漢威聯合 (HON) 2006 Q4 法說會逐字稿

Good morning.

My name is Luanne, and I'll be your conference operator today.

At this time, I'd like to welcome everyone to the Honeywell's fourth quarter earnings release conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS].

Thank you.

I'll now turn the call over to Mr. Nicholas Noviello, Director of Investor Relations.

Sir, you may begin your conference.

Thank you, Luanne, and good morning, everyone.

This is Nick Noviello.

With me today are Chairman and CEO, Dave Cote; and Senior Vice President and CFO, Dave Anderson.

Welcome to Honeywell's fourth quarter and full year 2006 earnings conference call.

This call and web cast, including any non-GAAP reconciliations, are available on our website, www.honeywell.com/investor.

Elements of this presentation contain forward-looking statements that are based on our best view of the world and our businesses as we see them today.

Those elements can change, and we would ask that you interpret them in that light.

This morning, we are going to update you on financial results for the fourth quarter and full year '06 and give you some additional views on 2007, including the first quarter.

Finally, we'll allow time for your questions.

So with that, let me turn over the presentation to Dave Cote.

Dave?

Thanks, Nick, and good morning, everyone.

I'm pleased to report this morning strong financial results in the fourth quarter, a great finish to 2006 for Honeywell, and an increase in 2007 free cash flow guidance.

This is all good stuff.

Starting with the fourth quarter, sales were up 14% to 8.3 billion, with 9% organic growth and margin expansion in each of our businesses.

EPS was $0.72, the high end out of our prior guidance, and free cash flow was up 54% to $941 million, that's a lot of cabbage. 2006 in total was a year of great progress for the Company.

Sales were up 13% to 31.4 billion, with 7% organic growth.

Segment profit was up 21%, margins were up 80 basis points to 13%, EPS was up 31% to $2.52, and free cash flow of $2.5 billion was up 41% from 2005.

You can imagine we're pretty proud of these results.

Each of our businesses continued to execute well and finish the year strong.

Aerospace continues to expand its breath and its depth, with new defense and commercial wins and a strong top line and margin growth.

ACS drove a 10% organic growth rate in 2006 due to a great focus on global expansion and new products.

They also successfully integrated key acquisitions.

Transportation maintained its top line and margins in a tough market.

And in a great sign for the future, they proceeded to win over 60% of all passenger and 70% of all commercial vehicle platforms awarded worldwide during the year.

And Specialty Materials realized the benefits of its transformation with growth in the base businesses, a great year at UOP, and 440 basis points of year-over-year margin improvement.

Our discipline with respect to cash deployment was evident as well, and we continue to deploy cash effectively between investment in our business and return to share owners.

We purchase both the Gardner Group and First Technology in the first half of 2006 and successfully divested 5 businesses, including the 2 noncore First Technology businesses and the remaining noncore Novar assets.

Our acquisition pipeline remains active, and it's full across all the businesses.

We announced a 10% increase in the dividend, the third increase in as many years.

Additionally, over the course of 2006, we reduced share count by 5% through a $1.9 billion repurchase program.

So great progress and strong results as we finished 2006.

We're very confident in our positioning and our prospects for 2007.

And as a result, we're raising our free cash flow guidance for the year to 2.5 to 2.7 billion.

So now let me turn the call over to Dave, and he'll have more detail on these wonderful financials

Good morning, everybody.

Thanks again for participating in the call this morning.

I'm going to go to slide 4, 4Q financial summary.

And just plan to kind of go through relatively quickly, the highlights of the quarter and the year and then spend a little more time on the performance of each of the segments.

Well, as Dave said in the quarter, sales up 14%, 9% organic growth, 5% related to the net of acquisitions and divestitures.

Good performance in segment profit up 177 million as you can see, or 19% to a 13.2% segment margin.

Earnings per share of $0.72, which as you'll recall is at the high end of the range that we communicated to you in the third quarter and then updated in our December guidance call.

EPS up 18%, driven by the increase in segment profit.

Below the line expenses were a little larger than we last communicated, primarily as a result of accrual for several legal settlements, mainly the Brunswick litigation, which we disclosed in the third quarter 10-Q.

And EPS up about 28% after taking into account the income from discontinued operations in the fourth quarter of last year and stock options expense this year.

And finally, very strong free cash flow, $941 million, up 54% from last year, in about 200 million favorable to our prior expectations.

The performance speaks to both the quality of our earnings and also the discipline that we're applying to our operating balance sheet.

So in summary, great performance for the quarter with strong organic sales, segment profit, EPS, and free cash flow.

The next page, slide 5, references the business segments in the fourth quarter, showing revenues and segment margin.

As you can see, we have sales growth and margin expansion in every one of our businesses.

And another great quarter where operating results drove our double digits earnings growth.

And I'm going to go through these -- through these segments in more detail in just a moment.

On the next slide, you can see how the fourth quarter performance translated into our full year results.

For the year, revenues up 13% to 31.4 billion, 7% organic growth, 6% related to the net of acquisitions and divestitures, and foreign exchange contributed no more than 0.5 point to the organic growth rate, which was consistent with our prior guidance.

Segment profit for the year, up 700 million; segment margin of 13%, up 80 basis points, as Dave said, from 2005.

And the segment margin growth reflected the continued success of our businesses as we rounded out '06 as well as the mix of sales we experienced during the year.

Below the line and legacy expenses remain more or less constant to the guidance we gave you at the beginning of the year with some additional charges in the fourth quarter related to, as I mentioned earlier, a litigation settlement.

Full year EPS up 31% to $2.52, reflecting strong segment profit growth, continued discipline management of below the line and legacy expenses, and obviously our successful share repurchase program where we've taken share count down over the course of 2006 by approximately 5%.

Now, if you were to adjust again, net income for discontinued ops, the tax charge related to cash repatriation last year, and stock option expense in '06, you'd see that EPS was still up a strong 30% year-over-year.

Finally, free cash flow for 2006, up 41% to just under 2.5 billion, reflecting strong conversion as we finish the year.

