honeywell international (hon) earnings report: q3 2015 conference call transcript · 2015-10-16 ·...

CompanyName:HoneywellInternationalIncCompanyTicker:HONSector:IndustrialGoodsIndustry:Industrial

EventDescription:Q32015EarningsCallMarketCapasofEventDate:76.82BPriceasofEventDate:96.5

©2014TheStreet,Inc.Al l R ightsReserved Page1of21

HoneywellInternational(HON)EarningsReport:Q32015ConferenceCallTranscriptThefollowingHoneywellInternationalconferencecalltookplaceonOctober16,2015,09:30AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

MarkMacaluso;HoneywellInternationalInc.;VPofIRDavidCote;HoneywellInternationalInc.;Chairman&CEOTomSzlosek;HoneywellInternationalInc.;SVP&CFO

OtherPart icipants

ScottDavis;BarclaysCapital;AnalystJeffreySprague;VerticalResearchPartners;AnalystJoeRitchie;GoldmanSachs;AnalystHowardRubel;JefferiesLLC;AnalystAndrewObin;BankofAmericaMerrillLynch;AnalystGautamKhanna;CowenandCompany;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

Goodday,ladiesandgentlemen,andwelcometoHoneywell'sthirdquarter2015earningsconferencecall.

(OperatorInstructions)

Asareminder,thisconferenceisbeingrecorded.

I'dnowliketointroduceyourhostfortoday'sconference,MarkMacaluso,VicePresidentofInvestorRelations.

MarkMacaluso (VPofIR):

Thanks[Heather].GoodmorningandwelcometoHoneywell'sthirdquarter2015earningsconferencecall.WithmetodayhereareChairmanandCEO,DavidCoteandSeniorVicePresidentandCFO,TomSzlosek.

Asareminder,thiscallandWebcast,includinganynon-GAAPreconciliations,areavailableonourWebsiteatwww.honeywell.com/investor.

Mostoftheelementsinthispresentationcontainforward-lookingstatementsthatarebasedonourbestviewoftheworldandofourbusinessesasweseethemtoday.Thoseelementscanchange,andweaskthatyouinterprettheminthatlight.Weidentifytheprincipalrisksanduncertaintiesthataffectourperformanceonourform10-QandotherSECfilings.

Thismorningwe'llreviewourfinancialresultsforthethirdquarter,gothroughourguidanceforthefourthquarter,andaswellprovideinitialframeworkfor2016.Finally,asalwayswe'llleavetimeforyour




questionsattheend.

Withthat,I'llturnthecallovertoChairmanandCEO,DavidCote.

DavidCote (Chairman&CEO):

Morning,everyone.AsI'msureyou'veseenbynow,Honeywelldeliveredanotherquarterofdouble-digitearningsgrowthhighlightedbyourstrongexecutionacrosstheportfolio.ReportedEPSof$1.60increased10%,normalizedfortax,reachingthehighendofourguidancerangeforthequarter.

Salesof$9.6billionwereup1%onacoreorganicbasis.Wesawcontinuedgrowthinourbusinessjetenginesandrepairandoverhaulactivitiesinaerospace,andinourshortcycleresidential,commercialandindustrialproductsbusinessesinACS.InPMT,demandforUOPcatalystsandSolsticeapplicationscontinued.Wegeneratedfreecashflowof$1.4billioninthethirdquarter,withfreecashflowconversioncominginabove100%,andweexpectthattocontinueinthefourthquarter.

Whilewealwayslikemore,ourtoplinegrowthwasrespectableinthissofteningmacroenvironment,andourrelentlessfocusonexecutiononceagainresultedinoutstandingmarginexpansionandcashconversion,whilecontinuingtodotheseedplantingforabrightfuture.Oursegmentmarginexpanded190basispointsto19.3%.EachofourthreesegmentsdeliveredmarginexpansionabovetheguidancewecommunicatedinJuly.

HOSGoldandourkeyprocessinitiativescontinuetodriveproductivitybenefitsandourpreviouslyfundedrestructuringactionswillhelpustocontinueimprovingouroperations.We'veproactivelyfundedover$60millionofnewrestructuringinthequarterbuildingonahealthypipelineofnewprojects,andweintendonkeepingthatpipelinefulltosupportstrongmarginexpansionnextyearandbeyond.

Therecontinuestobealotofexcitingdevelopmentsacrosstheportfolio,soletmetellyouaboutacoupleofthem.WeannouncedtheacquisitionofElsteronJuly28for$5billion.Elsteristheleadingproviderofthermalgassolutionsforcommercial,industrialandresidentialheatingsystems,andgas,water,andelectricitymetersincludingsmartmetersandsoftwareanddataanalyticsolutions.

InfrastructureinvestmentsandincreaseingasconsumptioninhighgrowthregionslikeIndiaandChinawillcontinuetodrivedemandforElster'sgasheatingassets,strengtheningourexistinggascombustionportfoliotocreateafullsolutionoffering.Elster'smeteringportfolioconsistsofbasicandsmartmeterswhichmeasurevolumesconsumedbycommercial,industrialandresidentialusers.Thegrowthherewillcontinue,astheadoptionofsmartmetersanddataanalyticsincreasesandasthelegislativemandatesinEurope,China,andothermajorregionstakeshape.

Inaddition,Elsterhasacomplementarypresencetoprocesssolutionsinnaturalgas,transportationandstorage.Alargeportionofnaturalgasreservesarefoundinremoteregionsandasthelong-termtrendtonaturalgasremainpositive,theneedtotransportitfromthesegeographiestotherestoftheworldcontinuestogrow.Thatmeansmorepipelines,regulators,controlvalvesandmeteringsystems.AndwithElsterwe'llbepositionedwellateachpointofthevaluechange.

Elsterisexpectedtoadd$2billioninsalesatapproximately20%operatingmargin,buildingonourgreatpositionsandgoodindustriesinACSandPMT.Weexpectapproximately8%ofsalesascostsynergies,andourdeploymentofHOSGoldacrosstheElsterenterprisewillbethekeytoachievingtheintegrationbenefits.We'realsoconfidentthattherearesignificantsalessynergyopportunities,particularlyinhighgrowthregionslikeChina,byleveragingourcurrentchannelsandinfrastructure.Wecontinuetoexpectthedealtocloseinthefirstquarterof2016andwe'reactivelyplanningtheintegration.

WecontinuetobelievewecansignificantlyenhanceshareownerreturnsthroughM&Aaswe've




proveninthepastwithacquisitionslikeEOP,Intermec,ThomasRussellandEMS.InAugust,Honeywell'spartnerInmarsat,successfullylaunchedthethirdglobalexpressorGXsatellite.ThelatestlaunchcompletestheGXsatelliteconstellation,whichwillultimatelyprovidepassengers,aircrewsandoperatorswithhighspeedinternetconnectivityanywhereintheworld,includingontransoceanicflights.

Aircraftconnectivityisoneofthebiggesttechnologicalrevolutionshappeningwithinthecommercialaviationsectorasthenumberofaircraftequippedwithpassengerconnectivitysystemsisexpectedtodoubletomorethan4,000by2016.Andwirelessin-flightentertainmentisexpectedtobeonaboutaquarteroftheglobalcommercialfleetby2018.Honeywell'spositiontobenefitfromthegrowingdemandinconnectivityastheexclusivehardwareproviderforInmarsat'sGXsatelliteconstellation,andtheexclusivewirelessairtimeresellerforInmarsatglobalexpressKAbandaircraftconnectivityservicesforbusinessaviationoperators.

Asairlinesincreasinglylookathowtheycanutilizerealtimeconnectivityforflightoperationaltasks,likerealtimeweatheranddatabaseupdatestothecockpitandproactivemaintenance,andaspassengerscontinuetorequestfasterWi-Ficonnectionsin-flight,theneedforHoneywell'sJetWave,high-speedsatellitecommunicationshardwarewillcontinue.Wecurrentlyhaveordersforover300JetWavesystemsin2016acrossourairtransportandbusinessaviationcustomerbase,withadditionalawardsexpectedsoon.

Intransportationsystemsweunveiledour2015globalturbochargerforecastattheannualFrankfortInternationalMotorShow.Wenowestimatethatby2020roughlyhalfofallcarsontheroadwillhaveturbochargeengines,upfromonethirdofallpassengervehiclestoday.

