漢威聯合 (HON) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Honeywell's fourth-quarter 2012 earnings conference call.

At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Elena Doom, Vice President of Investor Relations.

Thank you, Kevin.

Good morning and welcome to Honeywell's fourth-quarter 2012 earnings conference call.

Here with me today are Chairman and CEO Dave Cote, and Senior Vice President and CFO Dave Anderson.

This call and webcast, including any non-GAAP reconciliations, are available on our website at www.Honeywell.com/investor.

Please note that elements of today's presentation contain forward-looking statements that are based on our best view of the world and of our businesses as we see them today.

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

We also identify the principal risks and uncertainties that affect our performance in our Form 10-K and other SEC filings.

This morning, we will review our financial results for the fourth quarter and the full year 2012, as well as share with you our guidance for the first quarter and full-year 2013.

And, finally, we will leave time for your questions.

With that, I will turn the call over to Dave Cote.

Thanks, Elena.

Good morning, everyone.

As you can see, Honeywell delivered another excellent quarter despite a still-challenging macro environment.

As we said before, our goal is to be known as a Company that outperforms and delivers in both good times and bad, and I think our performance and track record really shows that.

We had modest sales growth in the quarter; it was up about 1% on an organic basis.

Yet we still continued to drive margin expansion, up 50 basis points to 15.6%, as well as pro forma EPS growth of 9% on an adjusted basis.

And that is using the same tax rate both periods.

So we are starting 2013 with some positive momentum.

First, the short-cycle order rates are improving slightly overall, with stabilization in key developed regions and some pockets of growth, particularly in China and some other high-growth regions.

And that suggests a modest improvement in end-market conditions.

Second, pension is expected to generate income of $50 million to $75 million this year.

That reflects the proactive funding we have done to date, coupled with a higher than expected return on assets last year.

Third, the euro exchange rate is a bit better.

Our outlook assumes an average euro/dollar rate of $1.25.

We are tracking above those levels today; but who knows what is going to happen with 11 months left in the year?

So, for now we are cautiously optimistic, but it is just too early to tell what direction the economy is going.

We are all well too familiar with the issue.

Big democracies around the world are still in gridlock over debt, and the US is kicking the debt can down the road and finding that kick doesn't quite go as far as it used to.

All of these factors make forecasting what is going to happen a real challenge.

So we think it is prudent to remain conservative, given that uncertainty.

To the extent the items noted are better it builds contingency to ensure we achieve our commitments.

We will update you in March at our annual investor conference as we always do.

Given the potential economic difficulty, we are staying conservative in our sales outlook, controlling costs, and leveraging our enablers -- the Honeywell Operating System, Velocity Product Development, and Functional Transformation -- just like we did in '11 and '12.

We are planning conservatively and we are staying flexible, ensuring that we can continue to respond to changes in the market.

We are also in the enviable position of having over $320 million of previously funded in-process repositioning, which we continue to execute.

This will give us a lift in 2013 as well as in future years.

So 2013 will be another year of outperformance for Honeywell, and our focus on evolving in everything we do to become better and better creates a bright future even beyond this year.

Our strong pipeline of new wins is setting us up for a multiyear cycle of outperformance.

As examples, Aerospace was awarded the 737 MAX fleet air system and several other mechanical system wins.

They signed an agreement to provide SyberJet with our Primus Apex avionics, and there are also several other unannounced wins; and that is just in Aerospace.

At the Honeywell level, we finished the year with a record backlog, roughly $15.8 billion, with new platform wins across many of our businesses last year.

To support this growth, we sustained high levels of R&D spending, up approximately 25% versus 2010.

We have also increased CapEx spending 11% last year and will increase it again this year, ensuring we meet our commitments to our customers, particularly in PMT.

So from the earliest stages of developing innovative new products which customers value, to executing on that delivery, the Honeywell pipeline looks full.

We are developing a Thinking Company -- not thinking as in spending days in contemplation, or thinking as in anarchy so you don't have to do what is requested, but rather thinking as in understanding why we do things.

That concept underlies our big process initiatives like the Honeywell Operating System, Velocity Product Development, and Functional Transformation.

We want to be able to do everything right and fast.

It is through our continued evolution that we will sustain our outperformance.

In a slow-growth global economy, this becomes especially important for margin rate growth.

These tools have become part of the Honeywell culture, along with our strong operating disciplines and shared best practices, all translating into meaningful productivity gains.

We think that puts us in an excellent position to achieve our 2014 sales and margin commitment as a Company.