Now, before I move on to the businesses, move off this slide, there are two additional points I just want to bring to your attention.

At the end of the year, consistent with our disclosure in the third quarter, we adopted FAS 158, related to the accounting for defined benefit pension and other retirement plans.

The adoption of the standard required a balance sheet adjustment to shareholders' equity of approximately 1.5 billion net of tax.

There was no impact to EPS as a result of the recording.

In addition, the second point I want to make is we made several adjustments to the asbestos reserves at year end.

Now, there's no change as a result of these adjustments, there's no change to our 2007 asbestos expense or cash guidance.

But they do result in -- are the result of a consistent and downward trend in the number of settlement values that we're seeing in terms of asbestos claims in the tort system.

The net result was a reduction of our [Bendix] current and our NARCO future reserves by 325 million and the establishment of a 5-year Bendix futures reserve of 335 million.

So positive really -- positive news on that front.

So in summary, a great year where we continued to build on our track record of financial performance.

Slide number 7.

Let's now go through each of the segments in turn, starting with Aerospace.

And for each of the segments, we'll show the summary data at the top for the quarter and the year and then some comments related to the fourth quarter and then on the right bottom comments related to the full year.

Now, for Aerospace, as you can see, during the quarter, we again built on our track record of 2006 wins.

Dave referenced the continued success we're having, military wins in the quarter included a 2-year $400 million extension of the TIGER program related to the Abrams family of vehicles.

And on the commercial side, we won business for radar, communications, and navigation equipment.

And this is just one of -- one of many, but a -- prominent wins with both Cathay Pacific and Lion Air.

Now, sales for Aerospace, as you can see, were up 8% in the quarter, segment profit up 17%, segment margin up 130 basis points to 18.2%.

Now, the mix was large, as expected, in the businesses with continued OE-driven growth in commercial.

Also defense and space sales growth driven by defense and a continuing ramping up of our space sales, which relates mostly to our third quarter win on the Orion program.

Segment margins in Aero reflected sales growth, price, and productivity gains, partially offset by inflation and mix primarily related to the strength of commercial OE sales in the quarter.

For the year, you can see Aero sales up 6%, 13% increase in segment profit, and a full point improvement in segment margin, up to 17%.

In the commercial business, strong demand by OE customers for both new air transport as well as business jets drove overall sales growth.

Commercial OE sales were up 15% for the year.

ATR OE sales up 14% and the business and general aviation OE sales were up 16%.

Now, on a reported basis, if you include, as you'll recall, the unfavorable impact year-over-year of FAA mandates in the first half of the year, commercial aftermarket sales were up 3%, 4% growth in ATR, 1% in BGA.

But if you adjust for those mandates, AGR aftermarket sales were up 4%, just under the year-over-year increase in global flying hours;

BGA aftermarket sales were up 6%, which is in line with our prior guidance.

Defense and space sales were up 3% for the year in line with expectations, driven by 6% increase in defense sales.

Now, on the margin side for the full year, volume growth, price, productivity, which included the benefits of the third quarter 2005 aerospace reorganization, more than offset inflation and unfavorable mix, again, primarily related to the strength of OE during the year to drive the full point of margin improvement.

So in summary, a great quarter and year for Aero, with results in line with expectations that we shared with you in December.

Let's go now to slide number 8, ACS.

Again, strong performance in the quarter and for the year and results in line with the expectations we shared with you in December.

ACS sales were up 17% in the quarter, segment profit up 20%, segment margins up 20 basis points to 12.6%.

Now, organic growth 11% driven by 9% growth in products, 16% growth in the fourth quarter in the solutions business.

Now, the organic growth in products was driven primarily by security and life safety, while both building and process solutions generated mid teens organic growth.

Orders growth in the solutions business averaged 19% in the quarter, with continued strong backlog growth.

So we're just continuing to see the strength on that side of the business.

Segment margin growth reflected volume, price, and productivity savings, which more than offset the negative impacts of inflation, sales mix between products and solutions, and the dilutive impact of acquisitions.

So for the year, now, ACS sales up 17% to just over $11 billion, segment profit up 15%, and segment margin of 11.1%.

Organic growth for the year for ACS, 10%; 8% organic on products; 11% organic growth in the solutions business.

And again, orders in the solutions businesses were up about 20% from last year, reflecting success we've had in reinvigorating the technologies, marketing, and selling focus on these businesses.

Full year segment margin for ACS, 11.1%, reflects volume growth and productivity offset by unfavorable mix associated with the strong organic growth in solutions as well as the distribution business of security.

And as we've indicated before, these businesses have combined average margin rates below the products businesses, but very good ROI profiles.

In addition, inflation, dilution related to Gardner and First Technologies acquisitions early in the year, and the planned year-over-year increase in ERP costs, negatively impacted the margins for '06.

So we've talked about -- through the course of 2006, we've talked about the momentum building in ACS, and I think it's pretty evident when you look at the organic growth and overall performance delivered by ACS in 2006.

So let's go to the next slide, Transportation Systems, slide number 9.

Now, although the market has been pretty difficult in '06, the business has been able to deliver results while building a very good growth proposition for the '08 and '09 time frame.

TS sales were up 9% in the quarter, segment profit up 15% and segment margin up 60 basis points to 11.6%.

Turbo sales were up 15% driven by moderate increases in light vehicle builds, diesel penetration, and also the corresponding volume growth that we've seen in Europe, as well as an easy comp, you'll recall, with the fourth quarter of 2005.

CPG sales were up only a 1% due to the impact of lower consumer spending on branded automotive aftermarket products and also lower formula pricing.

Margin growth reflected Turbo volume growth and productivity actions in the quarter, which were partially offset by inflation and lower sales of branded automotive aftermarket products.

Now, looking at TS for the year, sales up 2% to just under 4.6 billion, segment profit up 3%, and segment margin of 12.5%.

Now, importantly, Turbo sales were up 6% driven by new product introductions in Asia, strong North America class 8 demand early in the year, and also moderate increases in European light vehicle production and diesel penetration.

This growth in Turbo was offset partially by CPG sales, which were down 4% due to the impact of lower consumer spending on branded automotive aftermarket products.

