Honeywell International (HON) Earnings Report: Q4 2014...
Transcript of Honeywell International (HON) Earnings Report: Q4 2014...
CompanyName:HoneywellInternat ionalIncCompanyTicker:HONSector:Indust rialGoods
Industry:Indust rialEventDescription:Q4 2014 EarningsCall
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HoneywellInternational(HON)EarningsReport:Q42014ConferenceCallTranscriptThefollowingHoneywellInternationalconferencecalltookplaceonJanuary23,2015,09:30AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
MarkMacaluso;Honeywell;VP-IRDaveCote;Honeywell;Chairman,CEOTomSzlosek;Honeywell;CEO
OtherPart icipants
SteveWinoker;Bernstein;AnalystScottDavis;Berkeley;AnalystJeffreySprague;VerticalResearch;AnalystStephenTusa;JPMorgan;AnalystNigelCoe;MorganStanley;AnalystJoeRitchie;GoldmanSachs;AnalystChristopherGlynn;Oppenheimer;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator:
GooddayladiesandgentlemenwelcometoHoneywell'sfourth-quarter2014earningsconferencecall.
(OperatorInstructions)
Asareminder,thisconferenceisbeingrecorded,andIwouldnowliketointroduceyourhostfortoday'sconference,Mr.MarkMacaluso,VicePresidentofInvestorRelations.
MarkMacaluso (VP-IR):
Thankyou,Lisa.
GoodmorningandwelcometoHoneywell'sfourth-quarter2014earningsconferencecall.
WithmeheretodayourChairmanandCEODaveCote,SeniorVicePresidentandCFOTomSzlosek.Thiscallandwebcastputtinganynon-GAAPreconciliationsareavailableonherWebsiteatwww.Honeywell.com/investor.
Notethatelementsofthispresentationcontainforward-lookingstatementsthatarebasedonour(inaudible)ourbusinessasweseethemtoday.Thoseelementscanchange,andweaskthatyouinterprettheminthatlight.
Weidentifytheprinciplerisksanduncertaintiesthataffectourperformanceandourform10KandotherSECfilings.
Thismorningwe'llreviewourfinancialresultsforthefourthquarterandfull-year2014,andsharewithyouourguidanceforthefirstquarterandfullyearof2015.Finally,asalways,wewillleavetimeforyour
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questionsattheend.
SowiththatalternateallovertoChairmanandCEODaveCote.
DaveCote (Chairman,CEO):
Thanks,Mark.Andgoodmorningeveryone.
Wedeliveredanotherexcellentquartercappingoffaterrific2014.Inthisfourth-quarter,wedeliveredbetter-than-expectedoperationalperformanceineachofourkeymetrics.That'ssales,margin,earningsandcash,meetingorexceedingourguidanceacrosstheboard.Wedelivered4%organicsalesgrowthfollowing5%growthinthethirdquarter.
Andwecontinuetodrivemarginexpansionup130basispoints,excludingtheimpactofthefourth-quarter2014aerospaceOEMscenters,whichwediscussedindetaillastmonth.Wedeliveredearnings-per-shareof$1.43up15%year-over-yeararound11%[inloser]tax,soanotherquarterofdoubledigitearningsgrowth(andonecent)abovethehighendofourguidancerangewithstrongexecutionacrosstheportfolio.
Forthefullyear,weincreasedsalesonanorganicbasis3%whilecontinuingour[feet]planningwithinvestmentsinnewproductsandtechnology,highROICapEx,andexpansionofourglobalfootprint.Weachievesignificantmarginexpansionwithbenefitsfromourkeyprocessinproductivityinitiatives,andwe'vebeenabletoachieveallthisinwhatcontinuestobeaslowgrowthmacroenvironment.
Themomentumwesawinthesecondhalfgivesusconfidenceinthisyear.Ashortcyclebusinessescontinuetoimprovewithgoodorganicgrowthinthecommercialaftermarketbusiness,ESS,advancedmaterials,andTransportationSystems,allsuggestingamodestimprovementinendmarketconditionsoverall.We'realsoseeinggoodmomentumoutofourlongcyclebusinessesbuildingonarobustbacklog.
Webelievetheportfolioiswell-positionedtodeliverthisyearandbeyondenhancedbythesmart[gained]deploymentactionswe'vegainedoverthelastyears.WhileIbelievetheglobaleconomycouldbeabitbetterthisyearthaneconomistsareforecastingcurrently,wewill,asalways,planconservativelyinouroutlookandremainflexible.
Asyou'llhearinamoment,wecontinuetoplanforaslowtonogrowthenvironment[inEurope.]Wehavehedgedover80%ofourP&Lexposurerelatedtotheeuro,andweremainfocusedoncontrollingourspend.
AndTompreviewedinDecember,wesoldthefinal1.9millionsharesof[aerospace]stockthisquarter.Toremindyou,weoriginallyreceived6millionsharesunderconsiderationforourshareoftheir[aeroconsumable]solutionsbusinessin2008.
Atthattime,thoseshareswereworthabout150million.Wesoldthoseshares[overthecourseofthelastfivequarters]foratotalofabout$500million.We'vedeployedtheresultinggainsforrestructuringandotheractionstoproactivelypositionthecompanyforfuturegrowthandprofitability.Theactionsofthefourth-quarterwillsignificantlybenefitaerospaceoverourfive-yearplan,andwebelievewearewell-positionedforfuturesuccesswithourcommercialOPcustomersasaresult.
Now,therecontinuestobeoutalotofexcitingthingshappeningacrosstheportfoliotodrivethoseresults,andtohighlightafew,Honeywellscanningmobilitydeliveredanotherquarterofdouble-digitorganicsalesgrowth,benefitingfromnewcustomerwins.
Followingthesuccesswe'vehadwithIntermec,HSMannouncedinDecembertheacquisitionofDatamaxO'Neill,aglobalmanufactureoffixedandmobileprintersusedinavarietyofretailwarehousingdistributionandhealthcareapplications.ThisacquisitionpositionsHSMtoexpandinthe1.5billiondollarglobal
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[biocode]printingsegmenttobuildontheirexistingcapabilities.
Theteamisreallyexcitedaboutthisacquisition,whichextendsourglobalreachandprovidesscaleandsignificantsynergyopportunities.
Transactionsexpectedtoclosethisquarter.Whileourdealactivityinthispastyearwasmodest,theM&Apipelineremainsrobust.Weintendtomaintainourdisciplinedprocessandextendourstrongtrackrecord.We'vealsotalkedalotaboutoursolsticelineofrefrigerants,installationmaterials,aerosols,andsolventsthathaveozonedepletionofzero,andaglobalwarmingpotentiallowerthanCo2.Andthat's1000timesbetterthanwhatitreplaces.
Earlierthismonthweannouncedthatourflooringproductsbusinessstartfull-scalecommercialproductioninourBatonRouge,LouisianafacilityasthenewestsolsticeproductHFO1234CE.Nowthatisoneimpressivecatchyname,soIthinkweregoingtoprobablystickwithsolstice.We'reseeingincreasingdemandforourentiresolsticesuiteoflowGWPmaterials.
Thelifetimevalueofsignedagreementsin2014,exceeds$2.3billion,andwehaveanadditionalbilliondollarsplusundernegotiation.[Process]solutionshasalsobeenabrightspotaswecloseouttheyear.Organicsalesgrowthacceleratedinthesecondhalfoftheyear,andorderswereupdouble-digitinthefourth-quartersupportingcontinuedgrowththisyear.
HPFistransformingprojectexecutionwith[leaps].Thatisleanexecutionofautomationprojects.Andisinnovatingtowininthemarketwithautomatedofferingsacrosscontrolandsafetysystems,fielddevices,plantoptimizationsoftware,andservices.We'realsoexcitedaboutthegrowthsynergiesfromtheHPSand[URP]aredoingtogether.
Ourabilitytomatch[URP]processandoperatingknowledgewithHPScontrolandadvancedsoftwaresolutionswillenableunmatchedoperatingexcellenceforourrefiningpetrochemicalandgasprocessingcustomers.YoucanexpecttoseemoreofourinnovationondisplayattheMarchInvestorDaywereeachofthebusinesseswillhighlightanumberofQEinfluencednewproductsandroadmapsforfuturegrowthandproductivity.
WealsoplantosharewithyouhowHOSGoldisevolvingthroughouttheorganization,whichwebelieveisakeydifferentiator.Weheldourannualseniorleadershipmeetingearlierthismonth,andIcantellyouthateachofthebusinessesarehardatworkfindingnewandinnovativebreakthroughobjectivestodrivegrowthandmarginexpansion.