Having great positions in good industries, the power of One Honeywell, our consistent focus on improving every year in each of our five initiatives -- it really makes a difference.

And as always, we will update you on our progress in March at our annual investor conference, which will be focused this year on delivering 2014.

We plan to highlight a number of tailwinds driving enhanced growth and productivity across each of our businesses, which we expect will allow us to deliver on our long-term targets and beyond.

Again, we have a high level of confidence these targets are in range and achievable, which makes for a very exciting future.

And we look forward to delivering on that opportunity.

So, with that, I will turn it over to Dave.

Thanks, Dave.

Good morning, everyone.

Thanks for participating in this morning's call.

Let's go to slide 4, entitled 4Q 2012 Results.

I am just going to take you through the summary results for the quarter which, as you know, came in largely as expected when we gave you our December outlook.

Sales for the quarter of $9.6 billion were up 1% on both a reported and organic basis.

On a regional basis, the US was up approximately 2%; Europe was down 3%; China sales were up approximately 10%.

Now, sales did come in a little bit better than we expected in December as a result of both improved organic growth in ACS as well as Transportation Systems, and also favorability in terms of our assumption on foreign exchange.

All of this drove approximately $50 million in terms of higher sales.

Segment profit was up 5% in the quarter.

Segment margins expanded 50 basis points.

I'm going to walk you through the individual drivers when we go through each of the businesses in just a moment; but at a high level, productivity continues to be very strong, more than offsetting inflation and enabling continued investment for growth.

Below the line for the quarter was as expected, which was also consistent with our prior run rates, and no surprises there.

The tax rate was higher.

We gave you the guidance on that.

It was higher than normal at 30.6%, which was in keeping with our full-year 26.5% rate that we also guided to.

Now, pro forma earnings per share, which excludes the impact of the fourth-quarter mark-to-market adjustment for pension, was $1.10, an increase of 5% on a year-over-year basis.

However, if you normalize for taxes -- which, recall, didn't impact the full year, just the quarters -- EPS growth would have been 9%.

Fourth-quarter reported EPS was $0.32, which included roughly $1 billion of pretax mark-to-market.

This reflects a discount rate of 4.06% and a return on assets for the year of 13.5%.

Finally, free cash flow for the quarter was $1.3 billion, representing approximately 150% free cash flow conversion.

So with that summary for the quarter, let's go to a similar format and summary for the full-year 2012 on slide 5. 2012 sales were up 3% on both a reported and an organic basis to $37.7 billion.

Segment profit was up 10%, more than 3 times the growth in sales, demonstrating impressive conversion, and resulted in 90 basis points of margin expansion to 15.6%.

So it is another record year.

And you recall that in 2011 we grew segment margin by 90 basis points over 2010.

So an impressive back-to-back performance by Honeywell.

Now, all of this resulted in pro forma earnings per share of $4.48, up 11% over 2011.

You'll recall we set the bar pretty high for 2012, and we delivered at the high end of the range.

Finally, free cash flow was $3.7 billion, representing over 100% conversion, demonstrating a consistently high quality of earnings and working capital management, while funding approximately $100 million of higher CapEx in 2012 compared to full-year 2011.

Now let's go to Aerospace on slide 6. You can see here fourth-quarter sales for Aero slightly down, driven by the expected 6% decline in Defense and Space, partially offset by continued good growth on the commercial side.

Commercial OE was up 5% in the quarter; air transport up 6%; business and general aviation up 4%, both benefiting from our strong positions on key new platforms.

For the year, commercial OE was up 19%, or 12% if you exclude the impact of the prior year's BGA OE payments and the EMS acquisition; so really giving you, if you will, an organic look in terms of commercial OE growth.

All of that was driven by increased deliveries for both large air transport as well as business jets.

We saw the benefits in growth in Boeing and Airbus deliveries resulting from the ongoing ramp-up in production rates and also the continued healthy demand in the mid to large cabin business aircraft segment, where as you know we are well positioned and we continue to outperform.

The commercial aftermarket for Aero, sales were up 3% in the quarter; ATR was roughly flat; air transport roughly flat.

We saw some moderating growth, as expected, in business aviation in the aftermarket as we begin to lap significantly tougher year-over-year comps.

We also saw higher US airline inventories, and that weights somewhat on spares orders in the fourth quarter.

However, overall flight hours remained positive, up 1% in the fourth quarter.

We expect flight hour growth, as you'll recall, to be up in the 2.5% to 3.5% range in 2013, which will continue to drive growth in the aftermarket, albeit at a slower rate than what we experienced in '12.