As well as you'll recall the fourth quarter 2005 exit of our friction materials OE business in North America.

Now, segment margin for TS, consistent, again, with what we communicated in December reflected Turbo volume growth; continued productivity actions, including the realization of the benefits of integrating over the course of '06, CPG and friction materials; offset by inflation, higher warranty expense, and the impact of lower sales of branded automotive aftermarket products.

Now, one of the real highlights for the year for transportation systems, as Dave said earlier, was the greater than 60% win rate on all passenger vehicle platforms.

And by the way, it's probably evident but that's both gas and diesel platforms on a global basis.

So over 60% win rate on all passenger vehicle platforms and greater than a 70% win rate on all commercial vehicle platforms awarded worldwide in '06.

And we expect these platforms to launch in the '08/'09 time period, thus the confidence that we have and the excitement that we have about the outlook for this business.

So overall, a year where we focussed on execution and productivity to continue to weather relatively tough market conditions, but where we also significantly enhance the growth proposition of the business.

Let's go now to the next slide, Specialty Materials, slide number 10.

Sales for the segment up 25% in the quarter.

Segment profit up 27%, segment margin up 10 basis points to 7.3%.

Now, Specialty perform largely as expected in the fourth quarter.

Sales growth was impacted by timing verses prior quarters and also the impact from residential housing exposure in the U.S.

Segment margin growth reflected favorable price and raw material cost, which offset the impact of inflation and unfavorable sales mix, and for the year now, Specialty Materials up 43%, segment profit up 121% -- these are amazing numbers, aren't they? -- and segment margin of 12.3%.

Organic growth for the year 7% was strong across the base of fluorine, specialty products, and resins and chemicals.

We had strong refrigerants, semiconductor and armor-driven demand, primarily in the first half, as well as price increases related to our resins and chemicals long term formula price agreements that all drove this performance.

UOP sales for the year, up 20% on a stand-alone basis from 2005, based on strong demand for our proprietary technologies and catalysts.

And on the margin side, the full year contribution of UOP as well as the volume price and productivity gains, which offset inflationary pressures, drove the 440 basis points increase in segment margin over 2005.

So for Specialty Materials, 2006 was the year where we saw significant improvement and realized the benefits of the -- of literally the years that we invested in the transformation of this business, really see it's paid off.

With that background, with the review of the quarter and the segments, let's now go to 2007 and recap our financial outlook.

And now, as we discussed with you in December, really looking at very good growth across the board, revenues up to 32.8 billion, up 5% on both a reported and organic base from '06.

Consistent with our representation, again, in December, segment profit we see in the 4.4 to 4.5 billion range, up 9 to 12% with segment margin increasing between 50 and 90 basis points.

And key, of course, in that increase in segment profit together with essentially flat below the line expenses are the drivers of our EPS growth -- our net income and EPS growth, which we expect earnings per share up 13 to 17% in 2007 to a range of 2.85 to 2.95.

And, as Dave said earlier, as a result of our strong cash flow performance in 2006, as well as our expectations for '07, we're raising our free cash flow guidance to 2.5 to $2.7 billion.

So in summary, looking forward to this year being another terrific year for Honeywell.

Now, segment overview, just summarizing on slide number 12, the highlights of sales and margin expectations for each of our businesses for '07.

We've made some minor positive adjustments, really tweak to the numbers, based on our final 2006 results, but the overall sales and margin expansion theme is consistent with what I shared with you in our December outlook call.

On the next page, slide number 13, our first preview of the first quarter.

We expect total company sales to be up about 6% in the quarter with good growth in both Aerospace and ACS.

Transportation Systems top line we expect to be essentially flat, consistent with the full year guidance that we've given you, due to the negative impact of class 8 OE sales, which we expect to offset the growth in the other parts of the business.

Specialty Material sales should also be more or less flat on a reported basis.

But, again, you'll recall from our outlook call that the growth in the business will be offset by the loss of sales from the exit of remaining noncore assets associated with recent divestitures as well as the exit of nonstrategic low margin sales.

And you can see on the slide the reference on Specialty Materials that on adjusted basis that first quarter revenue growth outlook is approximately 4%.

So for the first quarter, we expect sales of about 7.7 billion and earnings per share of $0.60 to $0.62, up 15 to 19% compared with the first quarter of 2006.

So in summary, before going to Q&A, just a couple points to recap what we've -- what we've discussed so far this morning.

Number one, obviously is we're very pleased with the strong finish to 2006.

And the performance track record we continue to build at Honeywell really -- really building a source of pride in terms of our performance and a real energy that you can feel across the organization as a result.

Now, as we look forward to 2007, we're confident in our ability to execute our plan and deliver strong performance that will demonstrate continued value creation.

As a result of our strong finish in '06, as we've said, we've raised our 2007 free cash flow guidance, and we also have a bias toward the high-end of our 2007 EPS range.

So feeling -- feeling quite good as we start the year.

And finally, we hope that you're going to be able to join us on February 26th at our annual investor conference.

Of course, in addition to Dave and I, each of our business segment CEOs will be present and will really review the highlights of their performance and the compelling outlook for growth that we see across the Honeywell portfolio.

So with that, Nick, let's turn it over to Q&A.

Excellent, Dave.

Thanks.

Luanne, let's open up the line, please.

[OPERATOR INSTRUCTIONS].

John Inch, Merrill Lynch.

Hello?

Hey, John.

Hey, sorry.

Hey, I want to start off with asbestos.

Dave, you talked about, I guess the trend toward improved claims and the outlook on that business.

We've been sort of talking about this whole 524 (g) bankruptcy trust for NARCO it seems for years.

Where do we stand?

Are you guys, based on that trend, still going to pursue this?

Or why not if the loss rates are improved, why not just self-fund this?

And when do we think we're going to get a resolution to this?

Well, first of all, let me just kind of recap what I talked about, because I think that's important for us to do in terms of setting context.