Havingsuccessfullyperformedagainstthefive-yeartargetswesetfor2010to2014,wearenowfocusedondelivering2015andthefive-yeartargetsweissuedlastMarchfor2014-2018.2014wasastrongstart.Ourbusinessmodelworks.
Havingastrongportfoliowithgreatpositionsandgoodindustries,makingsurethemachineryworksbettereverydayforourcustomers,suppliersandemployees,andaculturethatfocusesononeHoneywellandevolvingourcapabilityandtechnologies.Fromourculture,wegetsustainabilityresults.
SowiththatalternativeortoTom.
TomSz losek(CEO):
Thanks,Dave,andgoodmorning.
Let'sbeginonslidefour,whichrecapsarefourth-quarterresultscomparedwiththeguidancewegaveyoulastmonthintheDecemberOutlookcost.
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Ontheleft-handside,we'veoutlinedtheguidancewesharedwithyouinDecember.Andontheright,youcanseeourresultsfortheorderasreported.I'mnotgoingtowalkthrougheachlineitemhere,butyoucanseebasedonthecheckmarks,thatwedeliveredorexceededourguidanceoneachlineitem,includingthetopandbottomline.
Theincrementalsalesandsegmentprofitsenableusto[beat]thehigherendofourEPSguidancerangeandalsotofindincrementalrestructuringandotheractionsinthequarter.
Thereareacoupleoftransactionsthatoccurredinthefourthquarterthatareworthremindingyouof,andagain,theyunfoldedexactlyofweforecastedinDecember.
First,wecompletedthesaleoftheremainingBEAVsharesresultingin$140milliongainat$0.14forshareonanafter-taxbasis.Thetimingofthesalewasimportantfromataxperspective,aswenotedinDecember.Thetimingallowedustooffsetthatgainwithotheritemsandtherefore[incurred]everylittleincometaxonthetransaction.
AlsointhequarterareaerospacebusinessrecognizethecostofcertaincommercialOEMincentivesthatbecameduewhenourcustomerachievedcontractualdevelopmentmilestonesonplatforms,whichwillincludeHoneywellavionicsandmechanicalcontent.Thecostwas$184millionor$140milliononanafter-taxbasis.That's$0.14pershare.
Asyouknow,we'vewonsignificantcontentintheairtransportandbusinessaviationsectors,andsuchup-frontincentivesareapartofthebusinessmodel.Andasyou'realsoaware,accountingfortheseincentivesisquiteconservative.Manyothersinthisindustrypreferthesetypesof[costsontheir]balancesheetandexpensethemoverthelifeoftheplatform.Webelievechargingtheincentivesup-frontgivesgreatertransparencytoourOEMprofitabilityinthesegment.
AlsotheOEMincentivespositionuswellontheplatformsalreadywon,butalsotowinnewbusinessonthecontentthatweselectinthefuture.
Onslide5,whichshowsthefourth-quarterresultswithoutthe[aero]OEM'sincentivesfortheBEAV[gain],salesof10.5millionincrease1%or4%onanorganicbasis.TheabsenceoffrictionmaterialsandthestrengtheningoftheUSdollarwereheadwindstoreportedsalesgrowthinthequarter.
You'llrecallwedivestedfrictionmaterialsinthequarter,sotheywillcontinuetobeunfavorablesalesheadwindsthroughoutthefirsthalfof2015.Weareencouragedwiththegrowthandmomentumthatisbeginningtoemerge.Weachieved4%organicsalesgrowthinthesecondhalfof2014,comparedwith2%forthefirsthalfand2%forall2013.Thegrowthwesawinthefourthquarterwasbroad-basedandresultedinbetter-than-expectedperformanceacrosstheportfolio.
I' llprovidemorecoloraswereviewthebusinessgroupsinamoment.Youcanseethesegmentprofitincreased9%withsegmentmarginsspanning130basispoints.Oureffortstodrivecommercialexcellence,supportedbydifferentiatedtechnologycontinuedtoproduceresults.
Inaddition,[productivity]remainsakeydriverofmarginexpansion,offsettinginflationandourcontinuedinvestmentsforgrowth.EPSwasonedollar$0.43,up15%,consistentwithourhistorical[practice].Thisexcludestheannualmark-to-marketadjustmentforourdefined-benefitpensionplan.
Inthefourthquarter,thismark-to-marketadjustmentwasapproximately$249millionor$0.23pershare,principallydrivenbylowerdiscountratesinourGermanandDutchplants.Sothefourth-quarterreportedEPSwas$1.20,andforreferencepurposes,themark-to-marketadjustmentof2013was$51millionoraboutfivecentsashare.
Finally,freecashflowinthequarter[up]$1.3billionrepresentingconversionof119%,andincreaseof6%in
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2013.
Sooverall,wegenerateaverystrongresultinarelativelyslowgrowthenvironment,andweincreasedourannualdividendinthefourthquarterby15%to$2.07ashare,continuingourcommitmenttogrowingthedividendfasterthantheearningsrategrowthandatrendyoucanexpectwillcontinue.
Onslidesix,thesamefourth-quarterresultswerepresentingonareportedbasis.Soasyoucansee,ourreportedsalesdecreased1%,andthatwasdrivenbytheArrowOEMincentives.Nochangetothe4%organicsalesgrowthinthequarterthatIshowedinthepreviouspage.
Soourrecorded[basis]segmentprofitdecreased2%withmarginscontracting20basispointsto15.9%inthequarter.Again,theonlydifferenceinthepreviousslideonsecondmarginistheinclusionofthat$184millionchargefortheArrowOEMincentive.
Movingtonetincome,theBEAVgainandtheOEMincentivesfullyoffsetoneanotheronanetoftaxbasis,andnormalizedfortaxEPSinthequarterincreased11%year-over-year.Therestofthefiguresonthisslideareidenticaltothepriorfourthquartersite.
I'mnowonslideseventorecapthefull-year2014result,againwithouttheimpactoftheArrowOEMincentivesfortheBEAVgain.Full-yearsalesof$40.5billion,up4%for3%onanorganicbasis.TheprimarydifferencebetweenthereportinorganicratesistheIntermecacquisitionnetoftheimpactofthefrictionmaterialsdivestiture.Wesellgoodorganicgrowthacrosstheportfolio,includingscanningmobility,[acquiring]industrialsafetybusinesses,transportationsystems[andOUP].
Segmentprofitincreased8%,demonstratingstrongsalesconversionandresultedina70basispointimprovementinthesegmentmarginratesto17%.Allthisresultedinearningspershare,excludingpensionmark-to-marketadjustmentof$5.56ashare,up12%over2013,representingourfifthconsecutiveyearofdouble-digitearningsgrowth.AndEPS$0.01abovethehighendofourDecemberguidancerange.OurreportedEPSof$5.33fortheyearagainreflectsthe23centmark-to-marketadjustmentthatImentionedforthefourthquarter.
Sofinally,freecashflowis$3.9[billion]inourlinewithourguidance.Pre-cashflowincreased16%year-over-yeardespiteanapproximate16%increaseinCapExinvestmentsinthegrowthareaswe'vepreviouslysharedwithyoumostlyin[PMT].
Solet'smovetoslideeighttoshowthefull-year2014results,includingtheimpactsoftheArrowOEMincentivesandtheBEAVgain.Toquicklyrecap,2014saleswereup3%onboththerecordedandorganicbasisto$40.3billion.
Secondprofitwasup5%resultinginthe30basispointmarginexpansionto16.6%,sotheArrowOEMincentivesreducedthegrowththereportedgrowthfrom4%to3%andreducesmarginexpansionfrom70to30basispoints.
Therestofthepageagainremainsthesameasthepreviousslide,andnowIwanttomoveontoslidenineanddiscussthebusinessesstartingwithaerospace.
Thisfirstslidehighlightsthefourth-quarterreportedanorganicsalesgrowthrateforaerospace.Asareminder,inthefourthquarterof2013,aerospacerecognizedanIPlitigationsettlementresultinginaone-timeroyaltygainof$63millionindefenseandspace.ItwasoffsetatthetimebyOEMincentivesin[BGA].
Bothoftheseitemswereincludedandthereforenettedoutinsalesandsegmentprofitattheaerospacelevelin2013.TotalReportedaerospacesalesweredown6%inthefourthquarterof2014,drivenbythreeitems,the$184millionOEMincentivesthatwediscussedinouroutlookcallbackinDecember;two,thefrictionmaterialsofdivestiturewhichclosedinthefirstquarter;andthree,theunfavorableimpactofforeignexchangeon
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reportedresults.
