costs to be approximately $340 million across the business, with more than 50% of these costs eliminated by the end of this year, and the balance eliminated in 2019. We feel very well about where we are in that regard. We have made very good progress, and we are managing this smartly. It's a big focus now that the spins are done. We expect that the full-year dilution on a go-forward basis from the two spins, net of the indemnity reimbursement, and excluding those remaining stranded costs will be approximately $0.90.

In terms of other preliminary figures for 2019, at our current level of buybacks, we are anticipating at least a 1% reduction in share count. Due to the measures we took earlier this year to de-risk our pension plan investment, pension income will be approximately $300 million lower year-over-year, and our funded status is expected to remain well above 100%.

Repositioning funding we expect to be approximately $325 million next year. Based on our planning for the fourth quarter and the repositioning we have funded to date in 2018, this represents an approximately $150 million decline year-over-year. We'll continue to take the opportunity to redeploy repositioning funding to improve our supply chain, optimize our fixed costs, and manage our remaining stranded cost reduction plan.

Finally, with the impact of the legacy liability indemnity reimbursements from our two spinoffs, we expect that asbestos and environmental will be lower by approximately $425 million. As a reminder, this reduction represents the 90% of expense that is covered by the indemnification agreement and is included in the $0.90 of dilution we mentioned earlier.

We will provide you with more details about our expected 2019 performance during our fourth quarter earnings report and 2019 outlook in January. Now with that, I'd like to turn the call back over to Darius, who will wrap up on Slide 10.

Darius Adamczyk -- Chairman and Chief Executive Officer

Thanks, Greg. The fourth quarter begins a new chapter for Honeywell. Our two spinoffs leave us in even stronger position with our more focused and growth-oriented portfolio in industry-leading businesses across attractive end markets. Each has multiple levers 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 free cash flow growth has exceeded 20% each quarter, and our free cash flow conversion has also improved significantly. We are rapidly approaching 100% conversion, as we demonstrated this quarter.

Our financial condition is best in class with a healthy balance sheet that provides us with significant capacity to deploy the 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 we are focused on continuing to outperform for our customers, our share owners, and our employees.

We are 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.

Mark Macaluso -- Vice President of Investor Relations

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

Questions and Answers:

Operator

Thank you. The floor is now open for questions. At this time, if you have a question or comment, please press *1 on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing *2. We ask that when you pose your question, please pick up your handset. Thank you. Our first question is coming from Nicole DeBlase with Deutsche Bank.

Nicole DeBlase -- Deutsche Bank -- Analyst

Yeah, thanks. Good morning, Darius and Greg.

Darius Adamczyk -- Chairman and Chief Executive Officer

Good morning.

Greg Lewis -- Senior Vice President and Chief Financial Officer

Good morning.

Nicole DeBlase -- Deutsche Bank -- Analyst

Maybe I'll start with a couple of higher-level questions. With the benefit of such a global business that you guys have touches many different end markets, maybe you could just talk through what you're seeing around the world, particularly with respect to emerging markets, since we're hearing some concerns from investors about potential project pushouts, slowdowns, and short-cycle activity, etc.?

Darius Adamczyk -- Chairman and Chief Executive Officer

I'll take that one. Certainly we're seeing a little bit of -- China has to be the highlight. Certainly Q3 was not as robust as some of the quarters that we saw in the first half. So, we did have some tougher comps that we expected. We had some challenges in our air and water business, which has been throughout the year. I'm not alarmed yet. But certainly Q3 was certainly slower in terms of growth. We grew the Chinese market, but not at the double-digit pace that we saw earlier in the year. So that's probably my No. 1 area to watch. I wouldn't say I'm concerned about it yet, but it's 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 probably at the other end of the spectrum we continue to be very bullish on the U.S. markets, and I expect that to continue. Then sort of the rest of the globe was a little bit of a mixed bag. 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 a focus for our business activities throughout the year. We see that coming back. Middle East was OK. India was a bit slower than we anticipated, but we expect a pretty good recovery in Q4.

All in all, that's certainly some puts and takes. Very encouraged by what we're seeing in North America, with a focus on China as we head into Q4.

Nicole DeBlase -- Deutsche Bank -- Analyst

Thanks, Darius. That was really comprehensive. 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? 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 earmarking for 2019?