Inaddition,globalmarketdemandwilldriveanincreaseddesireforturbotechnologyinnovationsthatenhanceavehicle'soverallpowertrainsystem,reducecomplexityandaretailoredtolocalmarketneeds.Inthisperiodofacceleratingturbopenetration,Honeywelliswell-positionedtomeetthechangingdemandsofourcustomers,andweexpecttocontinuegrowingfasterthantheindustryduetoourdifferentiatedtechnology,globalfootprintandtheHoneywelloperatingsystem.

Withjustovertwomonthsleftintheyear,we'reconfidentinourabilitytodeliverontheearningsguidancewesetfor2015lastDecember,despitetheslowergrowthenvironmentintheglobaleconomysincethen.Weareconfirmingourfull-year2015earningsguidanceatapproximately$6.10pershare,representinggrowthof10%versus2014,whichwouldbeoursixthconsecutiveyearofdouble-digitearningsgrowth.We'llcontinuetobeflexibleandplanconservativelyaswemoveinto2016.

Tomwillpreviewourinitialplanningframeworkfornextyear,andasyou'llsee,therearebrightspotsinwhatwillbeaslowgrowthenvironment.We'vedemonstratethatwecanexecutewell,particularlyinatoughmacroenvironment,abigreminderofthevalueofourdiversifiedandbalancedportfolio,andthestrengthoftheHoneywellprocessinitiatives.

Segmentmarginsareexpanding,whileatthesametimewearecontinuingseedplantinginhighgrowthregions,highROICapEx,processimprovements,andnewproductsandtechnologies.Therestructuringwefundedwillproviderunwayforfuturemarginexpansionthroughoutourfive-yearplan.We'reexcitedabouttheyearaheadandlookforwardtodiscussingourplanwithyouinDecember.Sowiththat,I'llturnitovertoTom.

T omSzlosek(SVP&CFO):

ThanksDave,andgoodmorning.I'monslide5,whichshowsthethirdquarterresults.Salesof$9.6billionwereup1%onacoreorganicbasisaswewereabletoovercomeasluggishmacroenvironment.

GrowthwasparticularlynoteworthyinBGAOEwhereengineshipmentswerestrong.InourACSshort




cycleproductsbusinessesacrossresidential,commercialandindustrialendmarkets,inUOPcatalysts,andinourSolsticesuiteofrefrigerants.Thegrowthintheseareashelpedustomitigatetheongoingchallengeswehavediscussedintheoilandgas,commercialvehicleandenergyretrofitmarketswhichweserve.

Onareportedbasis,thesalesdeclinethisquarterwasagaindrivenbyforeigncurrencyandlowerpassthroughpricinginresinsandchemicals.Segmentprofitincreased5%,withsegmentmarginexpanding190basispointsto19.3%.AsDavementioned,allthreeofoursegmentscameinabovethehighendoftheguidanceweissuedbackinJuly.

WecontinuetobenefitfromHOSGold,ourfocusoncommercialexcellence,newproductdevelopment,functionaltransformationandstrongcostcontrolacrosstheportfolio,whilemaintainingourinvestmentsforgrowth.Reallyniceworkacrosseachofthebusinessesinarelativelytoughenvironment.

Similartothepriorquarter,itemsbelowsegmentprofitwerefavorableonayear-over-yearbasisaswehadanticipated.Higherpensionincomewasoffsetbyadditionalrestructuring,asDavesaidwefundedover$60millionofnewrestructuringprojectsthisquarter,buildingonour$300millionpluspipelineasoftheendofthethirdquarter,whichpositionsuswellforcontinuedmarginexpansionthroughoutthefive-yearplan.

Onsharecount,inadditiontoournormalrepurchasingtooffsetcurrentdilution,weacceleratedourrepurchaseactivityinthethirdquartergiventhemarketdownturninthelatesummer.Theseactionswillenableustooffsettheexpecteddilutioninthenextfewquarters,andbroughtourweightedaveragefullydilutedsharecounttoapproximately790millionsharesforthequarter.Weexpectthecounttobeapproximately781millionsharesinthefourthquarter,asthefullimpactofthisrepurchasingactivitykicksin.

Reportedearningspershareof$1.60wasup10%normalizedtoourexpectedfull-yeartaxrateof26.5%inbothperiods,againcominginatthehighendofourEPSguidancerangeandmarkinganotherquarterofdouble-digitearningsgrowth.Finally,freecashflowwasstronginthequarterat$1.4billion,up43%versus2014withconversionof110%,largelydrivenbyimprovementinnetincomeandworkingcapital.Weanticipatefreecashflowandconversiontocontinueabove100%inthefourthquarter.

Sooverallanotherquarterofstrongearningsgrowth.We'reconfidentinachievingourEPSguidancefortheyear.Letmemoveontoslide5.

You'llrecognizethisformatweusedtoexplainthecomponentsofourrobustmarginexpansioninthequarter.Amajorityoftheexpansioniscomingfromouroperatinginitiatives,whichasyoucanseegenerated140ofthe190basispointmarginimprovement.HOSGoldistheoveralldriver.Newproductintroductionsandcommercialexcellencecontinuetodrivevolumegrowthdespitetheslowgrowthenvironment.

Eachsegmentisgeneratingsignificantproductivityandwe'recontinuingtoseethatimproveourgrossmarginrates.Oursupplychainsarebecomingmoreleanandthey'reastrongcollaborationacrosstheorganizationtodrivedownourmaterialcostsandindirectspend.We'realsoseeingsavingsfrompreviouslyfundedrestructuringactions.

Movingoverontheslide,thefrictionmaterialsdivestiture,ourforeigncurrencyhedgingapproachandlowerrawmaterialspassthroughpricinginRNC,alsoenhancedmarginscollectivelytothetuneofabout50basispoints.WesoldfrictionmaterialsinJulyof2014,thoughwe'velargelylappedthisbenefit.However,itisapermanentimprovementtoourmarginrate,reflectingourcontinuedapproachtocapitalallocation.




Onforeigncurrencyourhedgingstrategyprotectsouroperatingresults,evenassalesfluctuatewithchangesincurrency.Sothereisaliftinmarginthroughyearend.Andfinallyaswe'vediscussed,ourpricingmodelinresinsandchemicalsprotectsprofitdollarsinaperiodoflowersellingprices,therebyincreasingthemarginrate.Soanothersolidquarterofmarginimprovementdrivenbyouroperatingsystemandkeyprocessinitiatives.Weexpecttoseesimilaroutperformanceinthefourthquarteraswe'llexplainshortly.

Movingtoslide6andtheaerospaceresults,salesforthethirdquarterwereup2%onacoreorganicbasisdrivenbycontinuedgrowthinBGAOEengineshipments,commercialaftermarketandlightvehiclegasvolumes,offsetbylowercommercialvehicleproductionandtransportationsystems.Segmentmarginexpansioncontinuedtobestrongat150basispointsandweexceededthehighendoftheguidanceinthequarter.

CommercialOEwasup4%onacoreorganicbasis,drivenbyadouble-digitincreaseinBGAengineshipments,assaleswereupacrossallofthelargebusinessjetplatformsonwhichweparticipate.DeliveriesofourHTFenginescontinuedtogrowandweexpectenginedemandtoberobustintothefourthquarter.Similartolastquarter,airtransportOEsaleswereflatasplannedwhileregionalsalesdeclinedduetointentionaldelaysonshipmentstocertainemergingmarketcustomers.

Commercialaircraftsaleswereup3%onanorganicbasis,drivenbycontinuedstronggrowthinrepairandoverhaulactivities,partiallyoffsetbylowersparesales.R&Osaleswereuphighsingle-digitinthequarterandhaveimprovedsequentiallythroughout2015.WesawastronggrowthgloballyinATR,R&O,particularlyinEuropeandAPAC,whileourBGAR&ObusinesscontinuestoperformwellinitskeynorthAmericanmarket.

Onthesparesside,RMUs,whileretrofitmodificationsandupgradeshavecontinuedtomoderateaswehaveplanned,inATRsparesaleswereslowerthanexpected,approximatelyflatinthequarter,drivenprimarilybylowerthanexpecteddemandincertainhighgrowthregions,principallyChina.LookingaheadweexpectthatoursatcomandotherRMUswilloffsetsomeofthissparesoftness.