However,onanorganicbasis,fourth-quartersaleswere[up]4%,drivenbystrongexecutionacrosstheportfolio,andeachofthethreelegacyArrowbusinessesacceleratedgrowthinthefourthquartercomparedwiththefirstthreequartersandtransportationsystemscontinueditsmid-singledigitsgrowthperformance.
OrganicsalesgrowthandArrowhasacceleratedthroughout2014likeHoneywell,soifyouwillrecallArrowwasup1%inboththefirstandsecondquarters,3%inthethirdquarter,now4%tocloseouttheyearinthefourthquarter.
IfIlookattheindividualpiecesofaerospacestartingwiththecommercial[OE]salesdecreased14%onanorganicbasis--onareportedbasis,drivenbythenetunfavorableimpactoftheOEMincentives.However,onanorganicbasis,salesgrew7%.Thatwasprincipallytheresultofrobustengineshipmentsandbusinessingeneralaviationforthe[NovardiChallenger]350and[everyyear]legacy500.
Movingtocommercialaftermarkets,asyoucansee4%salesgrowthonboththerecordedandorganicbasis.ATRsparesgrowthwasbalancedacrossbothmechanicalandelectricalproductlines,offsettingmoderationin[VGARMUs].That'sretrofitmodificationsandupgrades.
Bothairlineandbusinessjetrepairandoverhaulactivityimprovedinthequarteraswell.[Expenseofspace]salesdeclined3%onareportedbasis,drivenbytheabsenceoftheprioryearlicensingroyaltygainIjustmentioned.However,onanorganicbasis,saleswereup2%intheorder.Internationalprogramscontinuetodrivegrowthwithdouble-digitsalesincreasesoffsettingmodestdeclinesinourUSDODandgovernmentservicebusinessesinthethirdquarter-orsorry,inthefourthquarter.
Finally,transportationsystemssalesdeclinedto16%onareportedbasis,reflectingthethirdquarterfrictionmaterialsinvestitureandforeignexchangeheadwinds.Onanorganicbasis,TSsalesincreased4%inthequarterasweonceagainsawstrongvolumegrowthinlightvehiclegasapplicationswherewecontinuetoseeincreasedglobalpenetration.
WealsocontinuetoseeourEuropeancommercialvehiclevolumesgrowthaswebenefitfromnewprogramsfollowingtheimplementationof[eurosix]submissionregulationsintheregion.Asyoucan,seetheunderlyingbusinessgrowthtrendsacrosstheArrowportfolioremainpositive,consistentwiththeoutlookweprovidedtoyouDecember.
SonowI'mslide10continuingwithaerospace,thefourth-quartersalesresultincommentaryareconsistentwithwhatIjustdiscussed.Sothatforthefullyear,aerospacesalesdeclined1%onareportedbasisdrivenbythefrictionmaterialsdivestitureandtheimpactoftheOEMincentives.However,onanorganicbasis,salesincreased2%.Aerospacemarginscontractedby160basispointsinthequarterdrivenbytheOEMincentives.
Butexcludingthe$184millionchargefortheOEMincentives,secondmarginsinthefirstquarterwereactuallyup210basispointsdrivenbyproductivity,[netof]inflation,wherematerialproductivitycontinuestobeasignificantdriveralsocommercialexcellenceandiffavorableimpactofthefrictionmaterialsdivestiture.
Andforthefullyear,youcanseethatArrow'ssecondmarginscommanded140basispoints,againexcludingtheOEMincentives.
Solet'sturntoACSresultsonslide11.ACSsaleswereup6%onanorganicbasisinthequarter,excludinganapproximate3%headwindfromFX.ThegrowthcameataboveourguidancewithbothESSand[BSD]finishingnearstrong.
ESSsalesfortheproductsbusinesswereup7%onanorganicbasisinthequarter,continuingthetrendofprogressivelystrongergrowthnotedineachquarterof2014.Scanningmobilitycontinuestoperformwell,
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drivenbynewproductintroductionsandlargeprogramwindssuchastheU.S.PostalServiceprogramwehiredlastquarter.
Inaddition,wecontinuetorealizeintegrationbenefitsfromIntermecsupportingthestronggrowthwe'veseenfromthecombinationofthetwobusinesses.ThependingacquisitionthatDavementioned,ofDatamaxO'Neil,complementsourexistingportfoliointheattractivebarcodeprintingspacerequiredwithIntermec.
AsfortherestofESS,growthwasdrivenbynewproductintroductions,furtherpenetrationinhigh-growthregion,higherresidentialsales,whichbenefitedboththePCandsecurity,andimprovementsinthe[non-resi]market,whichbenefitedour[fire]andindustrialsafetybusiness.
Buildingsolutionsanddistributionsaleswereup4%onanorganicbasisinthefourthquarterwithcontinuedstrengthintheAmerican'sfireandsecuritydistributionbusinessesandaccelerationandbusinesssolutions.ParticularlywithinbuildingsolutionswesawagoodgrowthintheAmericasaswellasanincreaseinhighermarginservicebusiness.
Boththebuildingsolutionsbacklogandservicebankswereupmidtohighsingledigitsonanorganicbasis,supportingouroutlook[inconfidence]forsalesaccelerationin2015.ACSmarginsexpanded70basispointsto15.9%inthequarter,thebusinesscontinuestobenefitfromgoodconversiononhighervolumesandproductivitynetofinflationsupportedbyourHOSinitiativesoffsetbycontinuedinvestmentsforgrowth.
Inaddition,wecontinuetorealizeincrementalsynergybenefitsfromthecombinationofIntermec'swithHSM.
SooverallverygoodgrowthandexecutioninACSandalotmoretocomeastheteamcontinuestocoordinatetheindividualbusinessesmoreandmorethroughconnectiveACS,whichisaninitiativetodriveandenhanceadegreeofintegrationacrossthebusinesses,andinparticularinthesupplychainandproductdevelopmentsandinthemarketingareas.
AlexwilltalkmoreaboutthisatourInvestorDayinMarch.
Somovingtoslide12forPerformanceMaterialsandTechnologies,PMTsalesinthequarterwereuptwopoints-wereat$2.6[billion],up3%onorganicbasis,areapproximatelyflatonreportedbasisdrivenbyforeignexchangeheadwind.
[Willitthreaten]theimpactofloweroilpricesonthePMTbusinessesinamoment,buttherewasverylittleimpactonPMTresultsinthequarter.
ForthefourthquarterUOPsalesdecreased1%onanorganicbasis,andasareminder,UOPhadexceptionalorganicgrowthinthefourthquarterof2013.You'llrecalltheywereup17%lastyear,drivenprimarilybyincreased[catalystsales],soaverydifficultcomparisonyear-over-year.
UOPexecutedverywell,reflectingstronglicensingrevenues,whichpartiallyoffsetthelower[catalystsales].Wealsocontinuetoseestrongordertrendsingasprocessing,particularlyatUOPRussell,givingusconfidenceasweheadinto2015.Andweanticipatefurthersalesgrowth2016and2017forthenewcapacityadditionsacrossUOPandalsotoadvancedmaterials,whichcomeonlinein2015.
Inprocesssolutions,organicsalesgrowthcontinuestoaccelerate.HPSwasup6%inthequarterwhileonareportedbasissaleswereflatastheorganic--orthestrongorganicinternationalgrowthwasoffsetbyforeignexchangeheadwind.HPSsawstrongvolumegrowthdrivenbytheadvancedsolutionsoftwarebusinessandtheHPSservicebusinessinallregions.
Ordersbacklogandservicebankgrowthalsocontinuedatastrongpace,updoubledigitsonanorganicbaseinthequarter.Andthisordersgrowthincreasedsteadilythroughout2014,whichsetsprocesssolutionsupnicelyforacceleratedsalesgrowthin2015andbeyond.
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Advancedmaterialssalesincreased4%onanorganicbasisdrivenbydouble-digitsalesandordersgrowth[inflooring]productsasdemandforournewlowglobalwarmingpotentialsuiteofsolsticeproductscontinuestogrow.Thiswaspartiallyoffsetbyadeclineinresidentchemicalsalesinthelowsingledigitrange,drivenprincipallybythemarket-basedpricingmodel,wherebysellingpricesarecloselytiedtothemarketpriceofrawmaterials,mostnotablybenzene,whichishighlycorrelatedtothepriceofoil.