Darius Adamczyk -- Chairman and Chief Executive Officer

Yeah, I think that's why we're very careful to pick our wording in the press release, which is that you should expect at least a 1% share count reduction. The 1% is roughly commensurate with the $3 billion that I already committed to. But you're spot on. Your comment is exactly right. That's the way we think about capital allocation. Depending on what happens in M&A, we'll potentially do buybacks. There are a couple things that we think we could get done and announce, maybe even possibly in Q4, probably not closing Q4. But I never really count the M&A transactions until they're signed and done.

I want to moderate 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 yeah, the framework you're thinking of is exactly the one we use, which is we toggle this between M&A and buyback. As I said, I would prefer M&A, but as I've said on multiple earnings calls now, it continues to be a challenging environment, and unfortunately, it's kind of becoming the new normal. Although we were thrilled to pick up the Transnorm acquisition, at I think an attractive entry point from a price point, 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 with just an outstanding business.

Nicole DeBlase -- Deutsche Bank -- Analyst

Thanks, Darius. I'll pass it on.

Darius Adamczyk -- Chairman and Chief Executive Officer

Thank you.

Operator

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

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Thank you. Good morning, everyone.

Darius Adamczyk -- Chairman and Chief Executive Officer

Good morning, Jeff.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

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?

Greg Lewis -- Senior Vice President and Chief Financial Officer

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 sub-period that we've 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. We've got both 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 the $0.31 is close to linear, but not exactly.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

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?

Greg Lewis -- Senior Vice President and Chief Financial Officer

No, the $0.90 is just simply the lost segment profit on 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 cost, which we feel good about our progress in terms of eliminating that so far, is not included in that number. We'll update you more on that as we get into the January guidance, and we finish the year out.

You can imagine that as we've 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 there'll be a lot of focus on that. But that is not in the $0.90 at this point in time.

In terms of the usage of the spin dividends, Darius talked about the capital deployment framework, and we'll utilize that as firepower for executing around that framework, but it is not precisely included in any way in that $0.90.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

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

Greg Lewis -- Senior Vice President and Chief Financial Officer

Yeah, 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 on the asbestos side, narco has nothing to do with that. So we have to take that out. But that's the warranty to think about it.

Mark Macaluso -- Vice President of Investor Relations

Jeff, this is Mark, if I could. Just to be clear, the caps, the $315 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 that 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 $315 million.

Greg Lewis -- Senior Vice President and Chief Financial Officer

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

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Great. Thank you very much, guys.

Greg Lewis -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Josh Pokrzywinski from Morgan Stanley.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Good morning, guys.

Darius Adamczyk -- Chairman and Chief Executive Officer

Good morning, Josh.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Just maybe to dig into PMT on a couple 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? Then a follow-up on that on some of the refinery comments.

Darius Adamczyk -- Chairman and Chief Executive Officer

It doesn't, because as you may recall, despite that ruling, there are quite a few states that are still adapting the HFO regulation and greenhouse 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 at the state level. 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. Again, obviously that's only a U.S. issue. What was your second question on PMT?

Josh Pokrzywinski -- Morgan Stanley -- Analyst

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

Darius Adamczyk -- Chairman and Chief Executive Officer

Specifically, refiners wait until the last moment. So a lot of that investment. So that's what sort of surprised us. We expect '19 to be a good year. But the numbers speak for themselves, with UOP backlog up double digits. That gives me a good sign. Strong booking rate. Sort of the margin challenges that were evident in Q3, we very much expected. We communicated those in Q3. 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 in UOP and what they're going to do.

Like I said, at the end of the day, I look at the numbers. When I see backlog up double digits like it is, I'm very encouraged as we head in 2019 and beyond.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Gotcha. 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, some P&L hit 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 spends and the moving pieces?

Greg Lewis -- Senior Vice President and Chief Financial Officer

Again, I think you should think about cash conversion next year as approaching 100%, even ex-spend. We feel like we're getting into that neighborhood this year. And with the continued opportunity that we do have in working capital, we've made really nice strides, as I highlighted. Six-tenths of a turn improvement year-over-year and this quarter in particular was sequentially better than last quarter by two- to three-tenths 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 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.