First of all, as I mentioned in the quarter, as a result of favorable NARCO experience and the ramping down of Bendix claims and settlement values, so both the number of claims on Bendix as well as the average settlement values, and the fact that we really have greater clarity regarding the Bendix asbestos experience.

What we have -- what we've done as a result of the -- the input that we've gotten from our outside advisors and experts is we've reduced the level of NARCO current reserves, and we've been able to -- as well as Bendix.

And what we've been able to do then is to going forward have a futures reserve for the Bendix claims, a 5-year futures reserve for the Bendix claims, which is very positive.

And so, John, we'll be -- each quarter basically adding and recognizing in addition to that 5-year futures claim.

So we'll just be building that and maintaining that on a -- on a rolling basis.

But it's really good news.

The backdrop is really good news.

Now with respect to the 524 (g) trust, we're still in the path for the formation of trust, there's some legal and procedural issues that we're working through.

We still see that as a net positive going forward.

On the other hand, again, the backdrop is one of favorability in terms of a ramping down of the claims that we're seeing, and overall favorable experience.

But we would expect, perhaps at the end of this year and potentially as deferring into 2008, just as a result of these legal and procedural issues, the formation of the 524 (g) trust.

And, Dave, I think you historically talked about about 100 million of contribution once the trust is officially established and then maybe, what, a 300 million run rate afterward in terms of kind of ongoing payment.

Does the -- does the claims and current environment, does that change that outlook any -- in any way, do you think?

Well, John, the formation of trust is probably more than the 100 that you referenced and the run rate going forward of cash outflows is probably less than you mentioned.

The numbers are almost reversed.

But what we would see is, probably, again, from a timing standpoint, more likely a split of cash outflows associated with the 524 (g) trust between '07 and '08, with even some possibility that those numbers will spill over entirely into 2008.

But the backdrop is one, again, of it's really a good news story.

It really reflects the discipline we've been able to apply to this area; and over time, as we've said, it's really going to be significantly less in terms of the cash requirements here, which is also going to support the operating cash flow growth story for the corporation going forward.

Okay.

And then, I just wanted to ask about cash flow.

I mean, I guess I've been historically under the impression that cash flow is a fairly difficult item for companies to forecast.

Can you just review again why you -- what gives you the confidence within sort of your operations to raise the cash flow outlook for this year?

Is there a specific piece of the business?

Is it working capital?

Why is the cash flow going up again?

Well, there's a couple key drivers.

I mean, one of them, obviously, is -- first of all, let's talk about the finish to 2006.

We kind of had, obviously, almost across the board improvement in terms of -- against our expectations in terms of how we finish.

Now, some of that favorability will set the higher bar and therefore from a year-over-year standpoint creates -- creates a little bit of additional challenge.

Thus, the 2.5 to 2.7 billion guidance that we've given you for the full year 2007.

But when you look at next year, it's really being driven by -- or this year, I should say, 2007 outlook.

It's really being driven by net income growth and also the continued focus that we have on improvement in working capital performance.

Those are the two key drivers in terms of year-over-year cash flow guidance improvement.

The other thing I'd add is on a total year basis, it's not that hard to predict.

On a quarterly basis, you could see more variability.

But on a total year basis, I think we've been pretty accurate, actually.

Yes.

No, I concur.

And then maybe just a final question for Dave Cote.

So it kind of begs the question what are you going to do with all of this cash?

There's hints of larger M&As sort of blowing within the industry.

Not necessarily Honeywell -- I don't know, Rockwell's cheaper.

Your process business is up 19% in orders.

Would that fit with it?

Lots of good ideas, John.

I would say -- you'll probably be disappointed in my answer because it's going to be very consistent with what we've been saying for 5 years and that's we're going to want to continue to increase our dividend in line with our earnings increases.

We still view our stock as attractive.

And as I mentioned before, the acquisition pipeline is just getting richer as our businesses get stronger and continue to improve all their processes, it just raises more and more opportunities for us.

So we're actually quite excited about what we can use that cash for.

And it's nice to have.

Yes.

And, Dave, I mean, ACS, is that still -- would we be reading the tea leaves right to say that ACS is still going to be the primary focus for M&A?

Well, I would say ACS up to this point has demonstrated the greatest ability amongst the businesses to identify new areas, fill the pipeline, negotiate good deals because we're deathly afraid of overpaying on anything.

And I think you see we've been pretty disciplined on that.

And they are also magnificent when it comes to integrating deals, so I'd say they've got the greatest track record up to this point.

But we're actually pretty excited about the possibilities in all the businesses.

So, it'd be a tough one to predict.

I would say ACS's got the better track record, but all of them have good plays.

This whole focus we've had on having great positions in good industries pays off on the acquisition front also because there's just more stuff that you can graft on to the existing branches.

Yes.

And one final one, Dave Anderson, how much does pension contribute now that the plan is closed for '06 -- for '07?

How much incrementally do we get from pension?

John, you recall when we -- when we gave you some of the key variables for 2007 in terms of the factors that would influenced our outcome, if you will, on our guidance call, pension was obviously one of those -- one of the five key factors.

And we finished strong in the U.S. plan with -- in terms of return on assets and given the -- given the discount rate and return on assets, we're looking at approximately $200 million of pension expense, including foreign -- that would be U.S. as well as foreign for 2007.

So that's a -- that's a nice tail wind that we have.

We obviously had anticipated that some of that in terms of when we reviewed the outlook for 2007.

So -- but a nice little support or tail wind that gives us confidence in '07.

It also helps us, as I mentioned earlier, in terms of that bias towards the high end of our guidance that we have as we enter the year.

Thank you.

You're welcome.

Thanks, John.

Robert McCarthy, Banc of America.

Good morning, everyone.

Hi.

Hi.

I guess one question on commercial construction.

I think you had a -- or nonresidential, rather.

I think you had a little bit of a cautious outlook for 2007, understandably, on your update call -- or your outlook call in early December.

Do you have any different view given the kind of strength you've seen and kind of the orders you've seen, particularly at ACS?

I would say no.

I think one thing, maybe just to clarify a little bit is certainly flagged commercial construction is an area that we need to monitor, given the severity of what we were seeing in terms of the -- and we were all seeing in terms of the residential construction numbers and the potential ripple effect or spillover.