Whilesalescanbevolatile,thepricingmodellargelyprotectstheprofitdollarsinresidentchemicals,evenonlowersales.PMTsecondmarginswereup90basispointsto16.5%,whichexceededourguidance,drivenbyhighervolumeandproductivitynetofinflation,partlyoffsetbycontinuedinvestmentsforgrowth.
InUOP,thehigher[makesoflicensing]revenueinthequarterresultedinatailwindtomargin.HPSalsoconvertedparticularlywell,continuingwithsuccessfulbusinesstransformationandbenefitingfromthegrowthImentionedinthehigher-marginadvancedsolutionsoftwareandservicebusinesses.
I'mnowonslide13label2015planningupdate.AndsimilartowhatwedidinDecember,relatedtotheimpactofoilpricedeclinesontheportfolio,Iwantedtoaddresssomeofthemajorglobaltrendsaffectingourportfolioandexplainhoweachoftheseitemsareimpactingourplansfor2015.
Letmestartwithoilpricedeclines.Overall,wecontinuetoviewtheimpactfromloweroilpricesasbeingnetneutraltoUOPandHPS.Theupstreamexplorationandproductionpartsinthevaluechaincontinuetorepresentarelativelysmallportionofourportfolio,roughly10to15%ofthecombinedUOPandHPSbusinesses.
Andourupstreambacklogshaveheldfirm.WearebeginningtoseesomedelaysfurtherdownstreamincountriesthatarenetoilproducerssuchasRussiaandtheMiddleEastasrefiningandpetrochemicalproductdecisionsaredeferred.
Ontheotherhand,incountriesthatarebeingimportersofoil,mostnotablyChina,India,andtheSoutheastAsiaregion,aswehadanticipated,theloweroilpricehasstimulatedmorediscretionarymidanddownstreamspending,wheretheyarewell-positioned.
Thisisbeingborneout,forexample,inprocesssolutionswereordersandbacklogsgrewroughlydoubledigitsonanorganicbasisinthequarter,asIhighlightedearlier.Soagain,wethinkoilpricesareneutraltotheUOPandHPSbusinessatthistime.Howeverwecontinuetomonitorthisactivitycloselyaswelookahead.
Salesandresinsandchemicalswillbenegativelyimpactedbylowerpriceslowerpricesforthe-loweroilpricesforthereasonsImentionedearlier.Whilesalescanbevolatile,thepricingmodel,againlargelyprotectsourprofitdollarsinthisbusinessevenonthelowersales.
Finally,weanticipatewe'llbegintoseethefavorableeffectsofloweroilpricesonourcoststructure,inparticular,inourindirectspend.Andwebelievethiswillacceleratethroughout2015.Ofcourse,itremainstobeseenhowoilpriceswillimpacttheglobaleconomy,shouldpricesstaybelow$50long-term.However,wecontinuetoseethiswillbeanetpositivefortheeconomyandHoneywellovertheplanninghorizon.
Turningtocurrencyfluctuationsyou'veobviouslyseenitcontinuedweakeningoftheeuro.AswehighlightedinDecemberour2015planisbasedontheeuroexchangerateof$1.20atthemidpoint.Wehavehedgesinplacecoveringapproximately80%ofoureuro[TNL]exposure.Sowhiletherewillcontinuetobepressureonthe[salesline],oureuro-basedearningsareprotected.
Wealsocontinuetoseevolatilityacrossourothercurrencyexposures,whichagainarelikelytoresultinheadwindsfortoplineorsimilartohedgingwe'vedoneitfortheeuro,theactionswe'vetakenwilllargelyprotectour2015earningsoutlooksfortheseothercurrenciesaswell.Andwe'llcontinuetoactivelymonitor
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thesituation.
TheoutlookfortheUSeconomycontinuestoimprove,andwe'reexpectingapositiveuptickinourUSbusinessesasaresult.Butwealsoremainfocusedonincreasingourpresenceinhigh-growthregions.Asareminder,HDRisnowrepresentalmostaquarterofourtotalbusiness,andareexpectedtodrive50%ofthesalesgrowthoverthecourseofourfive-yearplan.
Thepopulationgrowthurbanizationandinfrastructuredevelopmentcontinuetocreateattractiveopportunitiesacrossourentireportfolio.
InChina,weanticipatehighsingle-digitgrowthin2015,afterayearofroughlymid-single-digitgrowthinpot2014.OurinitiativeonbecomingtheChinesecompetitorcontinuestoaccelerateandbearfruit.Investmentsinlocalsalesandmarketingresourcesaretargetedtothehighergrowth[cities]inChinawherelocaleconomiesaregrowingmuchfasterthantheoverallChinaGDP.Also,ourOneHoneywellapproach,specificallyinACS,continuestodrive[cross-selling]opportunitiesacrossmultiplechannels.
Inaddition,we'rebuildingarobustpipelineofnewproductsgearedtowardthemacrotrendsintheregion,namelyairpurification,energyefficiency,andsecurity.AllthesefactorsgiveusconfidenceandacceleratedgrowthforHoneywellinChinain2015.
InIndia,aftertheinvestmentsacrosstheregionslowedinthefirsthalfoftheyearwhiletheelectionsunfolded,thesecondhalfwas--a2014wasverystrongforHoneywell.Andweanticipategrowthwillberoughlyhighsingledigitsin2015,drivenbyourinternationaldefenseandspacebusiness,newlaunchesintransportationsystems,newproductintroductionsin[EFF]acrosseachofourmajorverticals,andgrowthin[BSD]frominfrastructureprojectsandservices.
InRussiawhereourexposureislimited--wehavelessthanabout$500millioninannualsalesthere--wecontinuetohaveastrongbackloginourlongcyclebusinesses.WeexpectRussiatocontinuefocusingtheiravailablecapitalonenergy,sooilandgasandrenewaloftheiraerospacesector,twoareaswhereourportfolioiswell-positionedtogrow.
Ourshort-cyclebusinessesinRussiahavebeenimpacted,particularlyasitrelatestocurrencydevaluation.Butagain,theexposurethereisrelativelysmall.Andwhileourmanagementteamispayingcloseattentiontotheissuesfacingthecountry,we'realsocontinuingtolookforopportunitiestoenhanceourbusinessintheregion.
IntheMiddleEast,weexpectcontinueddouble-digitsalesgrowthin2015afterproximately20%growthin2014.Andthisisdrivenbybigwinsinboththeshortandlongcyclebusinessesasinfrastructureinvestmentscontinue.Ourportfolioiswell-positionedtobenefitfrom,andevenoutpaceinsomecases,theattractivegrowthrateinthesemarkets.
Turningtothenonresidentialsector,we'reencouragedbytheexpectedaccelerationofcommercialconstructionspending,forecasttobeupapproximately4%in2015andthecontinuedsolidgrowthontheindustrialsitein2015.
Soasareminder,roughly75%oftheACSportfolioservesthecommercialindustrialmarkets,andourbalanceportfolioiswell-positionedtocapitalizeonimprovementsinthearea.Morespecificallyonthecommercialproductsside,aftermodestgrowthtothefirstthreequartersof2014,wesawsomeaccelerationofthefourthquarterwithstronggrowthintheUS.WeexpecttheUStocontinuetodrivefurthercommercialproductsgrowthin2015,aswellasaccelerationinourhigh-growthregionswithstrengthinourECCandfiresystemsbusinesses,inparticular.
Intheindustrialproductsmarkets,weexpecthighersalesofindustrialsafetyequipment,particularlyinthe
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Americas,whichrepresentsabouthalfofourexposure.
Asforbuildingsolutions,thebacklogfromourprojectsbusinessesandtheservicebanks,throughmidandhighsingle-digitrespectivelyonanorganicbasisthisquarter,andwecontinuetoexpectenergyefficiencyprojectstosupportglobalaccelerationin2015.
Withregardtoourpensionplan,theneteffectsofhigherinvestmentreturnsandlowerdiscountrateswilldrive$125millionincreasetopensionincomefor2015.Nowweintendtofullyoffsetthatincreasewithrestructuringoverthecourseoftheyear.
Intotal,ourinternationalpensionplanrepresentapproximately25%ofourworldwidedefined-benefitpensionobligations.IntheUS,weendedtheyearwithadiscountedrateof4.08%andareturnonassetsof8%,whichresultedina[US-funded]statusofapproximately95%.Globally,the[fundedstatus]isabout94%.Wedonotanticipateany2015cashcontributionsrelatedtoourUSplan.
Letmeturntoslide14tosummarizeouroutlookfor2015.Ourfull-yearguidanceisidenticalwithwhatwesharedwithyouinDecember.