Now, for Defense and Space, I talked about the 6% down as expected in the quarter.

We lapped of course difficult comps that resulted from the wind-down of the Tiger program, and we had lower Space sales and some other programmatic completions.

But again, on track relative to expectations.

For the full year, D&S was down 3%, slightly better than we had originally planned for the year.

And Mike Matson and the team, Tim Mahoney and the team, really deserve a lot of credit for their pursuit of international opportunities, which are continuing to mitigate some of the budget headwinds that we expect in both 2013 and beyond.

Margins for Aerospace in fourth quarter, they expanded an impressive 110 basis points to 19.9%.

For the year, segment margins grew 130 basis points to 18.9% as a result of terrific sales conversion, also driven by commercial excellence and material and operational productivity.

I would also point out that, adjusted for the BGA OE payments that I referenced earlier, Aero's margins would still have been up an impressive 60 basis points in the year.

So let's go now to ACS on slide number 7 and take you through again the highlights for both the fourth quarter as well as for the full year of 2012.

Sales for ACS were up 3% in the fourth quarter on both reported and organic bases, in line with the full-year organic rate of about 3%.

Regionally, the US was up 4%; Europe was up 1%; China was up 7% organically; with signs of stability in the developed markets and also obviously improvement in high-growth regions, namely China, in the quarter.

Let's go through some of the highlights for the major business segments of ACS.

For ESS, for Energy, Safety & Security, sales were up 4% on an organic basis, reflecting an uptick from the roughly flat sales growth we had through the first three quarters of 2012.

Environmental Combustion and Control, ECC, saw significant improvement, up 6% organically in the quarter, driven by modest recovery in the North America and China markets, but also easier year-over-year comps.

We also saw continued strength in both Security, in Scanning & Mobility, driven by new product introductions as well as contract wins.

And importantly, we believe the sensing and control business declines have now leveled off.

This is important, obviously, because this business has really been a leading indicator for our shorter-cycle businesses, and we are expecting improvement there over the course of 2013.

Process solution sales for ACS were up 3% organically in the quarter.

Project orders were down, driven by continued extension of project timing by customers and also difficult comps versus the fourth quarter of 2011 where we booked several very large projects.

You will recall us talking about that in the December guidance call in terms of really that expectation for HPS orders.

Important to note, we have seen an improvement in backlog margins for HPS.

That is really due to the continued focus on accretive growth, and it's been a contributor to ACS's overall margin rate improvement.

Finally, for building systems -- or Building Solutions & Distribution, BSD, sales were up 1% organically in the quarter.

We continue to see energy orders push out due to a challenging funding and capital oversight environment for Building Solutions, particularly in the US and Europe; and this is being partially offset by good growth in China and also in some of the other high-growth regions.

I think what really is notable on this slide is the ACS margins, up a strong 110 basis points in the quarter to 15.5%, which, by the way, is a new record for ACS.

This performance was driven by, again, the theme of commercial excellence and productivity, net of inflation.

For the year, segment margins for ACS were up an impressive 70 basis points to 14.1%.

And importantly, ACS had margin expansion in 2012 in every business.

Now let's take a quick look at PMT on slide 8, Performance Materials and Technologies.

You can see PMT delivered another strong year with record sales and segment margins, while continuing to invest for growth.

Sales for the fourth quarter for PMT were up 8%, 2% organic.

Of course, the 8% driven primarily by the Thomas Russell acquisition as well as new product applications in Advanced Materials.

Those mitigated a weak macro environment across Advanced Materials.

The fourth-quarter sales at UOP were up 13% reported, but down 4% organic, as expected due to the timing of catalyst shipments, with a big catalyst quarter expected now in the first quarter of 2013.

For the year, UOP sales were up 17%, 12% organically.

They ended the year with record backlog of $2.8 billion, up 49% year-over-year, or 18% organically, driven in part by a series of major wins towards technology to produce petrochemicals from both natural gas as well as coal.

Advanced Materials for PMT were up 5% in the quarter, 5% organically, consistent with the positive growth we have seen in some of our other short-cycle businesses.

However, Fluorine Products and Resins and Chemicals continue to see tough markets overall, and we will expect that to continue somewhat in 2013.

That said, we also expect a ramp-up in new product offerings as we enter important new products, and those are going to provide tailwinds for us over the course of 2013 into 2014.

Segment profit for PMT was down 6%, but up 11% for the year.