Darius Adamczyk -- Chairman and Chief Executive Officer

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

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Thanks for the detail. I'll pass it along.

Darius Adamczyk -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. We'll next move to Steve Tusa from J.P. Morgan.

Steve Tusa -- J.P. Morgan -- Analyst

Good morning.

Darius Adamczyk -- Chairman and Chief Executive Officer

Good morning, Steve.

Steve Tusa -- J.P. Morgan -- Analyst

Darius, I've never heard you this excited. It's a bit of a change. We would've expected it from Dave, but you've been a little more balanced [crosstalk].

Darius Adamczyk -- Chairman and Chief Executive Officer

If Michigan loses tomorrow, I could be more excited.

Steve Tusa -- J.P. Morgan -- Analyst

Just on the orders, you threw out defense, you threw out the HPS orders, Intelligrated, obviously. When you think about 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 list maybe a couple ones we didn't hear like UOP or something like that. What were total orders up for long-cycle businesses?

Darius Adamczyk -- Chairman and Chief Executive Officer

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

Steve Tusa -- J.P. Morgan -- Analyst

Okay. Then just kind of attacking the base question in a little bit of a different way. Again, this is merely math on actuals. Just using the kind of prior Aero guide of about $3.7 billion and stripping out a $500 million number last 9 months or for the year for transpo gets to me around $3.1 million. Is that the right Aero pro forma, roughly? That's just basic math on what you guys have already given.

Greg Lewis -- Senior Vice President and Chief Financial Officer

I think you're in the neighborhood, yeah. I think you're in the neighborhood.

Steve Tusa -- J.P. Morgan -- Analyst

Okay. Then just for HBT, similar math gets me to around 1.1 type of number. Does that sound right?

Greg Lewis -- Senior Vice President and Chief Financial Officer

Let us check that one and make sure that one's obviously a little bit less precise, given the Homes/Buildings split, but we'll come back to you on that one particularly.

Steve Tusa -- J.P. Morgan -- Analyst

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

Darius Adamczyk -- Chairman and Chief Executive Officer

Yeah, I don't know if there's 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 commensurate with a slightly smaller Honeywell. But we still have, as you recall back to EPG, one of the things we have plenty of runway for and what Torsten's No. 1 mission are, and you had an 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.

It's a fairly substantial change in terms of the cost structure of Honeywell by (a) reducing it, and (b) 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 it's still going to be elevated at the levels we projected for '19 and probably for '20, and probably after that come down a bit more as we get some of that heavy lifting done. That's the way to frame it up and think about it.

Steve Tusa -- J.P. Morgan -- Analyst

Okay. Thanks a lot for the color.

Darius Adamczyk -- Chairman and Chief Executive Officer

Thanks.

Operator

Thank you. We'll next go to Scott Davis with Melius Research. Please go ahead.

Scott Davis -- Melius Research -- Analyst

Hi, good morning, guys.

Greg Lewis -- Senior Vice President and Chief Financial Officer

Good morning, Scott.

Scott Davis -- Melius Research -- Analyst

It's not much to pick on for sure, but one of the things that was thrown out there when you were doing the spins was potentially doing Buildings with the rezi business and you didn't, you kept Buildings. But what gets you excited about Buildings turning? This has long been really a, I don't know, kind of a 3%-ish 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 that. So give us kind of a sales pitch, if you will, on why you kept that business?

Darius Adamczyk -- Chairman and Chief Executive Officer

First of all, let's start with connected buildings. I think our technology offering in connected buildings is maybe further along than any of the other connected. We have ready-to-go technology that we're currently offering and selling. You heard an example of that in our pitch this morning. I'm very excited that we really need to be much more community savvy to really clearly explain to our customers what that will do for in their building in terms of energy consumption, comfort, security, wellbeing of the occupants and so on. So I'm very excited about that technology.

It's not futuristic; it's here now. I think we've got to get through the commercial challenges that we're facing. No. 2, the market dynamics between the rezi 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 is I think we also have to remember that we created this Homes P&L from scratch. Think about this Scott. We did more than 20 manufacturing transitions in the course of a year. If I didn't have that kind of hard debt lines, and we're going to get this done in a year, that probably would've taken three. So that team has done a tremendous job in executing that kind of heavy lift. I think they've performed pretty well, given that kind of a distraction.