Wecontinuetoexpectsalesintherangeof40.5to$41.1billion,up1%to2%onarecordedbasisandupapproximately4%onanorganicbasis.Reportedsalesgrowthisexpectedtobelowerthanorganic,primarilyduetotheimpactoffrictionmaterialdivestitureandtheforeign-exchangeheadlines.
Weareplanningsegmentmarginexpansionof100to130basispointsareup--60to90basispoints,excludingthefourth-quarterOEMincentives.
WeareprojectingEPS-now,thisexcludesthepensionmark-to-marketadjustmentof595to615representing,7%to11%growthversus2014.Thequarterlygrowthtrendsremaininlinewithourprior-yearresults,andthisrangealsocontinuestobebasedonafull-yearincometaxrateassumptionof26.5%andshareaccountheldroughlyflatto2014levels.
Pre-cashflowisexpectedtobeintherangeof$4.2to$4.3billion,up8%to10%from2014withCapExinvestmentspeakingatroughlytwotimesthedepreciation.AtamorenormalizedrateofCapExinvestments,soaround1.25timesdepreciation,weexpectfreecashflowconversiontoberoughlyat100%.
Sonowonslide15,withapreviewofthefirstquarter.FortotalHoneywell,we'reexpectingsalesof$9.4to$9.6billion.That'sdown1%to2%reported,butup3%to4%onanorganicbasis.
Segmentmarginsareexpectedtobeupapproximately110basispoints,andEPSisexpectedtobeintherangeof$1.36to$1.41,up6%to10%versus2014.
Startingwithaerospace,salesareexpectedtobeup3%to4%onanorganicbasisordown2%to4%onareportedbasis,reflectingtheyear-over-yearabsenceoffrictionmaterials,aswellasforexchangeheadwinds.
We'reexpectingpositiveorganicsalesgrowthfromeachofthefourbusinessesinthequarter.IncommercialOE,wereexpectingsalesuplowtomidsingledigits,drivenprimarilybynewplatformwinsin[BGA].Thegrowthisdrivenbyfavorabledemandtrendsforhigh-valuebusinessjetplatformswherewehavesignificantnewenginecontent.
Incommercialaftermarket,we'reexpectingsalestobeuplowsingledigitsandcontinuetorepairandoverhaulgrowth,aswellasATR[spears]growthinthequarter,drivenbyhigherdemandforbothmechanicalandelectricalproducts,partiallyoffsetbyadeclinein[BGARMUs]againstthechallengingprioryearcomparison.
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Defenseandspacesalesareexpectedtobeuplowtomidsingledigitsinthequarter,drivenbycontinuedstrengthandinternationalbusinesses.Intransportationsystems,salesareexpectedtobeupmidsingledigitsonanorganicbasis,butdownsignificantlyonareportedbasis,drivenbytheabsenceoffrictionintheforeign-exchangeheadwindsImentioned.
Onorganicbasis,thegrowthinTSisprimarilydrivenbynewlaunchesandstronglightvehiclegasdemandineachofourthreekeyregions:theUS,Europe,andChina.
Asforaerospacemargins,weexpectanincreaseof100to220basispoints,drivenbycommercialexcellence,significantproductivityimprovementsacrosstheportfolio,alongwithafavorableimpactonthemarginratefromthefrictionmaterialdivestiture.
Turningto[ACS],salesareexpectedtobeup45%organically,orflatup2%onreportedbasiswithcontinuedmidsingle-digitorganicgrowthinbothESSandBSD.Thedifferencebetweenareportedorganicratesreflecttheforeign-exchangeheadwindsinthequarter.
Theendmarketswhereweprimarilyparticipateresidential,commercial,andindustrial,arealllookingmoderatelybetteraswestart2015.Andwecontinuetobenefitfromnewproductintroductionsandhigh-growthregionpenetration.
Also,thestrongordersgrowthwesawattheendof2014inboththeshortandlongcyclebusinesses,givesusincreasingconfidenceinouroutlookfor2015.[ACS]marginsareexpectedtobeup100to120basispointswithcontinuedbenefitsandcommercialexcellenceproductivitynetofinflation,whileacceleratinginvestmentsforgrowthandnewproductareassuchasconnectedhomesandinhigh-growthregions.
Further,weexpecttorealizesynergiesfromtheintegrationofDatamaxO'NeilacquisitionsafterthetransactionclosesaswedidwithIntermecthroughout2014.
InPMT,salesareexpectedtobeapproximatelyflatonanorganicbasisanddownapproximately1%to3%reported,drivenbyforeignexchangeheadwindsandtheimpactofloweroilpriceson[presence]ofchemicals,apointImadeearlier.Excludingthesefactors,PMTsalesareexpectedtobeupapproximately4%inthequarter.
We'reexpectingUOPstobeuplowsingledigits,withgasprocessingsalesexpectedtodrivethemajorityofthegrowth.
InHPS,we'reexpectingorganicsalesupmidsingledigits.Thefavorableordersandbackloggrowthwesawin2014willsupportthesalesacceleration2015.
Ontheadvancedmaterialsside,we'reexpectingalowtomidsingledigitorganicsalesdecline,principallydrivenbyadoubledigitdeclineinresinsandchemicals,duetothefactorsImentionedearlier.Thesedeclinesareoffsetbycontinuedstrengthinourflooringproductsbusiness,whichisbenefitingfromincreaseddemandrelatingtothenewproducts,principallythesolsticeproductssuites.
Also,PMTsegmentmarginsinthequarterareexpectedtobeup100to120basispointsversus2014,drivenbyhighervolumesinproductivity,aswellasthefavorableimpactofthemarket-basedpricingmodelin[resinand]chemicals.
Letmemovetoslide16foraquickwrap-up.
In2014,wedemonstratedonceagainthatHoneywellcandeliveronitscommitmentsinarelativelyslowgrowtheconomyandamidstsomeveryvolatileglobaltrends,areminderonceagainofthevalueofourdiversifiedandbalanceportfolioandmanagementteamfocusedonexecutionandthestrengthoftheHoneywellplaybookandkeyenablers.
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Combinedthese,enabledustoaddtoourperformancetrackrecordasweexceedingguidanceonsalesachievedsignificantgrowthinsegmentmarginsanddeliveredondouble-digitEPSgrowthweoriginallylaidoutlastDecember.
We'regoingtocontinueinvestinginourfuturewithafocusonprofitablesalesgrowth.ThiswillcontinuetomeaninvestmentsinhighROICapEx,innewproductdevelopment,andinsalesandmarketingresources,particularlyinhigh-growthregions.Theinvestmentsarepayingoff,andyoucanseeinourresults.
Asweturnourattentionin2015,werecognizetheuncertaintyinthemacroenvironment,butthisisnotnewforus.Wehaveandwillcontinuetoplanconservatively,andwe'reconfidentthatourportfolioiswell-positionedforcontinuedoutperformance.
Ourordertrendsbothshortandlongcyclepointtoacceleratedsalesgrowthfornextyearthatshouldenablecontinuedstrongimprovementinourprofitability.We'reforecastingstrongorganicgrowthin2015andover100basispointimprovementinourmarginsasourHOS[goldenissues]aredeployedacrosstheportfolio.
Inaddition,wehavesignificantrestructuringsavingsinthebackfor2015.Sowe'llcontinuetoexecutein2015andbeyond.We'reveryexcitedabouttheupcomingyearandhavealotofmomentumacrosstheportfolioasweheadintoyeartwoofourfive-yearplan.
WelookforwardtotellingyoumoreatourMarch[fourth]InvestorDay.Sowiththat,Mark,let'sgototheQ&A.
MarkMacaluso (VP-IR):
Thankyou.
[Lisa],ifyouwould,pleaseopenthelineforquestions.
QUESTIONS&ANSWERS
Operator:
(OperatorInstructions)
SteveWinoker,Bernstein.
SteveWinoker(Analyst-Bernstein):
Hey.
Goodmorningall.Afterlastquarter'smultitudeofcongratulations,I'mhesitanttosayitagain,Dave,butIwillsaynicequarter.AndIguessI' llgetblamedbyallmycolleaguesouttherefordoingthis.
Unident if iedCompanyRepresentat ive :
It'sashametobenice.Youwouldn'twanttodosomethinglikethat.
SteveWinoker(Analyst-Bernstein):
Well,I'mtryingtobeverycautiousonthatfront.It'soneofmydevelopmentneeds.
Soanyway,listen,ontheoutlookcall,wespentalotoftime--youguysprovidedagreatamountofdetailforthinkingthroughtheoilprice,decliningoilpriceimpactacrossallyourbusinesses.