Defenseandspacesaleswereup2%onacoreorganicbasisdrivenbydouble-digitgrowthinourinternationaldefensebusiness.DemandfromourMiddleEastandAsia-Pacificcustomerswasstrong,whiletheUSoursaleswereslightlydown.

Finally,transportationsystemsalesincreased1%onacoreorganicbasisduetonewplatformlaunchesandcontinuedvolumegrowthforlightvehicleapplications.Salesgrowthoverallwaslowerthanexpectedduetolowercommercialvehiclevolumes,particularlyinNorthAmericaandChina.Weexpectthatcommercialvehiclevolumeswillimprovesequentiallyinthefourthquarter.Onareportedbasis,TSsalesdeclined16%reflectingforeigncurrencyheadwindsandthefrictionmaterialsdivestitureItalkedabout.

IwanttotakeaminutetoaddresssomeofthequestionswereceivedabouttheimpactoftheVolkswagenemissionsmatteronturbotechnologyandonourturbobusiness.IwantedtoexplainwhythisisfarfromadisasterfromHoneywell,infactit'sstillanorganicgrowthstory.First,whilewevaluetherelationshipwithVWaswedoeverycustomer,oursalestoVWrepresentslessthan1%oftotalHoneywellsales.So,whilesignificant,we'renotdependentonanyonevehiclemanufacturerglobally.

Second,thebenefitsofdieselenginesremaincompelling.Dieselenginesoperateathigherlevelsofcompression,enablingthemtoachievehigherfuelefficiencyandlowerCO2emissionsthangasolineengines.Inaddition,dieseldeliverssignificantlyhighertorque,enablingbetteraccelerationandgreatertowingcapacityandpayloadintrucksandlightcommercialvehicles.

Third,theoutputfordieselsupplycontinuestoberobustasdieselwillalwaysbeoneoftheuseful




outputsfromtheoilrefiningprocess.Aslongasthereisoilbeingrefined,therewillbeanamplesupplyofdiesel.Andlast,intheunlikelyeventthere'sagradualshiftawayfromdieseltechnologyorfromaparticularOEM,wearewell-positionedonotherexistingOEMplatformsandexpectthatwe'llcontinuetowinasignificantshareofnewplatforms,particularlyingaswherewehaveanincreasingposition.

Onayear-to-datebasis,ourTSbusinesshasgrown3%organicallyandweexpectthatgrowthtocontinueinto2016,asglobalpenetrationofdieselandgasturbochargertechnologyacceleratestoroughlyhalfofallvehiclesontheroadby2020.TransportationsystemscontinuestobeakeyelementoftheHoneywellgrowthstory.

Aerospacemarginexpanded150basispointsabovethehighendofourguidancerangedrivenbycommercialexcellence,productivitynetofinflationandthefavorableimpactsfromforeigncurrencyhedges,andthefrictionmaterialsdivestiture.PartiallyoffsetbythemarginimpactofhigherOEshipmentsandcontinuedinvestmentsforgrowth.TheseincludeflighttestingofournewconnectivityofferingsontheBoeing757testaircraft,whichsomeofyoumayhaveseeninParis,andnewproductionintroductionsacrossourmechanicalandelectricalportfoliotoensurewecontinuetowinontherightplatforms.

Let'sturntotheACSresultsonslide7.InACS,AlexandhisteamcontinuetoadvanceourconnectedACSinitiative.ACShasrealignedfourofitsbusinessesintotwostrategicbusinessunits,namelyHoneywellSecurityandFireorHSF,andSensingandProductivitySolutions,orSP&S,whichencompassesthelegacy,sensingandcontrolandscanningandmobilityportfolios.Thebroaderscopeofthesebusinesseswillprovideusbetterscaleinourhighgrowthregionsanddifferentiatedconnectivitysolutions,andwillpositionustobettercapitalizeongrowthopportunitiesacrossresidential,commercial,andindustrialmarkets.Youwillhearusreferencethesebusinessesthroughouttherestofthepresentation.

ACSsaleswereup3%onacoreorganicbasisinthethirdquarter,asweexperiencedcontinuedgrowthinourshortcycleproductsbusinesses.ACScontinuestooutperforminChina,up10%inthequarterdrivenbyourconnectedACSChinabusinessandcontinuedinvestmentsforgrowth.TheACSmarginexpansionwasagainverystrongat130basispoints,andweexceededthehighendofourmarginguidancerangethisquarter.

Energy,safetyandsecuritysaleswereup4%onacoreorganicbasisinthethirdquarter,drivenbythestrongperformanceinoursecurityandfireandsensingandproductivitysolutionsbusinesses.S&PSdeliveredanotherquarterofsoliddouble-digitcoreorganicsalesgrowth,drivenbyvolumefromprogramwins.MostnotablyfromtheUSpostalserviceagreement,alongwithnewproductintroductionsinChina.

TherestofESSalsocontinuestobenefitfromnewproductintroductionsandfurtherpenetrationinourhighgrowthregions.Thiswaspartiallyoffsetbyvolumedeclinesinourindustrialsafetybusinessdueprincipallytooilandgasrelateddiscretionarycuts.Buildingsolutionsanddistributionsaleswereup1%onacoreorganicbasisinthethirdquarter.WecontinuetoseestrengthintheAmerica'sdistributionbusinesswheresalesgrowthhasimprovedsequentiallyeveryquarterin2015.Thiswasoffsetbyadeclineinbillingsolutions,drivenprimarilybysoftnessintheprojectinstallationandenergyretrofitbusinesses.

IntheenergyretrofitbusinesswecurrentlyhavebeenselectedincompetitiveRFPsforapproximately500millionofUSfederalandmunicipalbusiness,whichwillsubsequentlyconverttoordersandthentorevenues.TheconversionoftheseRFPwinsinordershasunfortunatelytakenalongertimethanwe'vehistoricallyseen,drivingthispoolofpreorderstomorethan2Xprioryearlevels.Butasaprecursortofutureordersandbacklog,thisisapositivesign.

Andonthefederalsideinparticularwiththepresidentialchallengerequiringawardbytheendof2016,webelievethesepreorderswillstarttoconverttoordersinthecomingquarters.OverallinHPSthe




backlogisflatyearoveryear,asgrowthinprojectsandserviceshasbeenoffsetbythisenergychallenge.Alsoconversionofordersandbackloghasbeenslowerthananticipated.ParticularlyintheAmericasandEMEA.

ACSmarginsexpanded130basispointsto17.2%inthequarter.Thebusinesscontinuestobenefitfromgoodconversiononhighervolumesandsignificantproductivityimprovementsnetofinflation.Atthesametimewecontinuetomakestrategicinvestmentsinnewproductdevelopments,connectedproductofferings,andinourhigh-growthregionswhich,aswe'venoted,drovedouble-digitgrowthandcontinuedordermomentum,particularlyinChina.Weexpectfurthermarginexpansionin2016andbeyondastheteamintegratesandbuildsouttheconnectedACSinitiativewedescribedatourinvestorday.

Andnowonslide8todiscussPMTresults.PMTsalesweredown3%onacoreorganicbasisinwhatcontinuestobeachallengingmarketenvironmentforoilandgas.VariousinthePMTteamhadbeenresilientandunrelentingintheirfocustoovercometheseheadwinds,weexceededthehigh-endofoursegmentmarginguidanceby80basispoints,drivenbystrongexecutionandcontinuedproductivityactionswhilemaintainingourinvestmentsforgrowth.

UOPsalesweredown15%onacoreorganicbasisdrivenbylowergasprocessing,licensingandequipmentsales,partiallyoffsetbyrobustcatalystdemandaswehadplanned.Catalystshipmentsforthenewolefinunitsacceleratedinthequarter,whilecatalystorderswerestrongwhichweexpectwilldrivesubstantialcatalystsalesgrowthinthefourthquarter.ThehighercatalystsalesbenefitedPMTmarginsinthequarteraswell.

Ingasprocessingweareseeingsomesignsoflifecomingoutofaquietfirsthalf.WesignedordersfortwonewRussellmodularunitsandexpecttheorderstofurtherbuildintothefourthquarter,drivenbyinternationalopportunities.Inprocesssolutions,coreorganicsalesweredown5%drivenbydouble-digitdeclinesinourshortcyclefieldproductsbusinessandweaknessinlongcycleprojects,partiallyoffsetbyhighersalesinourservicecontractbusiness.TheHPSprojectsandservicesbacklogsremainedsolid,upover15%onacombinedbasis.