Now that's basically behind them, I'm going to moderate and I'm going to continue to be optimistic about what we're doing. I was with Vimal Kapur and his team earlier this week, and they've got their hand on the pulse and I think that could be a very successful business for us.

Scott Davis -- Melius Research -- Analyst

Fair enough. Transnorm seems interesting, but I don't know the company very well. Can you just give us a little sense of what, other than the installed base that you're getting, what you're getting from a standpoint of technology and is that something that you can, the synergies at least with Intelligrated, is that something you can make more Intelligrated to Europe and more Transnorm to the U.S.? Or does it not work that way?

Darius Adamczyk -- Chairman and Chief Executive Officer

No, it does work that way. In fact, Intelligrated was a customer of Transnorm, so we know the product. It is IP protected. It is actually technology differentiated. It has a high aftermarket and services component, which I always look for in any business. It has a very enviable position in Europe. Frankly, I was looking for beachhead to land in Europe in Intelligrated. We've been spending a lot of organic dollars, what I call just part of their R&D and sales and commercial buildout to have a broader presence in Europe.

Our U.S. customers have been asking us to really have a broader presence in Europe. 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 at what I view as a very appealing price in this kind of a market environment that we're in with differentiated technology and IP protection. I'm thrilled. As you know, Scott, I really like the warehouse automation space.

Scott Davis -- Melius Research -- Analyst

We do as well. Well, good luck, guys. Thank you.

Darius Adamczyk -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Andrew Kaplowitz from Citi.

Andrew Kaplowitz -- Citigroup Global Markets -- Analyst

Good morning, guys.

Darius Adamczyk -- Chairman and Chief Executive Officer

Good morning.

Andrew Kaplowitz -- Citigroup Global Markets -- Analyst

Darius, Aerospace has continued to strengthen here this cycle. Obviously, you do have more difficult comparisons in '19, but it's hard not to notice the momentum that Honeywell has, given its share on new business jet platforms that are coming to the market. You've talked about connectivity, the sense obviously strong. As you look at the continued product in '19, does it seem like the visibility here toward call it above-normal cycle growth in Aero is higher than usual in '19 and maybe beyond?

Darius Adamczyk -- Chairman and Chief Executive Officer

Yeah, we continue thought be bullish in Aero. As you look at our backlog position, there's no reason not to be. But your initial point is right too, which is our comps get a little bit tougher given the kind of growth rates that we've 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 (1) the growth in the business jet market. That hasn't been a high performer for quite a while. Now it's starting to really pop as a lot of the new platforms are being introduced into the marketplace; and (2) the used equipment inventory is down. It's down substantially, which is always a good sign in terms of new equipment sales.

And then defense and space. Defense continues to be very strong. We don't think that's going to change as we head into 2019. Potentially there could be a slight down arrow in terms of OE momentum. I don't really expect that to be the case, that may be 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 talk about, which is the commercial, the business jet, and defense, are all pointing either strongly up or up. 2019 looks very promising based on what we're seeing today.

Andrew Kaplowitz -- Citigroup Global Markets -- Analyst

Thanks. That's helpful. Maybe Darius or Greg, you mentioned the tariff impacts so far have been manageable. You continue to work to mitigate all the tariff impacts. But maybe you could elaborate in your comments? I think Greg, you said that tariff impacts in '19 could impact margin. How much more ability do you have to price increasing tariffs? You talked about changes that you might make. You talked about looking at your supply chain. Maybe more color there, if possible?

Greg Lewis -- Senior Vice President and Chief Financial Officer

Sure. In our last discussions, we talked about the fact that what we're seeing in 2018 in terms of pressure was in the tens of millions of dollars. 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. Hundreds of millions of dollars. We still feel good about our ability to price in the market. We've been successful and continue to take aggressive approaches in that regard.

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. 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 8 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 costs 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 that inflationary environment with pricing turns into a margin expansion challenge on the up side.

Darius Adamczyk -- Chairman and Chief Executive Officer

Andy, if I could just add, I think there's still a lot of unknowns. I mean, you have List 3, which potentially that rate goes up at the end of the year. Then you have a potential List 4, with timing which isn't particularly clear. There's a lot of unknowns here. We're working through all the knowns. I feel very confident in the process that we're building. 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, and timing. We're prepared. We're ready to act. We're trying to mitigate the best we can.