AndI'mtryingtocomparethattowhatTomjustwalkedusthrough.ButthethingthatreallyisofmaybeconcerntomeisthemidstreamdownstreamcommentarywhereinDecember,youreallytalkedaboutthatit
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wasanetpositiveintermsofrefinedproductdemandinvestmentdownstream,andotherareas.
Ijustliketogetalittlemorecoloronthat,particularlyaroundtheimpactofmaybenarrowingoilandgasspreadsonsomeofthoseinvestmentsthatarehappeningoutthere,justthemorecoloronwhyweshouldn'tbeworriedaboutthisforyouguysandwhyit'sactuallygoodthing.
MarkMacaluso (VP-IR):
Well,I' llstartwithmyperspectiveonit,andthenturnitovertoTomforevenmorecolorcommentary.
There'sadifferencebetweentheupstreamandthemidanddownstreamsegments,asyouknow.Andthemid-anddownstream,myview,aregoingtobedrivenmorebyoveralleconomicactivity.Thedemandforthatisgoingtobedrivenmorebyoveralleconomicactivitythenwhateveroilpricesare.
Asaresultofthat,I'mexpectingtoseeincreaseddemandforrefinedgoodsandproducts,whichisgoingtocauseagreaterdemandonthemidanddownstreamside.
Offsettingthat,atleastintheshortterm,there'sprobablygoingtobesomeoftheinvestmentsinplaceslikeRussiaandtheMiddleEast--perhapssomeinBrazil,butthey'dalreadyslowedsignificantly--thatwillbemorethanoffsetbywhateverybodyhastocrankupeverywhereelsearoundtheworld.
Sothat'skindoftheoverviewthatIseeforit.Andasyouprobablyknow,forthefirsttimeinfiveyears,I'mactuallyalittlemorebullishonwheretheglobaleconomyisgoingthaneconomicforecastersare.
Forthelastfouryears,I'vebeenmorenegativegenerally,andsoforthat'sbeenagoodcall,butthistimeIthinkitcouldbemorepositivethanwhattheythinkbecausethatimpacttheloweroilpricesiscausingthismajorredistributionfromoilproducingtooilusingeconomies,andthoseoilusingeconomiesarequitelarge.
Sooverall,Ithinkthisisagoodphenomenon,andit'sgoingtohelpdrivemoreofthatmidanddownstreaminvestment.
Tom?
TomSz losek(CEO):
Yes.Again,whatIwouldreiterateistheportionofour[HCSULP]businessthat'sinthemidanddownstream,numberone.
Numbertwo,thebacklogsreallybackedupbythestrongsecondhalf,particularlyinHPS,arereallystrong.IfyoulookatHPS,thebacklogonaconstantcurrencybasisisupabout12%year-over-year.
AndtheUOPbacklogisalso--I'msorry-yes,theUOPbacklogisrelativelyflat,0to1%.ButwhenIlookatUOP,itcontinuestobealumpybusiness.Fourthquarterwasadifficultcomparison,asIsaid.Wehad17%growthinthefourthquarter2013,butthebacklogisstrongasit'severbeen.It'sholdingup.Andourgrowthratein2015thatweforecastedforUOPismid-single-digitgrowth,sowe'reconfidentherealltheindicators.
MarkMacaluso (VP-IR):
AndUOPislumpy,butwithaverypositivetrend.
SteveWinoker(Analyst-Bernstein):
AndTom,you'renotseeinganybacklogpricerenegotiations?There'salotofchatteraboutthatinthemarket.
TomSz losek(CEO):
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No,notatall.Imean,we'veprobedandprobedandprobedthis,asyoumightimagine.
AndtheonlydevelopmentIwouldsayisdeferralsonneworderswheretherearemulti-billion-dollarinvestmentswheredecisionsarebeingthoughtthroughcarefullyintheregionsthatDavementioned.Butbyandlarge,that'sabouttheonlyimpactwe'veseensofar.
SteveWinoker(Analyst-Bernstein):
OkayI' llhanditoff.Thanks.
Operator:
ScottDavis,Berkeley.
Scot t Davis (Analyst-Berkeley):
Hi.Goodmorning,guys.
I'mgladtoseeyouguysarebullish.Wehaven'thadalotofpositiveconversationsinthelastcoupleofmonths,butmaybeyoucan--Ithinkyourviewonoilisprettyclear,Dave.Butgiveusasenseofyourviewoncurrency.AndreallytheangleI'mlookingforis,we'vehadsuchaviolentmovethat--howdoesitchangethecompetitivelandscape?DoyouseeguyswhocancomeinfromJapanorotherhigh-costregionslikeinEuropethatcannowsuddenlycompeteagainstyouinareaswheretheycouldn'tcompeteagainstyoubefore?Isthatrealornotreal?
DaveCote (Chairman,CEO):
Well,the-asyouknow,theJapanphenomenonhasbeen-thecurrencyphenomenonhasbeenacoupleofyearsinthemaking.AndIcan'tsaythatweeversawmuchofanimpactfromanyofthat.IguessitremainstobeseenonwhathappenswithEuropeancompetitors,butagain,notseeingmuchofanythinghappeningthere.
Whenitcomestotheoverallcurrency,we'veassumedtheUSdollarwouldstrengthenforawhilenow,andwe'realittlesurprisedactuallyitdidn'thappensoonerthanithas.SoIwouldsayit'soneofthosethingswe'vebeencountedcountingonhappening.Andasyouknow,thisisthefirsttimein-well,thisismy--goingintomy14thyear,thisisthefirsttimewe'veeverhadtheeurotranslation.Anditissolelybecauseitseemedlikethatwas70%[best]atthispoint.Whoknows?Thingshaveawayofchanginginwaysthatyouneverpredict,butIstillthinkthattheprospectofa[110]eurothisyearisentirelypossible.
TomSz losek(CEO):
TheotherthingI'daddDaveisourcostsavings.
YetwedobenefitinsomecasesfromthedecliningcurrencyyouknowScottasyourfullyawarewehavesignificantproductioncapacityinChinaandMexicoandotherpartsofEasternEurope,sowedofeellikeourpositionfromasupplychainperspectiveandacost-basedperspectivedoesenableustocontinuetocompetewiththecreditorsyoureferto.
DaveCote (Chairman,CEO):
Ithinkthat'sagoodpointTomjustmadeScott.ThepresenceinEuropealreadywehaveabigbasethereabout30,000employees,sowehaveabasetocompetefrom.
Scot t Davis (Analyst-Berkeley):
Okayfairenough.
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Guysgiveus,youknowIwasencouragedbywhatyousaidaboutnon-res,andourforecastwasactuallyabithigherthanyourforecastsoIhopewererightandyournot.Buteitherwaydirectionallyitistherightanswer.Butcanyouwalkaroundtheworldabitonthatandyouknowit'sreallytoughforustogetafeelfor--we'vegotgreatdataintheUSonnon-res,orthingsatleastwecantrackandoncewegetontheoutsidetheU.S.itstartstogetalittlemoredifficult.Socanyouwalkusaroundtheworldandmoreincontactsandmaybeyourorderbookorbacklogorhowyouseeitplayingoutindifferentregions?
DaveCote (Chairman,CEO):
Sure.Itwouldbeprettyconsistentwithhowwereseeingtheeconomies.
TheUSwouldsay--Ihopeyou'rerightalsowerealittlelowerinourestimations,butwethinkthatcontinuestoriseupward.It'sstillkindofareflectionofthegreatrecession,andyouheardussayatthetimeaboutVshapein,Vshapeout,slowin,slowout,andnon-resconstructionismoreofaslowinslowout.Wethinkit'sanicesteadygainanditjustcontinues.Youcouldarguethere'ssomeoffsettothatwithoilandgasCapExbutthathasreallyminimaleffectonournon-resconstructionbusiness.
InEuropeisconsistentwiththeeconomyisgoingtobeveryslow.Chinaprobablygoingtocontinuetobeamix,andinterestingphenomenontherecausethetier1citiesthatareexperiencingmoreoftheeconomicslowdown,theystillcouldusemorehousing.Andinsomeofthetier2,3,4citieswereGDPwillbegrowingfastermayhavebeenoverbuiltalittlebit.Sothatonestilltobefiguredoutbutoverallwethinkit'sstillanetpositiveonnon-resconstruction.