Plus, the fact that there was -- we -- there was some noise in the dodge data.

So it was really kind of hard to decipher and really understand what was going on there.

I'd say that if you looked at both our order rate, sales rate, in our -- if you will, our fast cycle product side of ACS and the order rate and backlog build that we've had in the solutions side of ACS, I'd say we're not seeing the evidence of that yet.

In fact --

I would say, I don't think we identified it as a trouble spot, but rather, as Dave said, more a monitored spot.

Well, I guess you can characterize it as a bit of a wild card for '07, and if it was better than your expectations, it would potentially drive those results to the up side.

Plus, I'd say we're less worried about it than we were a month ago.

You would?

Okay.

All right.

Well, that's fair enough.

And then on the process solutions side, specifically.

That slice of the Automation and Control business, could -- I mean, obviously, you've given us some very good granular data on solutions in general in the segment.

But could you talk about the process solutions business?

Give me a little more color there?

What you're seeing and anything in terms of the competitive dynamics?

Are you starting to defend our take share there?

What are you seeing in terms of geographic growth, and how do you feel about that business going forward as being core?

I'd say, I find it kind of interesting in that industry that every player is gaining share.

So I think this is one of those where you end up having to make a judgment because we're going to say the same thing, and I'd just point to something that says our sales are growing faster than the industry.

And that -- to me, that should be an indicator that we're gaining share.

We've had a big change in that business over the last 5 years.

And we really, as you know, had gotten behind on product.

We had a great install base, but we'd gotten behind on product.

And this is an industry where when you start to lose that edge, it takes time for it to play out.

Well, the same thing happens when you regain that edge, it takes time for it to play out, and we invested heavily in that Experion platform.

We worked it very hard over the last three or four years getting out there and explaining to everybody what it could do.

And as a result of that, we've regained a lot of momentum.

And you see it reflected in the orders rate, it takes some time for that to play through sales, and you saw that happening last year.

We had orders growing well and sales not so fast.

Now you're seeing both.

So I'd say the whole thing feels pretty darn good, and a lot of it has to do with just regaining that competitive edge.

Overall, I like that business.

I think it's in a good space, the industry is doing well, and we see it both with UOP and process solutions that that industry should continue to do well and I think it's a good part of Honeywell.

Would it be a candidate for acquisition or any kind of further expanded investment?

Well, I'm going to stay kind of general on that one.

As I said, if I take a look at most of the Honeywell portfolio, I think most of it can handle the right kind of acquisition because we worked hard to have a great position in a good industry, and process solutions has a great position in a good industry.

Okay.

And then just switching gears.

On the first quarter, I think you alluded to on the Specialty Materials side perhaps some impact from U.S. residential exposure.

Could you just review what that U.S. residential exposure is briefly?

Well, it's really in our -- in our floorings business.

And as we've indicated both on the refrigerant side and then also related to some insulation applications on our floorings business.

So it's really relatively de minimis when you look at it in the context of total Honeywell.

And you're really looking at less than for the Specialty Materials piece in terms of total Honeywell, that exposure is less than 1%.

Less than 1%.

But obviously at the margin, it's inflecting negatively.

So you felt the need to call it out?

Well, absolutely.

I mean, we called it out because of -- just trying to identify the factors up and down that are driving, especially materials revenues.

And that's clearly one of those items, and it's, again, related to residential construction market.

But if you look at it in terms of total Honeywell, I just wanted to give you some context, it's a relatively insignificant item.

All right.

Thank you for your time.

Sure.

Jeffrey Sprague, Citigroup.

Thanks.

Good morning.

Hey, Jeff.

Hey, just a few topics.

First, on the win rates and penetration at Transportation.

Sounds very encouraging.

But I wonder, does it give true visibility on growth?

In other words, if it's a smaller number you're bidding on or not the right size turbos, et cetera.

It's great to win, but maybe it's not a growth driver.

So I'm just wondering if you can put a little bit more color on what those wins mean for '08 and '09?

Well, it's definitely a growth driver because those percentages are calculated on a dollar basis.

So what's the total value of the order, not did you get three orders out of four kind of thing.

It's done on a dollar basis.

The second thing is that industry is going to continue to grow and grow well.

With this increased focus on energy efficiency in transportation, this is one of the best ways to get that.

You have an engine that can be a third to a half as small as a regular sized engine that's able to produce the same power using about 25% less fuel and meaning 25% less emissions.

That's a -- that's a real winner.

Yes, I guess I understand that.

I guess it still isn't clear, though, that the order rate equates to growth, right?

So you won 60% of the dollars, but is there real penetration in vehicle fleets behind those order rates?

You would think the answer is yes, but I was just wondering if you could actually size that?

I don't know that I can size it, but the answer's yes.

We're going to see very good growth in that business going forward.

And then, just on a similar topic.

Is it -- just in the first quarter, maybe first half although Transportation margins should be flat with -- I mean Transportation sales flat, is there some margin pressure at the beginning of the year as class 8 tips over?

Not really.

Not really, Jeff.

The real key driver there is just going to be continued strong performance in the overall Turbo business including the European passenger vehicle business.

And we see that with good momentum coming out of the fourth quarter of 2006.

And, Dave Anderson, can you size the mix effect on ACS margins?

I mean, there's a lot of other puts and takes on investment and cost and price.

Just the mix effect?

And when you talk about the mix effect, Jeff, are you talking about for '06 or the outlook for '07, or both?

For '06, the mix effect kind of solutions verses product.

What we saw, as I mentioned, is we saw 8% organic growth in the products business for the full year in ACS, and 11% organic growth in the solutions business.

And you're looking at probably an average of high single digits on the solutions side in terms of profitability or verses teams in terms of pretax profitability margin on the -- on the product side.

So you can kind of -- you can sort of do the math yourself in terms of looking at that in terms of the implications.