InserviceswesawanincreaseindemandforourAssurance360servicepartnershipoffering,whichisamulti-yearagreementtomaintain,supportandoptimizetheperformanceofHoneywellcontrolsystems.Organicordersweredown6%inthequarterandweexpectsimilarchallengesfortherestoftheyearinHPSascustomersdelaycapitalspendingdecisionsandcutdiscretionaryspend.

Someofthespendingcutsreflectahesitancyinourinstallbasetoremovehighcapacityandhighlyprofitableplantsfromoperation,evenforshortmaintenanceperiods.ThisdeferredmaintenancewilleventuallyrequireaddressingwhichwillbenefitourHPSservicebusinessandforthatmatterourUOPcatalystbusiness.

Advancedmaterialsaleswereup8%onacoreorganicbasis,drivenbyfluorineproductswhichgrewdouble-digitsforthefifthstraightquarter,asdemandforSolsticeglobalwarmingproductscontinuestoramp.Inaddition,specialtyproductscontinuestobenefitfrominvestmentsinnewproducts.Onareportedbasisadvancedmaterialsalesdeclined8%,primarilyduetotheimpactofthelowerpassthroughpricinginresinsandchemicals,aswe'vehighlightedpreviously.

PMTsegmentmarginswereup330basispointsto20.8%,whichagainexceededourguidancedrivenbysignificantproductivityactionsnetofinflation,commercialexcellence,andthefavorableimpactofrawmaterialspassthroughpricinginresinsandchemicals.PMTinitiatedcostmanagementactionslatein2014toaddressthechallengesweanticipatedintheoilandgasenvironmentandhavebeenveryfocusedonreducingdirectmaterialandindirectcosts.Thiswaspartiallyoffsetbycontinuedinvestments




forgrowthandcapacityexpansionandR&DtodevelopgroundbreakingnewproductslikeSolstice.Wehavealsobenefitedfromongoingrestructuringandreducingourfixedcoststructure,whichshouldhelptosustainthestrongmarginexpansionwe'veseenyeartodate.

I'mnowonslide9withapreviewofthefourthquarter.BeforeIgetintothepreview,IwanttospendamomentremindingeveryoneofthegainfromthesaleoftheBEAVaerospacesharesandOEMincentivesfromthefourthquarter2014.Wesoldtheremaining1.9millionofBEAVsharesinthefourthquarteroflastyearandseparatelyincurredchargeof$184millionforcommercialOEMincentivesinaerospace.Onanafter-taxbasistherewasnoimpacttoEPSforthequarter,orfullyearfromthesetwotransactions.

ThecostfortheseOEMincentiveswasincludedintheaerospacesegmentasareductionofrevenue,whilethegainfromthesaleofBEAVsharesisbelowthelineandnotincludedintheaerospacesegment.Sothe2014reportedsalesandmarginsforAerowerecomparablylow.

Movingtothefourthquarterof2015,we'reexpectinganotherquarterofdouble-digitearningsgrowthtocapofftheyear.EPS,excludingpensionmark-to-marketadjustment,isexpectedtobeapproximately$1.58,up10%yearoveryear.TotalHoneywellsalesareexpectedtobe$10billionto$10.2billion,orup1%to2%onacoreorganicbasis.Segmentmarginsareexpectedtobeupapproximately120to140basispoints,excludingtheimpactofthe$184millionfourth-quarterOEMincentivesin2014.

Weexpectourmarginswillcontinuetoimproveonoperationalexcellencesimilartowhatwe'veseenthroughouttheyear.We'restillplanningafull-yeartaxratein2015of26.5%,inclusiveofafourthquartertaxrateofapproximately27.5%.AsImentionedearlier,weexpectthesharecounttobeapproximately781millionsharesinthequarteronaweightedaverageandfullydilutedbasis.Weintendtobeopportunisticbasedonmarketvolatilityandbereadytostepinagainwhenweseegoodbuyingopportunities.

Aerospacesalesareexpectedtobeup1%to2%onacoreorganicbasis.IncommercialOEweexpectthatcoreorganicsaleswillbeupmidsingle-digit,drivenprimarilybycontinuedhealthyenginedemandinmidtolargecabinbusinessaircraft.Incommercialaftermarket,weexpectcoreorganicsalestobeuplowsingle-digitswithsimilartrendstowhatwesawinthethirdquarter.Thatisstrongrepairandoverhauloffsetbysparesoftness.

DefenseandspacesalesareexpectedtobeflattoslightlyuponacoreorganicbasiswithcontinuedmodestdeclinesintheUSandslowergrowthintheinternationalbusinessagainstamoredifficultprioryearcomparison.Asareminder,defenseandspaceinternationalincreased17%inthefourthquarterof2014.

Intransportationsystems,salesareexpectedtobeuplowsingle-digitonacoreorganicbasis,drivenbybothlightvehiclegasanddieselturbovolumes,partiallyoffsetbycontinuedheadwindsfromlowercommercialvehicleproduction,particularlyinChinaaswehavediscussedpreviously.Aerospacesegmentmarginsareexpectedtoincrease40to60basispoints,excludingthefourthquarterof2014incentivesandthisisdrivenbycommercialexcellence,furtherproductivityimprovementsandpartiallyoffsetbythemarginimpactofhigherOEshipments.

MovingontoACS,salesareexpectedtobeup2%to3%onacoreorganicbasiswithlowsingle-digitcoreorganicgrowthinbothESSandBSD.GrowthinourresidentialandcommercialbusinesseswithinESSshouldbesimilartowhatwesawinthethirdquarterwithgoodperformanceinsecurityandfireinparticular.OntheindustrialsideS&PSgrowthwillbeslowerwiththecompletionoftheUSpostalservicedeployment,andweexpectcontinuedoilandgasrelatedheadwindsinindustrialsafety.

InBSDweexpectcontinuedgrowthinAmerica'sdistributiontobepartiallyoffsetbyaslowerconversionofordersoutofbacklogandbuildingsolutions.ACSmarginsareexpectedtobeup70to90basispoints




drivenprimarilybycommercialexcellence,continuedproductivitynetofinflationandthebenefitsofpriorperiodrestructuring.Wewillcontinuetheinvestmentsinnewproductdevelopmentandinhighgrowthregionstosupportfurthergrowthinthefourthquarterandinto2016.

PMTsalesareexpectedtobedown2%to3%onacoreorganicbasis,reflectingtheslowdownwe'veexperienced.We'reexpectingUOPtobeupmidsingle-digitonacoreorganicbasisprimarilyduetostrongdouble-digitpetrochemicalandrefiningcatalystgrowth,partiallyoffsetbycontinueddeclinesinourgasprocessingandprocesstechnologyandequipmentbusinesses.InHPSwe'reexpectingcoreorganicsalestobedownmidtohighsingle-digit,withdeclinesineachlineofbusiness.

Wecontinuetoseedelaysindiscretionaryspendacrosstheportfolioandtheconversionofordersintorevenuehasslowed.However,ourwinrateonmegaautomationprojectsishelpingtomitigatethesedeclinesanddriveastrongbacklog.Yeartodatewe'vewonwellover50%ofthesemegacompetitions.

Inadvancedmaterialswe'reexpectingcoreorganicsalestobedownslightly,principallydrivenbytiminginflooringsproducts.PMTsegmentmarginsinthequarterareexpectedtobeup300to320basispoints,drivenbystrongproductivitynetofinflationandthefavorablemarginimpactofrawmaterialspassedthroughpricinginresinsandchemicals.WhilethefourthquarterwillagainbechallengingforPMT,ourdisciplinedcostmanagementandproductivityinitiativesgiveusconfidencetodeliveronourcommitments.

Letmemovetoslide10whereI'dliketoreviewourfull-year2015outlook.Oursalesarenowexpectedtobeapproximately$38.7billion,upapproximately2%coreorganicanddown4%reportedversustheprioryear.Asforsegmentmargins,we'reexpectingthefullyeartobeapproximately18.8%,up220basispointsor180basispointsexcludingthefourth-quarterOEMincentivesfrom2014.ThisputsuswellabovethehighendofthemarginrateguidancewesharedwithyoulastDecember,andontracktoachieveour2018long-termtargets.