India,therecouldbeanawakeninginIndia.I'veneverseensuchexcitementinthebusinesscommunityinthe20+yearsthatI'vebeengoingthere.I'mactuallyprettyencouragedaboutwhattheycouldbedoingandinfactIamgoingtheretomorrowtobethereforthepresident'svisitaspartofhisUSIndiaCEOforumandIreallythinktherecouldbeatakeofftherethatwe'veallreallybeenwaitingforatleast10or12yearsnow,andthatonecouldturnouttobequiteagoodpositive.
TomSz losek(CEO):
ThethingIwouldaddtothatDave,isScotttoansweryourquestiononthenon-res.IlookatourexposureintheproductsbusinessesinACSprincipallyinfireandinsomeofthecommercialbusinessesinECC.
AsIsaidinmycomments,thegrowthratehasbeenverynicemid-singledigitsapproachingdoubledigitsinsomecases,sogoodtrendsthere.Andtheninbuildingsolutions,wherewehave,weprovideboththeprojectsandservicesinthatsamespace.
Thebackdoorratesandbacklogshavebeengood.Ifyoulookatthebacklogoverallforthebusinessesit'supaboutmid-singledigitsoverlastyear.Andit'sacrossalltheregions.It'sactuallydoubledigitsinEuropebutthatcomesoffalowercomparison.Butoverallyouknoweachoftheregionsareinthatrange.
Sowefeellikeit'sheadedintherightdirection.
Scot t Davis (Analyst-Berkeley):
That'sencouraging.WellhaveasafetriptoIndia,David,givethepresidentmybest.
DaveCote (Chairman,CEO):
Okay.
Operator:
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JeffreySprague,VerticalResearch.
Jef f reySprague (Analyst-VerticalResearch):
Thankyou,goodmorning.
Justacoupleofthings,backtothatenergyexposuresandthelike.OnU0Pinparticularandthecapacitythatyouputinplace,doyouguyshavepeoplecontractuallylockedupthere?
Isthereanykindoftakeorpayorasystemdoeskindofunexpectedlytakekindofasharperturnfortheworseyourkindofexposedthere?
TomSz losek(CEO):
Yes,exposuresnotthatgreatandithelpsthatwegetupfrontpaymentsonthetechnologylicensing.So,yes,iftherewasaseveredownturnofcoursewe'dfeelit,butI'mnotthatworriedaboutitrightnow.
Jef f reySprague (Analyst-VerticalResearch):
AllrightweareseeingafewrefinerycancellationsintheUSjustthroughthisweekalone.Iwasalsojustwonderingonhedges.Tomhowthosework.WasthereaPNLexpensein2014toprepyourselfherefor2015,oristhatrunningthroughonthebalancesheetsomehow?
TomSz losek(CEO):
Goodquestion,Jeff.Allofthehedgesqualifyformarkettomarketaccounting.I'msorryqualifyfornotmarkettomarket.
Sotheywould--theimpactofthehedgeinstrumentswhentheysettlewouldberecognizedatthesametimetheunderlyingitemsthatarebeinghedgearerecognized.There'snothingunusual,it'sjusttheextentofthecurrencythatwe'vegoneoutandhedged.
Jef f reySprague (Analyst-VerticalResearch):
Okay.AndI'mjustwonderingifyoucouldgivealittlemorespecificcoloronArrowSpareswhenyouspoketokindofaftermarketgenerallyandkindofallinwithRNO,butwhat'sgoingoninsparestrends?Areyouseeing,youknowmoreactivitywitholderairplanesthatmightbefuelcostsrelatedoranythingthatstandsout?
TomSz losek(CEO):
Itellyouonthe--it'salittlebitofadichotomybetweenATRandBGAbutrealstronggrowthontheATRsite.Andmid-single-digitgrowthonthespares.It'sgrowingonBGAsideaswellbutnotassignificantly.Butwedoexpectthose--thattoimproveintheATRtrendstoimprovefor2015.
Jef f reySprague (Analyst-VerticalResearch):
Okay.Great.Thankyouguys.
TomSz losek(CEO):
You'rewelcome.
Operator:
(OperatorInstructions)
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StephenTusa,JPMorgan.
StephenTusa (Analyst-JPMorgan):
Helloguys.GoodMorning.Mediocrequarterbutit'sgoodenoughthesedays.
SojustonUOP,justremindushowmuchofthatbusinessisnewprojects,andifyouweretoseeanairpocketinnewprojectswhatkindofbacklogdoyouhavetodaytokindofgiveyoualittlebitofleewaytotakeaction?Soforexampleinthefirstquarterifyousawthatnumbergodown30%whenwouldthathityourevenuewise.Isthatevena16issueisthatmorelikea2017issue?
TomSz losek(CEO):
IguessIwouldconsiderthecompositionofthatUOPbacklogStevetokindofanswerthatquestion.AsIsaidthebacklogisheldupverywell.
DaveCote (Chairman,CEO):
Ihaveatoughtimeseeingit.EvenintherecessionIdon'tthinkitwasthatbad.
TomSz losek(CEO):
Ithinkonthecapitalsidewherewecommendonthiscapitalprojectsissortofthemiddleortheend.Andsomostofthecapitalisspentinthegroundandwewouldcomeinaninstallthesystemsandthetechnology.Sothebacklogisholdingup.
Iwouldalsosaythatifyoulookatthecompositionofthebacklog,it'sinthecatalyst,it'sinequipment,andit'singas.Andinallthreeplacesitsholdingupandthere'sreallynotanymaterialdifferencefromwhatweseen.SolikeDavesaidIhaven'theardorseenanythingintermsofpotentialdecline.
StephenTusa (Analyst-JPMorgan):
Right.I'mjusttryingtounderstandwhatkindofvisibilityandtimingdynamicsplannedyourabilitytotakeactionifhedoseesomethinglikethat.
DaveCote (Chairman,CEO):
Wehavetimetoreactnotjusttherebutaroundthecompany.
StephenTusa (Analyst-JPMorgan):
Right.AndyourordersandbackloginUOPandtheordersinthefourthquarterandwhatyourbacklogintheyearat?
TomSz losek(CEO):
Idon'tknowwhetherwedisclosethat.
StephenTusa (Analyst-JPMorgan):
Wasn'titlike$2.8billionorsomethinglikethatattheendofthethirdquarter?
IknowyouguysgaveanumberatyourHPSday--inNovemberIbelieve.No?
DaveCote (Chairman,CEO):
Notoffthetopofmyhead.Wecangetbacktoyouonthatone.
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StephenTusa (Analyst-JPMorgan):
AndIguessjustoneotherquestiononcapitalallocation.
Atanykindofchangeinphilosophyaroundbuybacksyouknowversusdealhere?Anythinggettingalittlemoreattractiveasthemarketkindofbumpsaround?
DaveCote (Chairman,CEO):
Iwouldn'tsayourphilosophyhaschangeandthat'swhatyousawusincreasethedividendgreaterthantheearningsratethisyearbecausethat'sconsistentwithourfive-yearplanofraisingthepayoutratiooverthisfive-yearperiod.
Butthat'sgoingtocontinuetobeapriorityforus.AndI'dsayontheM&ApipelineI'mactuallyfeelingbetteraboutthatthanIhaveinthesepastfewmonths.Ialwaysfeltgoodaboutit,butIwouldsaytheworkRogerisdoingandthebusinessesaredoingisimprovingthatoverallpipeline.
Itdoesn'tmeananythingisgoingtohappensoonbutIcansayIfeelbetteraboutit.Ithinkthere'ssomeincreasingly--let'ssaygoodpropertiesthatwouldbeverygoodfitwithHoneywellifwecouldmakethemhappen.
StephenTusa (Analyst-JPMorgan):
Gotit.Great,thanksalot.
DaveCote (Chairman,CEO):
You'rewelcome.
Operator:
NigelCoewithMorganStanley.
NigelCoe (Analyst-MorganStanley):
Thanks,goodmorning.Dave,youmentionyouarefeelingmorebullishontheconsensusforfiveyears,andeveryoneelsefearfulaspricescomeinsomewhat.Soundslikeyoumightbeabouttodeploythebalancesheetisthatafaircomment?Steveyoumentionedthebacklogislookingprettyfertilebutjustconceptuallyisthatcorrect?
DaveCote (Chairman,CEO):
JusttomakesureIunderstoodareyousayingamIgettingreadytodosomething?
NigelCoe (Analyst-MorganStanley):
Welljustgivenmultipleshavecomedownalittlebitandyou'vegotamorebullishviewontheeconomythanmost.