I mean, I don't have the precise number, but clearly, that represents head wind for the business in terms of margin expansion, coupled with, as we've talked about [in a theme] and it's something you're well aware of is just the dilutive impact of the acquisitions that we've done, in terms of the acquisition accounting, as well as some of the first-year cost inventory step-up, and the first-year cost of implementing some of the cost saves and cost synergies associated with those acquisitions.

So those are the -- those are two factors that influenced ACS margin overall.

But again, we saw a very nice finish to ACS margins in 2006 and are guiding up for continued improvement in ACS margins in 2007.

Jeff, if I could add a little color to that also.

ACS has actually done a very good job of improving their margin rate over the last 3 or 4 years, and in fact, has gone up I'd say about 2.5 maybe 3 points in total.

But it ends up being masked somewhat because of the acquisition cost, which is bookkeeping as you know.

The investment in ERP, which ends up being a cost for the first couple years, and then you end up seeing the benefit as we get out into that '08 and beyond time frame, which gives us a lot of encouragement.

We also struggled early on, as you recall, with selling our -- our selling -- not expense, but our coverage.

We didn't have very good sales coverage.

And we thought it made sense to invest in that, which we did.

And that hurt it by about 0.5 point also.

All of these are things that they're basically increasing their overall margin rate, using it to handle those three items and just portends a very good future for that business.

So I'm quite encouraged by what ACS is going to be doing.

I mean, that really is the gist of my question.

I'm trying to get to where this business is really going.

Up.

Yes.

Just a couple other quick things.

The repositioning in the charge -- repositioning costs in the quarter, Dave, what's the after tax amount of those?

It's $45 million, Jeff, on a pretax basis, so you can think of that as $32 million in round numbers, something like that, on an aft-tax basis.

By the way -- by the way, just -- it's a really good question because it's also indicative of the strength of the performance that we saw at the end of the year.

And -- and I just want to emphasize again the discipline that we apply to that process and the kind of paybacks that we're seeing.

So we're just really, really pleased that we have that level of capacity as we finish the year to fund that'll really support '07/'08 and beyond performance.

Okay.

And just finally -- I'll pass it on here.

Can -- I'm sure you'll give us more color next month, but can you give us the rough composition of the Aero guidance revenue, maybe just OE aftermarket and defense and space kind of revenue growth outlook for '07?

Yes.

Defense and space we're looking at about 3% -- first of all, overall, we're looking at about 5% up for the business, and 3% for the defense and space side, which translates, then, in terms of the commercial side is probably in the range of 6% up for the year.

So the overall blend, if you looked at the overall blend between defense and space and commercial, it's around 3% for defense and 6%, a little bit more than that on the commercial side.

And the -- on the ATR side, we're looking at continued very good OE growth, Jeff.

So it should be in excess of that 6%.

The aftermarket should [glow] on the ATR side, the air transport side should glow -- grow in line with global flying hours, which we're anticipating to be about 4% again next year.

And on the BGA, on the business and general aviation, we'd be looking at OE growth of about 8%, and the aftermarket pretty consistent with what we've seen this year, which is probably somewhere in the 5% maybe as much as 6% range next year.

Great.

Thank you very much.

You're welcome.

Howard Rubel, Jefferies.

Hi, thank you very much.

Couple things.

First, go back to the asbestos for a moment, Dave -- Mr. Anderson.

Sorry, gentlemen.

That's all right.

The -- if I understand this correctly, does this mean that we avoid some of the periodic expenses that we've been seeing from Bendix going forward?

No, Howard, what we'll be doing is, as I mentioned, and I may not have been clear in my response, we've established a 5-year reserve.

And what we intend to do is to, if you will, top up or replenish that reserve every quarter based upon our recent experience using an average of several periods in terms of determining what those -- what those claim values are and claim rates are.

So what we'll see is still for Bendix, we'll see an ongoing quarterly expense -- P&L expense associated with it as we just continue to call it roll forward and replenish that 5-year reserve.

It should be lower than what we've been experiencing in the past, no?

Well -- well, we would hope so.

I mean, what we've seen is, as I mentioned, and it's really a good news story, is we've seen a decline in both claim rates and values.

So if that trend continues, that -- as you point out, that's a good news story for us.

And we had -- obviously, we had pretty good overall experience in 2006; and as I said, I think it's really indicative, not only of some of the sort of macro or external influences, state tort reform and other factors that are influencing.

But we just do -- I think are just doing a very good job across the board in terms of managing this exposure.

And it's really becoming less and less significant when you look at Honeywell both from a P&L as well as from a cash standpoint.

Exactly.

That's the key point.

No, I agree, and then the last thing is this continued delay of the NARCO settlement clearly helps you from a present value point of view.

Yes.

And so clearly helps you from a better definition of the claims that need to go into that trust.

Yes.

We're -- we're pleased with that, as well.

And as I said, we'll continue to work through the procedural and some of the legal requirements there, but we would anticipate a relatively low impact from a cash standpoint of the 524 (g) trust formation.

At this stage, that's our outlook for 2007, more likely to spill over into '08.

Just a couple of quick items, and then I'll -- I'll move on.

First, it looks like input costs and raw materials aren't the same issue that they were a year ago.

Could you elaborate on that a little bit, and is that enabling you to expand pricing or margins in a few areas?

And could you comment specifically --?

I could -- I could --

The biggest issue that you saw in the past there, Howard, was in Specialty Materials.

And the biggest issue there was in nylon.

And if you recall, that was -- one of the major efforts we had was to -- how did we extricate ourselves from that problem while maintaining a presence in what's a good business -- a good industry.

And with -- what the team over there has been able to do, we reduced the overall sales from about 1.2 billion to 1 billion a year.

And we went from 100% exposure to the raw material cost cycle -- in other words, whatever was happening in supply and demand on materials was totally independent to supply and demand on the end product -- to one where two-thirds of that 900 or 1 billion in sales is now on formula pricing, meaning whether it goes up -- whether our raws go up or go down, it immediately gets passed on to the customer.

So you're not going to hear us talk about that too much in the future.

And we're also running into a nice position now where there's -- demand is exceeding supply on [capital acnea].

And that puts us in a nice spot.