Andrew Kaplowitz -- Citigroup Global Markets -- Analyst

Thanks, guys. Appreciate it.

Darius Adamczyk -- Chairman and Chief Executive Officer

Thanks, Andy.

Operator

Thank you. Our next question comes from Sheila Kahyaoglu from Jefferies.

Sheila Kahyaoglu -- Jefferies -- Analyst

Hi, good morning and thanks for taking my question.

Darius Adamczyk -- Chairman and Chief Executive Officer

Good morning.

Sheila Kahyaoglu -- Jefferies -- Analyst

Darius, it seems you're building a very focused aerospace company, but maybe in a more measured manner. I'm just looking at Aerospace post-Garrett. It looks to be somewhat accretive to margin and maybe eliminates a 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 risk?

Darius Adamczyk -- Chairman and Chief Executive Officer

The Aerospace group has been very good at a couple things, especially in the last couple of years. No. 1 is they certainly continue to drive productivity and becoming much more efficient. There's a high level of expertise in terms of what they can accomplish. I think they're far from done, so there's further opportunity to do that. No. 2 is they're much more installed-base focused in terms of the upgrades, enhancements, software enhancements and so on. Obviously continue to build accretion to the margin rate. Overall, I like how the team is executing.

They've won a lot. They've had a lot of great wins on a lot of different platforms, and the execution is strong. I particularly like the progress on the commercial side of the business. Connected aircraft continues to be a very big opportunity, which we materialize. Longer term, I pointed this out, we look for a 25+ kind of a margin rate. We think that's very possible in that business. We're going to continue to march forward as Tim and the team make progress there.

Sheila Kahyaoglu -- Jefferies -- Analyst

Thank you.

Darius Adamczyk -- Chairman and Chief Executive Officer

Thank you.

Operator

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

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Yes, good morning.

Greg Lewis -- Senior Vice President and Chief Financial Officer

Good morning, Andrew.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

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

Darius Adamczyk -- Chairman and Chief Executive Officer

Very good point. It's been a while. But it's interesting how the global markets are evolving right now. 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.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

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 a shortage of engineers. They're sort of at the limit, not really able to take more projects. Are we seeing contagion from China in high-growth regions? Just a follow-up question.

Darius Adamczyk -- Chairman and Chief Executive Officer

I'm very encouraged and thrilled to see the kind of GDP growth rate 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. Obviously, U.S. has increased its rate. So our high-growth focused strategy I think is still spot on and needs to be. 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'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 mindset for the local markets, both from R&D, manufacturing, sales, marketing, all these perspectives. Now as we restructure and look 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 growth in the U.S., we're obviously going to continue to invest in increasing 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.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

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

Darius Adamczyk -- Chairman and Chief Executive Officer

I think it can. No. 1 is sort of the business profile and the timing of payments, particularly for our projects business. They are very favorable. No. 2, 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 into standardizing some of our terms and conditions. That's been, frankly I would say it hasn't been the cleanest structure that we had, and now we're really standardizing and cleaning that up. It's generating benefits. It's not just for SPS. 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.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Thank you very much.

Darius Adamczyk -- Chairman and Chief Executive Officer

Thanks.

Operator

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

Nigel Coe -- Wolfe Research -- Analyst

Thanks, good morning. Thanks for going long and fitting us in here. This is great. More of a comment than a question. You've got to [inaudible] price this quarter. You seem like you're in good shape to manage the extra inflationary pressure from tariffs. But you're the only one for whom potential List 4 of the companies they're at so far, so I'm wondering, are you working on the basic assumption that the 25% that was in place in January and we've got List 4, and are you taking pre-emptive actions to anticipate and get ahead of those potentials?

Darius Adamczyk -- Chairman and Chief Executive Officer

Yeah, the short answer is yes. We are getting ready. I'm not saying we're necessarily pulling the trigger on all those actions. But I think you always, the way we think about things is 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. We're assuming that will happen. Frankly, we think that's probably obviously increasing as more times go by. We have to be ready. 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 or most of that impact.