Therearesomeputsandtakesamongthesegmentsinceourlastupdate.Butwecontinuetohaveconfidenceinthesegmentmarginsforeachbusiness,roughly21%forbothaeroandPMTand16.5%foraero.StrongperformanceacrosstheportfolioandasDavementionedearlier,we'reconfirmingourfull-yearEPSguidanceatapproximately$6.10,representing10%growth.Whilethere'sstillworktodotoensurewedeliveronourfull-yearresults,wehavecommencedour2016planning.

Onslide11I'dliketowalkyouthroughsomeofourkeyplanningassumptionsandinitialthoughtsbybusiness.Thetableyouseedepictsourinitial2016viewbybusinesscomparedto2015.SojustsoI'mclear,neutralindicatesasimilargrowthratein2016as2015.Likewise,plusindicatesastrongergrowthratein2016versus2015.

Inaerospace,commercialOEgrowthwillbeinlinewith2015.OurstrongpositionsonsuccessfulplatformswilldrivecontinuedshipmentsofnewenginestokeyOEMs,followingdouble-digitBGAOEgrowthin2015.OntheATRsideweexpectslightlybettergrowthasproductionoftheAirbusA350ramps.TheseandothernewplatformswillcontinuetosupportgrowthinourATRandBGAinstallbaseandservicebusinessaswemoveforward.

Ouraftermarketbusinesswillbeslightlybetterin2016duetocontinuedstrengthinairlinerepairandoverhaulactivitiesandhigherenginemaintenanceeventsinBGA,andtrackinginlinewithflighthours.Ouraftermarketbusinesswillcontinuetofluctuatebasedonflighthoursandmaintenanceevents,inventorylevelsandcustomerbuyingpatterns.

Defenseandspacesalesareexpectedtobelargelyinlinewith2015orapproximatelyflattoupslightly.WeanticipatetheUSportionofthebusinesswillcontinuetostabilizeaswebenefitfromourstronginstallbaseandserviceofferings.




Ourinternationalbusinessshouldcontinueitsstrongperformancedespitefacingtoughercompsyearonyearafterseveralquartersofdouble-digitgrowthin2015.AsTimhighlightedbackinMarch,directinternationalsalesareexpectedtobeabout35%ofourdefenseandspacebusinessby2018.Soitwillremainagrowthengineforusaswemoveforward.

Finally,weexpectgrowthintransportationsystemsfromnewplatformlaunchesandsteadyvolumegrowthinlightvehiclegasapplicationsglobally,particularlyinEurope.Similarto2015,weexpecttoseemoderateheadwindsfromlowercommercialvehiclesales,butalsoanticipatethatthesteepdeclinesinCVsaleswillmoderate.Overall,turbopenetrationcontinuestogrowasOEMdevelopsglobalengineplatformswhichcanfillneedsinmultiplemarketsandwebelievewe'rewell-positionedtomeetthoseOEMdemandsandwinasignificantportionofallnewplatforms.

Asareminder,amajorityofourFXexposureisinaerospacewithintransportationsystems.Basedontoday'sratesandourFXhedgingstrategywecontinuetoexpectayear-over-yearEPSheadwindin2015ofroughly$0.15.ForACSwe'reexpectinggrowthsimilartowhatwe'veseenthroughout2015.Roughly20%oftheACSportfolioisinresidentialmarketswiththeremainderservingthecommercialandindustrialmarkets.

GrowthinESSwillbedrivenbynewproductintroductionsandfurtherpenetrationinhighgrowthregions.Oursecurityandfirebusinessiswellpositionedforcontinuedgrowthandweexpectthatourenergyefficiencyandconnectedproductsandtechnologieswilldrivefurtherourperformance.

Aswe'vementioned,theacquisitionofElsterisexpectedtoadd$2billioninannualsales,sothesoonerweclosethedealthebetter.Ontheindustrialsidewedon'texpectanyneartermimprovementtotheheadwindswe'refacinginindustrialsafetyandalsoseemoredifficultcompsinS&PSafterfourstraightquartersofdouble-digitgrowth.

InBSDweexpecttheAmerica'sdistributionbusinesstocontinuetoperformwellandthatthebuildingsolutionsbacklogandservicebankwillcontinuetogrow.However,weexpectacontinuedslowconversionintorevenuesparticularlyinAmericasandEurope.

MovingtoPMT,wedoexpectimprovementinHPSgrowthrates,drivenbystrongbacklogandimprovingservicebank.InUOPwe'veseenincreasedlevelsofprojectquotationsandtheUOPteamisoptimisticofstrongfourthquarterorders.Butthebacklogofequipmentandgasprocessingorderswillbedownyearoveryear,whichwillmakegrowthin2016challenging.UOPexpectssustainedcatalystdemandaftergrowthinthemidsingle-digitsin2015.

InadvancedmaterialsweexpecttobenefitfromoursignificantSolsticewinsasdemandforournextgenerationrefrigerantscontinuestogrowandwebuilduponourover$3billioninsignedagreements.We'recontinuingtomakesignificantCapExinvestmentsinUOPandfluorineproductsand2016we'llbeatasimilarlevelofspendto2015.ThiswillsupportanexpansionofcatalystproductioncapacityinboththeUSandChina,includingMTOandothercatalystsaswellasgrowingbacklogofSolsticeorders.

Lookingatsegmentmargin,wehavestrongconfidenceinourabilitytosustainthepatternofexpansionyou'vecometoexpectedfromus,eveninthisslowgrowthenvironmentandevenwiththepotentialforeignexchangemovementsI'vementioned.Aswepointedout,wecontinuetohaveopportunitytoclosethemarginrategapversusourpeers.Startswithnewproducts,theyarealmostalwaysmarginenhancingandourinvestmentstodevelopnewproductsaresacrosanctinHoneywell,asevidencedbyourR&Dasapercentofrevenueaveragingapproximately5%overthelastthreeyears.

OurHOSGoldenterpriseshavethemarketandcustomerconnectiontoensurethattheR&Dspendisproperlyallocated.Pricinghasalsocontinuedtoholdupwell.Wehaveastandardpricingmethodology,toolsandorganizationfocusedonmaximizingvaluecaptured.We'reasequallyfocused




oncost,theHoneywelloperatingsystempermeateseverythingwedo.

Takeournumberonecostcategory,directandindirectmaterials.Wecontinuetomatureouralreadyworldclasssourcingprocessesandtools,whicharecreatinganongoingproductivityparadigm.We'realsocontinuingtoinvestinvalueengineeringtolowerourexistingbondcostsandmakeproductseasiertoproduce.There'salsoourfactories,theHOSmethodologyispervasivethroughoutthesupplychainandineveryoneofourfactoriesyoucanseetheleanmanufacturing,supplier(inaudible)thevisualprocessmanagementandcollaborationthatmakesHOSwork.

Also,ourcreationofproductioncentersofexcellencewhereweperformsimilaractivitiesinoneplaceisstartingtomatureandpayoff.AnexampleisourelectronicsmanufacturingCOEandACS.Wearenowproducingprintcircuitboardsinonelocationinsteadofseven.Andourhighgrowthregionfootprintisprovidingalowcostbasetosupportthisconsolidation,onewherewederivedthebenefitofthestrongerUSdollaraswell.

Inaddition,ourfunctionaltransformationandorganizationaleffectivenessinitiativesdesignedtoimprovequalityofsupporttothebusinessesandreducecosts,arestrongerthanever.WehavededicatedteamssupportingFTeffortsandourbackofficeorganizationslikeITandfinance,andwe'reconfidentthesegroupscandrivesustainedproductivitywhileimprovingservicelevels.

Backingupalltheseeffortsisourrestructuringpipeline.Wehaveover$300millioninunspentfundingthatwillenableustosupporttheinitiativesImentioned.Butwe'reinthemiddleofourplanning,ourannualplanningprocess,andwelookforwardtoprovidingyoumoredetailsregardingour2016guidanceduringouroutlookcallonDecember16.

Letmesumituponpage12.Onceagain,we'vedemonstratedwecandeliveronourearningscommitmentsdespitelimitedhelpfromthemacroenvironment.AbigreminderofthevalueofourdiversifiedandbalancedportfolioandofthestrengthoftheHoneywelloperatingsystem.Wemetourmarginexpansionearningsgrowthexpectationsinthequarter,withmarginsexpandingineachbusinessaswecontinuetoexecutewellacrosstheportfolio.Wedidthiswhilemaintainingourfocusandinvestmentforthefutureasourinvestmentsinnewproductsandtechnologies,highROICapEx,processimprovements,restructuringinhighgrowthregionscontinuetogrow.