Margins in the quarter, as expected, down about 200 basis points, primarily by the lower UOP catalyst shipments I referenced and also some unfavorable Resins and Chemicals price-to-raws relationship.

However, for the year segment margins for PMT were up 30 basis points to 18.7%, so a very impressive 2012 for PMT.

And, we continue to expect -- we get this question a lot about PMT and in terms of the ongoing run rate in terms of its margins rates -- and we expect that to continue to be in the 18%, 18.5%-plus range.

Andreas and his team will continue to execute on a number of smart investments, and they will continue to capitalize on growth opportunities that lie ahead; and I am sure he will probably talk about that at our March Investor Day.

Transportation Systems, slide number 9, performing well despite the challenging European macro environment.

Sales in the quarter were down 8% organically in TS against a very difficult quarter for light-vehicle production in terms of the industry.

We anticipate that industry down approximately 10% year-over-year.

However, TS is seeing the benefit of new platform launches.

It is also seeing its higher gas penetration benefits in both the US as well as in China.

We saw some signs of stabilization in Europe as we exited December, coupled with a modest uptick in China for the fourth quarter.

However, we continue to expect a difficult environment for Europe in the first quarter, and we think it is prudent to plan, as Dave said, plan conservatively and watch the market closely while preparing for an upturn later in the year 2013.

Segment margins were down for TS 130 basis points in the quarter, but just 50 basis points for the year.

Of course, the margin degradation driven by lower volumes, some unfavorable mix and foreign exchange, partially offset by very strong productivity actions by Alex and his team.

We are investing, obviously, to continue to improve the efficiency and flexibility of Transportation Systems, and we've got an overall improved cost and competitive footprint in both Turbo and Friction.

We are going to see these benefits driving further productivity gains as we progress over the course of '13 and of course 2014.

Let's now go to slide number 10 and just do a quick reprise of our 2013 guidance.

As you can see, we are reaffirming 2013.

Our '12 results finished as expected; and as Dave referenced, the year-end US fiscal compromise didn't do much to change our view of the macro environment.

That uncertainty still hangs out there.

We are still expecting sales to be up on a reported basis 4% to 5%; 1% to 3% on an organic basis.

One thing I do want to point out here is that we planned -- and this builds on Dave's point that he mentioned in his opening remarks -- for the midpoint of our guidance to be an average rate of $1.25 for the euro.

We continue to think that is the prudent planning approach.

However, as we have indicated on the bottom right of the page, a strong euro or a stronger euro is one of the drivers that could push sales and segment profit towards the high end of our range.

Obviously, on the other hand, business mix, other items could push us to the lower end.

Now, below the line items we will have some puts and takes; but we are expecting the net to be favorable on a year-over-year basis.

A component of this is that $50 million to $75 million of pension income in 2013 that we now expect, slightly more tailwind than we indicated when we gave guidance in December.

This positive is driven by the proactive funding we have done to date; and you recall that funding in '10, '11, as well as '12.

It is also attributable to a higher than expected return on plan assets in 2012, and partially offset by a lower assumed rate of return that is effective in 2013.

We are still operating with a range for pension income given the foreign plan estimates, which we don't anticipate to be finalized for a few more months.

Importantly on the tax front, we are still planning for a 26.5% rate, unchanged from 2012.

Earnings per share, $4.75 to $4.95, up 6% to 11% over the $4.48 for 2012.

And we will continue to generate strong free cash flow despite higher levels of CapEx spending that we will have this year to really fund growth investments.

In summary, we are sticking with our guidance from December with a higher level of confidence and with potential upside that we for now we think makes sense, as Dave said, to hold as contingency and could be used, among other things, to fund repositioning and other actions in the year, given the uncertainty that is still prevalent in the economy.

Now let's go to slide 11 and let's talk about then the so-what of that for the first quarter.

For the first quarter, we are expecting sales, as you can see, to be in the range of $9.3 billion to $9.5 billion, flat to up 2% on a reported basis.

EPS, we are expecting to be in the range of $1.10 to $1.15, in line with that 6% to 11% increase that we are looking for the full year for 2013, and represents roughly 23% of our full-year guidance.

So that is in line with our normal linearity.

With that, let's take a look at the businesses, just a couple points on the first quarter for each of them.

Aero, we expect sales to be roughly flat to down slightly on a year-over-year basis driven by continued modest Defense and sales decline.

We are thinking that D&S will be down about 3%.

And also some challenging comps on the commercial side, both on the OE side, particularly BGA, and also on the aftermarket.