DaveCote (Chairman,CEO):
Yes,Iwouldneverofcoursesayanythingonewayoranother,Nigel.IjustsayI'mencouragedbywhattheguysaredoingonthepipelineandthestuffI'mseeing.Andwe'vegotthecapabilityandwerejustgoingtocontinuetobesmartaboutit.
NigelCoe (Analyst-MorganStanley):
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Okay.That'sfair.
Andthecommentarysurroundingbuildingsolutionsisreallyencouraging,andobviouslywe'veseenapickupingeneralconstructionactivitybutamwonderingtheperformancecontractingenergy-savingpartofthatportfolioareyouseeingsimilartrendsthere?Andtherehasbeenabitofadebatethatlowenergypricesmeansthatsomeofthisworkcouldgetpushedoutdoyouagreewiththatthoughtprocess?
DaveCote (Chairman,CEO):
WellIguessyou'dhavetosayyesit'spossiblebutwerenotseeingthat.
It'snotlike$50oilischeap,itwasn'tthatlongagothatwewereconcernedthatitcouldbearecessionitcouldhit$35.So$50isnotcheap.
It'scheaperthanitwas,butisnotcheap.
NigelCoe (Analyst-MorganStanley):
Okay,areyouseeingsimilartrendsintheperformancecontractingside?
DaveCote (Chairman,CEO):
Yes.Ordersaregoodthere.
NigelCoe (Analyst-MorganStanley):
Okay,andthenjustaquickoneonthehedgeaccounting.Sothewaythatworksisyoutakethefullimpactonthetopline,andthenthemitigationisthroughthecogsline?
TomSz losek(CEO):
Willactuallytheitemsthatwerehedgingandweregettingintoacomplicatedaccountinglessonhere,buttheitemsthatwerehedgingareactuallycostitemsthatweredoingitselectivelythroughouttheportfolio.
Asyoucanappreciatewehaveaglobalsupplychainandalotofcurrenciesmovingacrossborders,butwhatwedoisfocusonhedgingtheexpenseitems.AndyouknowyouletthatenablesyoutoprotecttheoverallPNL.Butwhatthatdoesisopenupthetoplineandforthetoplineisinalotofcasesexposedtocurrency.
NigelCoe (Analyst-MorganStanley):
Right.AndIjustquickly,Ithinkyoumentionedyourhedgeddownto110,isthecorrectTom?
TomSz losek(CEO):
No.Isaidourplanwasbasedon120,andwe'vehedgedataratethatIthinkprotectsthatprettywell.
NigelCoe (Analyst-MorganStanley):
Okaythanks.
Operator:
JoeRitchie,GoldmanSachs.
JoeRitchie (Analyst-GoldmanSachs):
CompanyName:HoneywellInternat ionalIncCompanyTicker:HONSector:Indust rialGoods
Industry:Indust rialEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page20of 22
Thankyou,goodmorningeveryone.Dave,IjustguesssincelasttimeIsawyouIhavetosaycongratulationstoyourpatsthefloodgatenotwithstanding.
DaveCote (Chairman,CEO):
Thepostandthenewshavingaball,sotospeak,withthis.
JoeRitchie (Analyst-GoldmanSachs):
Indeedtheyare,andtheyprobablyshould.Butmovingontomaybeaquestiononcapitalallocation.IjustwanttoaskNigel'squestionslightlydifferently.Evaluationsofcomedownespeciallyinoilandgas,hasyourpriorityintermsofwhereyou'relookingforthenexttargethasthatchangeatall?Justgivenclearlytherearemoreattractivevaluationsontheoilandgassidetoday?
DaveCote (Chairman,CEO):
Iwouldsay--I'dbackuponitIguessandsaygreatpositionsingoodindustriesarestillgoingtobecomethefundamentalforus.Andsecondly,pricingmakesadifference.
Sothere'salotofstuffthatwe'dlikeinalotofdifferentsegmentsmanyofwhichwereoutlinedforyouinthepast,andwe'regoingtocontinuetolookatdoespricingmakessense,doesitmakesensetodayversusfurtherintothefuture.Andwetendtotrytobeprettycarefulabouttimingwhenitgoesintoevenpickingoffagreatpositioninagoodindustry.
JoeRitchie (Analyst-GoldmanSachs):
Okay.Thatmakessense.AndIguessgiventhatthismonthyoujustgotbackfromyourtop300meetingI'dbecurioustohearhowyoufeelabouttheprogressyouguysaremakingintermsofpivotingthecompanyreallytoanorganicgrowthstory.
Youknowthemarginstoryistherebutreallypivotingtoorganicandimprovingyourcashflowconversionoverthenextfewyears.
DaveCote (Chairman,CEO):
Maybethebestwaytosayitisthatcomingoutofthatmeeting,wehad300unbelievablyenergizedpeople.EvenmoresothanI'veseeninthepast.Andeverybody'sreallyprettybullishnotjustaboutwhatwe'vedone,butaboutwherethingsaregoing.
AndHOSGoldandwhatwearedoingtodevelopandfundthebreakthroughinitiativesforthe76Enterprisesisreallyenergizingeveryonearoundtheworld.Justwonderfultosee.
JoeRitchie (Analyst-GoldmanSachs):
Okay.Allright.
Soprettyconfidentintheoutlookthereandthenmaybeonelastfollow-upquestiononTS.Tom,youmentionedthatyouknowthegrowthisbeenreallygood,yourexposureispredominantlytoEuropeandyouhavegotautobuildsthatareexpectedtomoderate15.Youmentionedinyourpreparedcommentsthatthere'sbeenincreasingimprovementinthelightvehiclegasapplication,isyourportfoliopositionedwellforthatopportunityandmaybejustalittlebitofcolorthere.
TomSz losek(CEO):
WellfirstofallwhatI'mreferringtoistheincreasedpenetrationturbosonthegascombustionenginesonlightvehicles.That'sjustatrendwereseeingintheUS,China,India,everywhere.
CompanyName:HoneywellInternat ionalIncCompanyTicker:HONSector:Indust rialGoods
Industry:Indust rialEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page21of 22
Andwearewell-positionedtotakeadvantageofthat,we'vegotnotmanufacturingineachofthoseplacesbutalsointhelocalproductdevelopmentcapacityandengineeringteamsthatworkwiththeOEMsinthoseregions.SoIfeellikewereprettywell-positionedandthegrowthratesyouknowsupportthat.
JoeRitchie (Analyst-GoldmanSachs):
Okay.Thanksguysallgetbackinto.
Operator:
ChristopherGlynn,Oppenheimer.
ChristopherGlynn(Analyst-Oppenheimer):
Thankyou,goodmorning.Alotofdetailalready.JustdrillingintoACSalittlebetter.Itwasnicetoseea6%organicnumberagainstthe5%organiccomptheyearagoinparticular.Justwondering,howyouguysarekindofpricingattributionhereintermsofmarketsversusexecutionagainsttheVPDandHUEandthingslikethat.
DaveCote (Chairman,CEO):
PrettywelloverallI'dsaysomeofthebusinessesaredoingextremelywellwithinsomeofthescanningandmobilityforexamplewe'dhavetohighlightsthegasdetectionbusinesshasdoneextremelywellwithit,andthenI'dsayeverybodyelseiskindofinthemiddleofprogress.Butprogressisgoodeverywhere.It'sreallyworkingwell.
ChristopherGlynn(Analyst-Oppenheimer):
Okay.Thanksthatwasall.
DaveCote (Chairman,CEO):
You'rewelcome.
Operator:
IwouldnowliketoturntheconferencebackovertoMr.MarkMacalusoforanyadditionalclosingremarks.
MarkMacaluso:ThanksKellysaidandwithoutitliketohaveacallbackovertodayforfinalremarks.
DaveCote (Chairman,CEO):
Wellwe'reproudofwhatwe'vedone,butevenmoreimportantwereexcitedaboutweregoing.Ourbusinessmodelreallydoeswork.AndwhileIbelievethatloweroilpriceswillleadtoaslightlybetterglobaleconomythanwhat'sforecastedcurrently,wellplanconservativelyasalwaystoensurethatwedodeliveronourcommitmentstoyou.
Webelievewearewellpositionedtodeliveronourfive-yearcommitmenttoyou,andwelookforwardtoseeingmanyofyouatourMarchinvestordaywherewe'llsharemoreabouthowandwhywillgetthere.
Andinthemeantime,thenextthefollowingSunday,inaveryAmericansport,IhopewecanallbePatriots.Thankyou.
Operator:
Thankyou.
CompanyName:HoneywellInternat ionalIncCompanyTicker:HONSector:Indust rialGoods
Industry:Indust rialEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page22of 22
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