Asweheadintothefourthquarterweexpectearningstogrowagain10%whichwillsetusupforoursixthconsecutiveyearofdouble-digitearningsgrowth.We'vehadgoodmomentumonmarginexpansionandfreecashflowconversionwhichwillcontinueaswecloseouttheyear.Therewillcontinuetobeputsandtakesacrosstheportfolioasweheadinto2016.

Ourstrongmargin--segmentmarginperformanceandbalancesheetcapacitygiveustheconfidenceandflexibilitytomanagethroughtheuncertaineconomicclimateandprovideagoodfoundationforcontinuedearningsoutperformancein2016andthroughoutourfive-yearplan.

WiththatMark,let'smovetoQ&A.

QUESTIONS&ANSWERS

Operator :

Thefloorisnowopenedforquestions.

(OperatorInstructions)

OurfirstquestioniscomingfromScottDaviswithBarclays.




Scott Davis (Analyst-BarclaysCapital):

Hi,goodmorning,guys.


Hey,Scott.


It'sgoodtoseeadecentprintinwhat'sbeenaprettycrappytapeoverall.


Thankyou.


Keepingthewheelson.Butinthatspirit,it'sinteresting,you'vedonealotofwhatyoucallseedplantingovertheyears,andyourmarginsareexceptional;thecoregrowthcontinuestobejustalittleshyofglobalGDP.Whatdoyoureallyattributethecoregrowth,thelowercoregrowthandthebeatsonmargins--andwhatImeanis,istheseedplantingandsuchinthenewproducts,isthatmoreofamarginmixshift,improvingpositionandyou'rewillingtotradesomevolumeformargins,orisitjustafunctionreallyoftheendmarketsyou'resellinginto?


I'dsayit'sacombinationofthings,Scott.Ithinkyoutouchedonmostofthem.Oneis,itisaslowgrowthenvironmentoverall.Withinthat,we'vebeenableto--withthenewproductlaunchesthatwe'vedone,thoseendupbeingmargin-enhancinglaunches.Butaswealsosaidbackintheinvestordayacoupleyearsago,thatwewerereallygoingtostarttoseethesalesinflectionaswegottowardstheendof2016andinto2017aswegottheplantexpansionsdone,theaerospacelaunchesoccurred.So,weprettymuchexpecteditwasgoingtoworkoutthisway.

Inthemeantime,wehadalotofseedplantingwe'ddoneontheprocessimprovementside,whichcontinues.There'sjustalotofprocessimprovementsstillavailabletous,whichisgoingtoallowustocontinuetoexpandmarginsatthesametimethatweinvestinR&D.So,fromanoverallsalesperspective,whileIwishthemacroenvironmentcooperatedalittlemore,andmorethanwe--certainlyit'slessthanwhatweexpectedatthebeginningoftheyear,we'regoingtocontinuetodeliververywellonthatsalesgrowthbecauseweanticipatedthatitwasgoingtobeonthelowersidefor2015andsomeinto2016,butthattheinflectionswouldoccurafterthat.


Right(multiplespeakers).Yes,makessense.So,Dave,you'vebeendoingthisalongtime,andweseeatleast,orthoseofuswhohavebeenaroundawhileseesomesimilaritiesherein2015to2001,andevenendof2007,early2008.Howdoyouthinkabouttheweaknessinemergingmarketsandthefalloff,andhowthatincreasesriskatleasttothe--notjustcallitarecessionriskthatwecould--asmalleventcouldtakeusoffthecliff.Howdoyouthinkaboutthat,andhowdoyouplanforit?


Frommyperspective,itfeelslikemarketsreallythinkthere'sachanceofarecessionhere.AndIguesswhilethere'salwaysthechanceifthereweresomeuntowardterroristeventsomewhereorsomethingdrasticlikethat--Ireallydon'tseethat.Thisfeelsalotdifferentthanitdidin2001or2008tome,just




because,afterourgreatrecession,we'veneverreallyhadarecovery.2010wastheonlyrealrecoveryyearthatwehad.

Afterthat,it'sreallybeenaslowgrowthenvironment,andIthinkthat'skindofwhatwecanexpectoverthenexttwoorthreeyears,andjustthewayweoughttothinkaboutthings.Idon'tseeaboomcoming,butbythesametokenIdon'tseeacrashcoming.AndIreallythinkthattheabilitytoperforminthatkindofslowgrowthenvironmentiswhat'sgoingtodifferentiatecompanies,andthat'sthewaywe'replanning.That'sthewaywe'rethinkingaboutthings.Asyouknow,wealwaystendtobeconservativeonsales,andwe'regoingtocontinuetodothat,especiallyinthiskindofenvironment.


Yes.


Doesthathelp,Scott?


Yes,no,itdoes.IwentbackandIreadallthetranscriptsfrom2008,andeverybodyheldonandheldonandheldon,andsomesimilarcomments,andthenallofasuddenthewheelsfelloffand--youhaveto--ifyou'reinourjobatleast,youhavetostartscenarioanalysisplanninghere,andit'sfeelingalittlesloppy.That'sall.Idon'tdisagreewithyourassessment.


Icanunderstandthetranscripts,butifyoulookatlikedebtpositionofthe,say,justtheAmericanconsumerbackthenversustoday--verydifferent.Bankcapability,bankreservesverydifferentthenthanwhatwe'redealingwithtoday.


Yes,certainlyoncredit.Okay,I'llpassiton.Iknowyouhavelotsofquestions.Thanks,guys.

Operator :

We'lltakeournextquestionfromJeffreySpraguewithVerticalResearchPartners.

Jef f reySprague (Analyst-VerticalResearchPartners):

Thankyou.Goodmorning,everyone.


Hey,Jeff.


Hey.Guys,IwaswonderingifwecoulddrillalittledeeperintoUOPandwhatyou'reactuallyexpectinginQ4intermsofcatalystandotheractivity,andthenjusttriangulateitthen.WheredoesthatbringUOPfortheyearintermsofyear-over-yearchangeversustheprioryearforthetotalyear?AndreallywhereI'mgoingwiththat,too,thenisthinkingaboutyourframeworkfor2016--thereductionthatyou'relookingforinactivity--isthatactuallyanoutrightdeclineinUOPfor2016,andanyothercolorthereyoucouldgiveuswouldbehelpful.





Someoverallcomments,andI'llturnitovertoTom.I'dsayyou'regoingtoseeatleastthreedifferentphenomena.Onewouldbewhathappensonorders;whathappensonsales;whathappensoncatalysts.Fromanordersperspective,that'sbeendeclining,asyouknow,andit'sbeenalittleleanhereduringthisyear.AndIwouldexpect,nextyear,ordersactivityisgoingtopickup.Andweseethatalready,asTommentionedonquotesactivity;so,weexpectthebacklogtostartbuildingagainnextyear.

Whenitcomestosales,becauseofthelagfrombacklogtosales,weexpectthatsaleswillbedownnextyearinUOPversusthisyear,largelybecauseofthatbacklogcompletionandthetimeittakestobuilditbackupagain.

Thethirdphenomenacatalyst--we'veseenthatstartingtopickupagain,whichisaverygoodsign,asyouknow.Andwealsofeelthatthere'sthisunrequiteddemandatthispointforrefineryreloads.Refineryhasbeenmakingalotofmoney,sotheyhaven'twantedtoevershutdowntoreload,andhavepreferreddwindlingyieldstoshuttingdownandgettingthebetterproductivity.Inotherwords,wantingtoproducewhilethetimingwasintheir--andpricingwasintheirfavor.Andwe'veseencatalystsstarttopickup,andweexpectthatthatwillcontinuethroughnextyear.

Youputallthosetogether,nextyearweexpectsalestobedownbutordersbacklogtostartbuildingup,andthisisjustwhywehaveadiversifiedportfolio.Ialwayssaydiversityofopportunityforustobeabletomanagethatbecauseitwillcomeback,andIhavenodoubt,inaverygoodway.

Tom,anything--?


Justtoputalittlemorespecificsonit,definitely,asDavesaid,ordershavebeendown,particularlyontheequipmentandgasprocessingside.Butwiththatsaid,there'saverystrongpipelineforthefourthquarter.Wekindoftrackthequotationactivityinoursalesforce.comapplications,andweareseeingasignificantamountofinquiriesandrequestsforproposalandthelike.Andso,we'vegotavery--visibilitytowhatcouldbeastrongfourthquarterfororders.