Dave, I don't know if there's anything else you want to add on raw --

I just -- I think that summarized it well.

I think if you looked at just the -- either the full year or the fourth quarter for Specialty Materials, what you saw is favorable price year-over-year, Dave.

If you do the operating income walk or the margin rate walk.

We saw favorability in terms of price year-over-year, and we saw a reduction or therefore favorability in terms of the impact of raw material year-over-year.

So it's -- it's working.

And clearly contributed to the margin growth of -- for the business for the year, as well as for the quarter.

Does that answer your question, Howard?

Yes, that was great.

Thank you very much, gentlemen.

Okay, Howard.

Scott Davis, Morgan Stanley.

Good.

Good morning, fellows.

Hey, Scott.

Congrats on making a lot of cabbage this year, I guess to use your term.

It does feel good.

I haven't heard that one in a while, and it got a chuckle out of us here.

I thought maybe we could talk a little bit about some of the things going on in the M&A landscape with the GE/Smiths deal.

I'm not 100% aware of your overlap there, so maybe you can talk a little bit through that, and maybe how you would expect that transaction to change the competitive landscape a bit for you?

I don't think it really changes the landscape all that much for us.

If you take that look at the Smith composition, it was 13 or 14 different businesses.

No, I think, critical mass on any of them.

So from our perspective, I don't think it changes it too much.

I'm sure GE found it attractive -- was they looked at some of the engine components that were in there and some of the engine things that they did.

For us, it wasn't quite as -- quite as important, I think.

Okay.

Is that diplomatic enough for you?

Yes, it sounds -- it sounds like a question for another time. [laughter].

Scott -- Scott, I'll tell you -- if I could just add maybe a little color to what Dave just said.

He said 13 to 14 businesses.

If those further decompose -- Smiths aero business further decomposes into 25 product lines, and if you look at those, there really were probably 5 or fewer that you would say really represent sort of fill-in or add to the Honeywell Aero business, none of which were -- we would say were, quote, compelling, given the breadth and depth of our technologies.

And a significant portion of the remainder, we would say -- we would have to either say we're not interested or somehow figure out a way to make them work.

I mean, propellers, piston rings, things like this.

I mean, it just -- it just is really not -- for us it's just not compelling.

Got you.

Talk a little bit about asset sales, and I guess the question is two fold here.

I mean, one, are you done selling assets?

I think you guys have been pretty successful in printing your portfolio.

And when I look at your portfolio, the one thing that kind of stands out that doesn't just -- doesn't really seem to be fitting in the portfolio anymore is the consumer products side in the auto business.

And had another kind of negative top line quarter.

And -- is this a business that's just going to be dying a slow death?

And maybe it makes sense just to -- given how much free money's out there and private equity monies that's out there, maybe let somebody else monetize it?

I mean, how do you view that?

Well, at the end of the day it's -- it's a small piece of the total company.

It's really not a big deal.

It's -- I don't even know if it's 5% of the Company sales any longer.

It's -- up until this past year, it was always a very steady performer.

It didn't hurt you, it didn't help you, and we got decent cash flow out of it, which we were able to deploy.

Last year was the first time, actually, where the increase in gas prices created that consumer dynamic which hadn't existed before.

I think that's going to come back, so that's going to give us some upside over the next year or two.

And there's some new products that they're toying with.

Brand extensions and the ability to do more globally that I think could make that a little more intriguing than it appears today.

So I'm -- while there is -- I agree, there's a heady private equity market out there today, I still think there's some upside in that business for us and it's a good cash generator.

Okay.

Understood.

And lastly, you're generating a lot of cash, and you're now upping your '07 guidance for generating cash.

What's left of your share repurchase authorization, the big kahuna that you put out there a couple quarters ago?

It's about -- it's about 700 million that's left, Scott, on that.

Okay.

And you would expect to continue to buy back stock opportunistically here?

Absolutely.

We still think it's a good deal.

Yes.

Understood.

All right, guys.

Thanks for your time.

Congrats on the year.

Thanks, Scott.

Nigel Coe, Deutsche Bank.

Thanks.

Good morning.

Just want to clear up the question on Bendix, at the risk of beating a dead horse.

But you talked about going forward the possibility or perhaps probability of lower expensing.

Now, should we embed that with -- in getting to the higher end of the range, or is that just pure upside?

No, I would say that -- we were really talking about -- kind of in the out years, there, Nigel, when we talked about that and it's kind of -- I think it's kind of at the margin.

I mean, if you looked at our total expense for 2006, I believe it was in the neighborhood about $125 million in terms of pension expense -- 126 to be precise.

And our guidance that we've given is about 150 million, 120 to 150 million for 2007.

So it's -- this is not a big deal one way or the other.

Do we want to see downward trend?

Absolutely.

Do we think the factors right now in terms the overall environment would support that over time in terms of outlook?

The answer is yes, but it's not something that we would see as an influence or a driver on the range of our 2007 guidance.

Okay.

And you took a 5-year view on the claims [appearance].

Did you consider maybe doing a bit more? 10, 20 years and just take the noise out of the P&L?

Well, when we look at still -- what we think in terms of the available data -- what's available in terms of the data and our ability to project.

Our outside advisor felt comfortable, as did our auditors, with the 5-year projection.

Okay.

Just one more question on ACS.

You had 4 points of FX benefit there.

It suggests to me that the business mix is more skewed towards Europe than I'd expected.

Can you just -- given all the M&A activity there, can you just give us the geographic split of sales there, and maybe just a more general question what do you see in Europe right now and what sort of growth rate do you see on that?

Well, we're looking at good growth overall.

Europe in total represents 40% -- 40 to 45% of our total revenues.

Okay.

Yes.

Really, obviously, significantly influenced by our ACS business as well as by our Transportation Systems business.

Or also, even though the GDP is going to be in the 1.5 to 2% range, which we'd obviously all like to see going higher, but I'd say that's the more likely bet.

What we're seeing is actually that -- particularly in ACS and Transportation, that investment in new products and selling coverage that we've been doing is going to start really paying off for us.

Okay.