Nigel Coe -- Wolfe Research -- Analyst

Okay. Then a quick follow-on. Going back to free cash flow because to my mind, that was the real highlight in a great quarter. You call out SPS and PMT as particularly strong contributors to cash. Is that because Aero and HBT were with the spins weren't producing quite as good conversion? Or as it some catch-up here? And maybe any commentary in terms of free cash conversion by business would be helpful.

Darius Adamczyk -- Chairman and Chief Executive Officer

Yeah, I'll start and maybe turn it over. I think you nailed it, Nigel. From an HBT perspective, when you have to do two spins and you have to do this many transitions, there is some level of inefficiency, particularly in the inventory situation because we're doing a lot of plant separations and so on. As I stated before, I think the team has done just an incredible job to get us ready.

Aero, they've 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's probably further gains to be made there. But they've done really a nice job. Then SPS has been tremendous across the board, whether we talk about all three elements of working capital, advances, and so on. Then PMT really picking up the pace, particularly on receivables. They've had a lot of past-dues that are now coming in. Really nice momentum and building into Q4. We think there's even more upside there.

Greg Lewis -- Senior Vice President and Chief Financial Officer

Aero is up, so they had a good performance too. I think they just had a head start in terms of the disciplined aspect that Darius talked about with things like terms and so on. In many ways, we're actually modeling a lot of the Aerospace processes and behaviors in 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 this cash flow quite nicely also.

Nigel Coe -- Wolfe Research -- Analyst

Great, perfect.

Operator

Our final question today is from Julian Mitchell from Barclays. Please go ahead.

Julian Mitchell -- Barclays -- Analyst

Thanks very much. Maybe just a quick question on HPS. I think in process you talked a little about the strength still being short-cycle driven. Just wondered what you're seeing in terms of green field projects, large orders? There's obviously some movement in the L&G area, but maybe some offsets from macro uncertainty on large projects in general. Maybe just how you see the green field demand?

Darius Adamczyk -- Chairman and Chief Executive Officer

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

Julian Mitchell -- Barclays -- Analyst

Thank you. Then my last one would just be around Buildings. You talked about the expectation of an improvement in growth there in '19 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 do you think the run rate of investments is sufficient right now?

Darius Adamczyk -- Chairman and Chief Executive Officer

I think on R&D, I would say it's not necessarily a need to increase the R&D level, but really to streamline and optimize that investment around things that really matter. I think that there's frankly, there's 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 things that move the needle and not the incrementalism, which require a lot of investment but really don't generate great returns. I think it's certainly an area of opportunity.

But I think some of the really high-performing businesses like fire, which have continued to do very well, it's not all bad news. I think there are a lot of good things going at the Buildings part of the portfolio already. But certainly like in any large business, there's a couple things we also need to improve. So I'm very confident the team is going to get it done.

Greg Lewis -- Senior Vice President and Chief Financial Officer

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 in the areas Darius highlighted. We feel very good about the end market and our position there. It should be good.

Darius Adamczyk -- Chairman and Chief Executive Officer

Just to echo what Greg said. I think we all probably underestimated the amount of time and 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. I'm thrilled with the execution that the team has exhibited.

Greg Lewis -- Senior Vice President and Chief Financial Officer

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

Julian Mitchell -- Barclays -- Analyst

Perfect. Thank you.

Darius Adamczyk -- Chairman and Chief Executive Officer

Thanks.

Operator

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

Darius Adamczyk -- Chairman and Chief Executive Officer

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 and great heritage, and I'm confident both will be very successful. We look forward to watching their accomplishments as new public companies.

I have full confidence that the strong performance Honeywell delivered for our share owners in the first three quarters of 2018 will continue through the year end. Our order rates are strong, our backlogs are growing, we are realizing the benefits of our continued efforts to drive software and connect at growth, productivity, commercial excellence, and improved 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.

Operator

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

Duration: 70 minutes

Call participants:

Darius Adamczyk -- Chairman and Chief Executive Officer

Greg Lewis -- Senior Vice President and Chief Financial Officer

Nicole DeBlase -- Deutsche Bank -- Analyst

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Steve Tusa -- J.P. Morgan -- Analyst

Scott Davis -- Melius Research -- Analyst

Andrew Kaplowitz -- Citigroup Global Markets -- Analyst

Sheila Kahyaoglu -- Jefferies -- Analyst

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

Julian Mitchell -- Barclays -- Analyst

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