Intermsofthebacklog,bytheendoftheyear,sure,itwillbedownyearoveryear,butit'snotgoingtobeearth-shatteringdown.Itcouldbehigh-singledigits,maybeslightlyintodoubledigits,butit's--thatwillbemanageable.Onthecatalystside,they'rehavingafantasticyear.Theyhadafantasticordersquarterinthethirdquarter,andit'sgoingtoleadtoareallystrongfourthquarteronthecatalystside.We'llprobablybemid-tohigh-single-digitgrowthoncatalystsforthefullyear.Andwehopetosustainthatlevelofsalesin2016oncatalysttooffsetthepressurethatyou'llseeabitfromthebacklogthatImentioned.


Jeff,Ishouldadd,ontheprocesscontrolsideweactuallyexpectsaleswillbeupnextyearversusthisyearaswestarttoseethebenefitofthosemegaprojectsthatwe'vewon.


Thatwasgoingtobemyfollow-upquestionandyouansweredit,soI'llletitgothereandpassthebaton.Thankyou.

Operator :

Andwe'lltakeournextquestionfromJoeRitchiewithGoldmanSachs.




JoeRitchie (Analyst-GoldmanSachs):

Thanks.Goodmorning,everyone.


Hey,Joe.


MaybeIwillfollowuponthatlastpointonHPSbecauseitseemslikethegrowthinHPSclearlyhasn'tbeenasbadassomeofyourcompetitors,andsomaybeyoucancommentalittlebitontheshareopportunitiesthere,andwhat,ifanything,you'reseeingintermsofpricingpressureinthatmarket?


Well,it'skindofataleoftwocities.Ontheshortcycleside,wehaveseenthedeclinetherethatwe'vetalkedabout.Ontheotherside,lookingatthesebigprojects,themegaprojectswherewe'vealwayssaidthatisreallywhereourbigmarketisandwherewedoparticularlywellbecauseofthecomplexityandthenumerousamountofinputandoutputpointsthatyouhavetomaintain.We'vealwaysdonewellthere,andwe'vedonereallywellovertheselastcoupleofyearswinningalotofthesebigordersthataregoingtodoverywellforusandplanttheseedsforthefuture.Whenyouputallthattogether,whilethisyearhasbeenalittletougherbecauseofthatshortcycleimpactandthefactthatthemegaprojectsdon'tcomeinrightaway,thatreversesnextyearandwestarttoseethebenefitofthatmegaprojectcomingthrough.


AndtheotherthingIwouldadd--Joe,youaskedaboutpricinginprocesssolutions.Itisholdingupwell,asyoumightexpectwiththediscretionarycutsinourcustomerbasethat--you'dseesomepressurethere,butthetechnologythatwehavereallyallowsustodeliversomevaluethatwe'recapturingpricingon.It'sholdingupfairlywellinthatsegment.


No,that'shelpful.AndmaybefollowingupalittlebitonScott'scommentfromearlierandaskingexplicitly--we'vebeeninanorganicgrowth,callitthedoldrumsforthelastfewyears,andthenyourmarginexpansionhasbeenreallyimpressive.Andyou'vebeenabletoekeoutdouble-digitearningsgrowth.Asyoulookinto2016,isthereanopportunityforyouguystocontinuetododouble-digittypegrowthintheenvironmentthatwe'reintoday?


I'dsaythat'scertainlyoneofthethingswe'regoingtobelookingataswegothroughourAOPplanning.AsI'veprobablymentionedinthepast,westartedplanningfor2016inparticularbackinJanuaryofthisyear,recognizingthatthekindofmacroenvironmentwewereinandthatitwouldrequiremoreadvancedplanningthanalotofcompaniesdowhenitcomestohowfaroutyoulook.We'regoingtotalkalotmoreaboutthatattheDecembercall,butIfullyexpectthat,inaslowgrowthenvironment,we'regoingtocontinuetoexpandmarginsinawaythatpeoplearegoingtolike.


Okay.Fairenough.I'llgetbackinqueueandgivesomebodyelseashot.Thanks,guys.





IusedasmanywordsasIcould,Joe,tonotgiveyoutheanswer,thenumbersyouwerelookingfor.


Fairenough.Iexpectedyouto.

Operator :

I'lltakeournextquestionfromHowardRubelwith

Jefferies.

HowardRubel(Analyst-JefferiesLLC):

Thankyouverymuch.Dave,yourChinanumberswereprettygood;couldyouelaboratealittlebitonthat?It'sprobablyataleofmultiplecitiesandproductsastowhatworked,whatdidn't,andhowareyouseeingtheenvironment?


Well,yes,you'reright.China'sabitofI'dsayadichotomyatthisstagebecausethereissomethingsthatarestilldoingwellandsomethingsthataren'tdoingsowell,anddependinguponwhichcompanyyoutalkto,youcanenduponeithersideofthat.We'reoneoftheguysthataredoingprettywelloverall.

I'dsayweareseeingtheoilandgasnegativeimpactthere,justlikewearearoundtherestoftheworld.Butwhenwetakealookatouraeroandturbobusiness,that'sdoingfine.AndwhenwetakealookatACSinparticular,that'sdoinggreat,stilldoingdoubledigit.Andasyouknow,it'sbeenverygoodforthewholeyear,andI'dsaydrivenbyacoupleofthings.

Oneisthekindofseedplantingthatwe'vedoneinthepastthatwe'vetalkedabout,wherewewanttobethelocalguyandthere's--havemoremid-marketproduct.Andthat'sreallyhelpedustobeabletoexpandthemarketsthatweserve.AndpullingtogetheralloftheACSstuffintoasingleChinaoperationhashelpedusalottherealso.Ithinksomeofthis,agoodchunkofitisjustourincreasedcompetitiveness,andtheabilitytogoaftermid-market.

Ontheothersideofit,we'restillinthe--secondpointofit--we'restillinadecentspot,whenyoutakealookattheoverallneedforconstruction,retrofit,oldbuildings,there'sstillalotofupsidethereforuswithACS.I'dattributeittothetwo.

Tom,Idon'tknowifthere'sanythingyouwanttoadd?


No,Ithinkyouhitonthemall,Dave.


Andthenjustasafollow-upandalittlebitbroader,alotoftheresultsweredrivenbyproductivityorHOSGoldorsomethingslikethat,andthishasbeenaterrificprogramforalongtime.Howdoyoumodifyitorchangeitsothatpeopledon'tbecomecomplacent?


TheotherthingIwouldaddinthatis,allthenewproductsthatweadd,thatweintroduceintothesystemthathavehighermarginratesthanwhatwehadbeforebecauseofthevalueit'sabletoprovidetothecustomerthrougheitherHueyorcombiningfunctionsorbeingabletogivethemabetterpricewith




betterperformance,thatreallydoesmakeadifferenceovertime.Itjustmakesyoumuchmorecompetitiveandalotmoreprofitable.So,thatimpactisintherealso.

Intermsofkeepingitfresh,that'snotthatdifficultI'dsayforustodo.AndIoftentimessaytheonlythingthatIeverworryaboutwhenitcomestoHoneywellgenerallyisifweloseourhunger.Idon'tthinkthat'sgoingtohappen.Everybody'sstillprettyhungryandwantstoperform,andwewantthatmultiplepremiumthatwethinkwedeserve,andwe'regoingtokeepdoingeverythingweneedto,togetit.AndIcanpromiseeverybody'sthinkingthatway.


Thankyouverymuch,Dave.


You'rewelcome.

Operator :

Andwe'lltakeournextquestionfromAndrewObinwithBank

ofAmericaMerrillLynch.

AndrewObin (Analyst-BankofAmericaMerrillLynch):

Yes,goodmorning.


Hey,Andrew.


Greatexecutioninatoughenvironment.


Thanks,muchappreciated.


Hey,questiononBSDconversion


Yes,Ithinkthe--Andrew,you'rereferringtotheordersphenomenonItalkedaboutwiththebacklog?


Yes.