And just a quick one on the Transportation.

If we back out the class 8 drag, organic growth would be, what, 2, 3%?

Yes, that's probably a good number, Nigel.

Okay.

Thanks a lot.

You're welcome.

Nicole Parent, Credit Suisse.

Thanks for taking my question.

I guess the first question would just be on ACS.

Dave, you talked about, I think, 2.5 to 3 points of margin expansion over the past couple years.

Is there any way to quantify it over the last 12 months?

You had great organic growth in 2006, up 10%.

If you strip out ERP and you strip out the acquisition dilution, what do you think the underlying business margin expansion on that 10% organic growth was in '06?

Yes, I don't have the data on a one-year basis, but the same thing would be true on a one year as it was for the 5-year.

Dave, I don't know if there's anything else you want to --

I would say it's almost a full point of impact.

Dave, if you go back to -- and, Nicole, if you go back, you'll recall to our original guidance for 2006, we had about a 12% operating income margin built in.

Frankly, if you look at the underlying performance of the business, it's been at least that good.

So during the course of the year, acquisition impact, ERP, other items, basically would be about 1 point in total.

Okay.

Thank you.

On repositioning charges, restructuring, could you give us the cash verses the P&L expense?

Repositioning, environmental, and asbestos.

Sure.

Let's start with -- just go through the 2006 numbers. 2006 from a P&L standpoint, we had, as I mentioned earlier, asbestos 126 million; environmental, we had 210 million; and repositioning came in at about 100 million.

Now, we had some other.

I mentioned some litigation reserve, Nicole, and some other items that we took, and so in total there, round numbers 145 million for the year.

For that line item.

And from a cash standpoint, we're looking at in terms of environmental, in the neighborhood of 250 to 260 million that we spent in 2006 -- let's call it 260; net asbestos came in at about 150 million; and repositioning at about 150 million.

Okay.

And then '07?

'07, what we're looking at in terms of our guidance is we would continue at about that run rate in terms of expense.

For environmental, you'll recall our guidance is about 200 a year.

We think that's a good number -- a good planning number to use for the Company.

As I just mentioned in response to Nigel's question, I believe, it was -- asbestos, we look at 120 to 150 million for the year.

And repositioning and other, I think 100 million as a placeholder is a pretty good number to use there, as well.

Okay.

For 2007.

Okay.

And I guess just one last one on funding future growth, could you talk about R&D spend forecast for 2007?

You mentioned in the press release this new lab for Specialty Materials in China.

Additionally, Aerospace investment as you think about kind of new platforms coming on.

Could you just quantify what you think by business we would expect to see that ramp up to?

We don't have it for disclosure by business.

I would just say, Nicole, as we've been pretty consistent in saying for 100 years we've differentiated with technology, and for the next 100, we're going to differentiate with technology.

We've invested pretty well, I think, in R&D; and we've done a better job of how do we invest the dollars that we have in there.

And you're going to see it on an ongoing basis increasing and being spent more effectively.

Great.

Thanks.

Shannon O'Callaghan, Lehman Brothers.

Morning, guys.

Good morning.

Question on the ACS organic growth expectation.

I mean, in the fourth quarter, reported growth was 17, 11% was organic.

Could you comment on what the -- what the first quarter and full year assumes organically in that you have -- it looks like the first quarter's up about 14, the year's up about 6.

What are the organic rates in there?

Well, we're looking at -- first of all, for the full year, or ACS 2007, our guidance is about 6% up on a reported basis, we're looking at about 5% across the board in terms of organic.

And you'll recall from the slide that I gave on the first quarter preview for ACS, we're looking at 13% up on a reported 7% organic.

Okay.

And in terms of the contribution there, I guess it's acquisition and FX.

The acquisitions kind of go away, but any reason that -- the 7 going to 5 is just sort of assuming some moderation or anything in particular you're seeing?

No, I think it's just the planning assumption that we've used for the year.

Hopefully, we'll do better than that.

We've obviously -- in looking at the first quarter, we've got very good momentum as we talked about coming out of 2006.

So it's just the embedded assumption we've used for the full year for ACS.

Okay.

And then just -- on the Aero operating margin, you're coming out of this year with 100 basis points of improvement.

I know R&D's kind of flat next year.

Can you just talk through the other items in terms of why the margin expansion would moderate in Aero?

Well, recall that we had the benefit -- Shannon, you'll recall we had the benefit year-over-year in '06 compared to '05 of the full year impact of the Aerospace reorganization --

Right.

-- Which was about $100 million of total benefit, and so we got over two-thirds, three-quarters of that incrementally in 2006 compared to 2005.

Okay.

Yes.

And, I guess, just maybe -- a lot of my questions have been asked, but just maybe a broader economic comment broadly, I mean, given your international exposure.

I mean, what are you seeing geographically around the world, and how do you feel in terms of confidence?

Well, actually, I've been using this line for about 18 months now, and I think it's still true is that the global economy is better than what you read in the papers.

And it feels like that to us all the time.

Japan's doing fine, China continues the grow well, India is coming on and getting better.

Europe, while I'm still always surprised at how happy everybody is with 1.5 to 2% growth, it's a hell of a lot better than it was.

And the U.S. continues to do well.

So I feel pretty good about it.

It may be not as robust in terms of growth as it was in '06, but still pretty darn good.

I mean, if it stayed this bad all the time, I think we'd all be very happy.

All right.

Thanks a lot, guys.

You're welcome.

There are no further questions at this time.

Mr. Noviello, do you have any closing remarks?

I think that's it for me.

Dave, did you have anything to finish up the call?

We're just very happy with the way things wrapped up in the fourth quarter.

We're very proud of how the numbers looked for the total year.

And we're really excited about seeing the momentum that we've been able to build over the last few years carry into 2007 and beyond.

This whole idea of having great positions in good industries and having major process change across the Company is really paying off.

And we really feel that we're building a machine that's going to continue to perform.

It feels pretty darn good.

Okay.

Great.

Thank you, Luanne.

Thank you, everyone, for joining us this morning.

This concludes today's conference call.

You may now disconnect.