Yes.Ithink,it'sinterestingthatthemandatesonthefederalsidebythePresidenthavebeenprettycleartotheagencies,andthey'vegoneoutanddonealltheRFPwork.They'vefoundthevendorsthattheywanttoworkwith.They'veheldthecompetitions,andrightnowthey'reinastateofneedingtomovetoclosetheseoutandactuallygettheworkimplemented.We'reseeingsomedelaysonthatastheygo




throughthebudgetingprocessfornextyear.Ifullyexpectthatastheyarepreparingbudgets,particularlyonthefederalside,thatthiswillbeafactorthattheyhavetoconsiderandincorporate.


Andwhenwasthelasttimewesawsomethinglikethat?


Yes,Idon't--Idon'trecall(multiplespeakers).


Meeither.Thisone'skindofunusual,Ihavetosay.We'vebeenalittlesurprisedbyitourselves,anditjustshowsthere'salotofpent-updemandoutthere.Andyouaredealingwithgovernment,sotheydon'talwaysmoveasquicklyasanyofusmightlike.Butthat'sallgoingtoplayinatsomepointhere.


CanIaskyou(multiplespeakers)I'msorry.


It'sagooddealforthem.Thisisoneofthosethingswhere,withnomoneyouton--fromthem--theyendupsavingmoney,whichoftentimestakesthemsomeworktobeabletounderstandandconvinceothers,butoncetheydo,itgenerallygetsthere.So,thisis--I'mprettyconfidentthisstuff'sgoingtoconvert.It'saquestionoftiming.


Andifyoucangiveusapreview,andIknowyouguysaregoingtohaveacallaboutthis,butjustintermsoffive-yearplan,ifyoulookatrevenues,it'snosurprise,Ithink,thattherevenuesarerunningatthelowendofthelow,thelowendofexpectations.Atthesametime,ifIlookatthemarginperformance,it'sjustamazing.Howshouldwethinkthisframeworkgrowthversusmargininthelongerterm,anddoyouneedtoadjustpeople'sbehaviorinsidetheCompanytogetmoremargininalowergrowthenvironment?


I'mnotworriedaboutchangingbehaviorstogetthemarginrateperformance.We'redoingallthatstuffnow,soit'sgoingtoworkout;thatwillworkoutfine.Whenitcomesto--howdoweperformversusthefive-yearplan,whoknowswhattheeconomydoesin2017and2018?

AsIoftentimessay,thefuturehasthisoddwayofunfoldingdifferentlythanallofuspredict.AndwhileI'mpredictingslowgrowthrightnow,thereisachanceitcouldgotheotherwayaround.Idon'tseearecession.However,thereisachancethatthiscouldjustbecomesomethingalotbetter.Putallthattogether,andI'dhavetosaythesalesgrowth,toyourpoint,thatweestimatedinthefive-yearplanlookssportyatthispoint,evenwiththeinflectionthatwe'reexpecting.

Onthemarginrateside,stillhavehighexpectationsthere.Andasyourecallintheinvestorday,oneofthethingswetriedtoshowwasnotjustthefive-yearplan,butwherewethoughteachbusinessandtheCompanycouldgetto.Andwhenyoulookatthat,ifyougot--prettysurewehadachartinthereacoupleyearsagowhenwedidthis--whenyoulookatthat,yousee,geez,there'sstillalotofroomtopenetrate,andwehavehighermargin-ratepeersineverysinglebusinessthatwe'rein,andfortheCompanyintotal.Andwe'regoingtobeabletocontinuetodrivethat,andeverybodyintheCompanyisdrivingtothoselong-termnumbers,notjustachievingthefive-yearplan.





Terrific,thankyouverymuch.


You'rewelcome.

Operator :

Andwe'lltakeourfinalquestionfromGautamKhannawithCowen.

GautamKhanna(Analyst-CowenandCompany):

Hi,goodmorning,andIhavetwoquestionsifyouwouldn'tmind?YoumentionedthestrongpipelinefortheThomasRussellforeignnatgasprocessingopportunities.Iwasjustwondering,ifyouweretobookacoupleofthoseinthenextfewquarters,couldthatactuallybackfillthedeclineyou'reexpectingatUOPnextyear,oraretheseprojectsmostlyfordeliverybeyond2016?AndthenIhaveaquickoneontheaftermarketaswell.


I'dsayonthegasside,totheextentthatwegetthoseorders,wecanturnthemprettyquickly.We'regoingtostayconservativeonwhatdowereallyexpectwhenitcomestoorders.Wewereencouragedthatwegotacoupleofordersthereinthispastquarterversusnoneinthefirstsixmonthsoftheyear.Andwe'rehopefulthatwelandacouplemoreinthefourthquarterandearlynextyear,buttooearlyforustocommitonthat.

Intermsof,wouldthatalonebeenoughtonothaveadeclineinUOPsalesnextyear?I'dsaythat'sunlikely.Mostlikelywhatwe'regoingtobedealingwithisasalesdeclinewhenitcomestoUOP.Butasyouknow,catalystsareprettygoodforus,andweexpectthecatalyststoperformwell,andthat's,let'ssay,agoodmixtohave.


Fairenough.Thankyou.AndifyoucouldtalkalittlebitmoreaboutthecommercialaerospaceAPRsparestrendsyoumentioned--someofthegeographiesareweak.Doyouthinkthere'sbeendestockinggoingonincertaingeographiesthisyear?Andcanyoualsotalkaboutprovisioningthisyearandperhapsnextyear,giventheA350rampyoucitedontheOEside?Andthanks.


Acouplecomments,andthenI'llturnitovertoTom.Tryingtounderstandexactlywhatishappeningouttherewhenitcomestosparesisalways[war]because--you'veprobablyheardmesaythisbefore,butit'skindofanamorphousblobintermsoftryingtounderstandwhat'sinthereandwhat'shappening.Asaresultofthat,that'sanotherreasonwetendtostayprettyconservativeintermsofwhatweexpect.

Overallthough,we'dexpectcontinuedsparesgrowthnextyear.Itmayshowas--intherepairandoverhaularea,ratherthanwhatwemightdefineasspares,butoverallwe'dexpectgrowthtocontinuethere.AndtherehasbeensomesoftnessinChinathatwe'vetalkedabout.

Theoverallwaytolookatit--IthinktheindicatorthatIalwayspayattentiontoiswhat'shappeningonflighthours?Andaslongasflighthoursaregrowing,itmeansthatthere'sgoingtobeademandinpullforsparesandrepairsofsomekind,andthat'stheoveralllong-termphenomenonthatmatters.Howitplaysoutintheshorttermisalittletoughertofigureout.





Yes,youprettymuchsaidit,Dave.TheR&Oworkthatwedodoesconsumealotofspares,andthatR&Obusinessisgrowingverystrongly.Andso,whenyouconsiderthemintheirtotality,it'sveryhealthy,anditisinlinewiththeflight-hourgrowth.That'swhatweexpecttocontinue.

Yes,maybethere'ssomeconsolidationinairlines,ordifferentbuyingbehaviors.Overall,we'vekindofbecomeaccustomedtothose,anddealingwithourapproaches.So,Iexpectour--ustocontinuetobealignedwithflighthours.


Andprovisioning--doyouexpectanychangethereyeartoyear?


Ithinkyearoveryearitshouldbefairlystable.


Okay.AndwhatpercentageofATRaftermarkettodayisprovisioning,ifyoucouldjustremindus?


Idon'tthinkwegointothatgenerally.


Nicetrythough,Gautam.


Thanksalot,guys.


Allright,goodbye.

Operator :

Thatconcludestoday'squestion-and-answersession.Atthistime,I'llturnthefloorbackovertoDaveCoteforanyadditionalorclosingremarks.


Thanks.We'requitepleasedwithourcontinuedabilitytodeliverdouble-digitearningsgrowth,eveninthisslowgrowtheconomy.Andwerecognizethatkindofoutperformanceaswhatyouhavecometoexpectfromus,andweintendtocontinueoutperforming.Thegrowthprogramsthatwehavefundedineverybusinessandregionwillcontinuetodeliver,andevenmoresointhefuture.Thatgrowth,combinedwithcontinuedprocessimprovementsfromthingslikeHOS,functionaltransformation,andHueyandthelikewilladdtoourcapabilitytogrowmarginrates.Andwelookforwardtocontinuingtodeliverforourinvestors.Thanks.

Operator :

Thatdoesconcludetoday'steleconference.Pleasedisconnectyourlinesatthistimeandhaveawonderfulday.




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honeywell international (hon) earnings report: q3 2015 conference call transcript · 2015-10-16 ·...

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