ACS sales we expect to be flat to up 2%.

Overall, we are seeing stability in their major end-markets with pockets of growth emerging.

We are also expecting low single-digit growth in both HPS and BSD, which are in line with those recent order trends that I talked to you about.

For PMT we're expecting sales up 7% and 9%, or flat to down slightly on an organic basis, and driven by a robust quarter for catalyst shipments in UOP and the addition obviously of Thomas Russell adding to that reported growth, providing tailwind to us.

Advanced Materials, on the other hand, is expecting mid to high single-digit declines due to the challenging end-market dynamics and also some lower volumes for PMT.

Finally, in Transportation Systems, we are expecting sales to be down 5% to 7%, driven by continued weak light-vehicle production particularly in Europe as we referenced earlier.

We are also expecting EU light-vehicle production -- that is, the industry -- to be down again in the first quarter in the range of about 10%.

We also expect some continued foreign currency headwinds; and again that may be mitigated if we continue to see some favorability in terms of our euro-to-dollar assumption.

As you can see, relatively modest planning assumptions around the top-line sales across the business, but generating again very good EPS growth in terms of our outlook for the first quarter.

So with that, Elena, before we go to Q&A, let me just summarize on slide number 12.

Obviously, 2012 was another great year for Honeywell, another year of outperformance.

We set and we met high expectations, particularly as it relates to earnings growth and cash generation.

Now, we also continued to invest for the future, doing, as Dave said, smart things that will continue to deliver value in future periods.

As we turn the page to 2013, we are planning another year of strong margin expansion in a slow-growth environment.

We have seen signs of stability.

The horizon looks a little brighter than it did even a couple weeks ago.

But nothing suggests that anything less than conservative planning is best at this point.

The Honeywell playbook is working.

We are continuing to evolve as a Thinking Company.

We are improving and leveraging our key process enablers and our productivity tools.

We're growing faster than our served markets.

And we are doing everything more efficiently to drive continued outperformance versus our peers.

Now 2013 is an exciting year for us, not just because of what we are going to do this year, but because it is another yardstick closer to the 2014 targets we set back in 2010.

We have got a lot of momentum as we prepare to make the final push for 2014, with tailwinds across a number of the businesses for growth as well as increased productivity.

Again, as Dave said, this is going to be the focus of our upcoming March 16 investor conference in New York City -- delivering 2014 from innovation to execution.

As we continue to evolve as a Company, the strong portfolio that we have created, the unified One Honeywell culture, and our continuous improvement process disciplines, these are the keys to how we are going to deliver the 2014 targets and continue to position for strong outperformance beyond that.

So, with that now, Elena, let's go over to you for Q&A.

Thanks, Dave.

March 6.

Just one clarification.

The investor conference, March 6 in New York City.

Thank you very much.

Kevin, if you could now open the line, we will take our first question.

(Operator Instructions) Scott Davis, Barclays.

Hi, good morning, guys.

One of the things that you didn't address in the presentation was cash reinvestment for 2013.

I am guessing since you don't have to make a pension contribution, you are probably sitting on a fair amount of cash at this point.

What is your thought on potentially buying back some stock?

Or are there more deals out there like Thomas Russell that -- if you can comment on that.

A couple comments, then I will turn over to Dave.

But I think we did go through a bunch of that in the December call.

The plan really hasn't changed all that much.

We raised the dividend by 10%.

We bought back some shares in December last year.

We are saying we will hold share count about flat with the fourth quarter this year.

And as we have said in the past, the policy still hasn't changed when it comes to acquisitions and additional repurchases.

We are going to be opportunistic about what do we think makes sense.

So hasn't really changed from what we said in December.

Dave, anything you want to add?

No.

I would say, absolutely we are on track for that.

You will obviously fund the Intermec acquisition, Dave, during the course of the year.

The one thing I would just say is obviously as the acquisition pipeline continues --

Still looks good.

-- continues to be attractive, we are going to continue to leverage our strong disciplines, both in terms of price paid as well as execution and integration.

But that looks good.

I think the share buyback is absolutely on track.

We are going to have over $1.3 billion cash outflow for dividends in 2013.

And, obviously, very positive feedback that we're getting in terms of that continued rate of growth on the dividend.

So that's really the story, Scott.

Fair enough.

One of the highlights to me, in the quarter at least, is the ACS margin.

We've talked about this I think for several quarters.

Things have been progressing really nicely there.

I don't think in our model we had ACS margins over 15% until like 2016 or something, so you are way ahead of that pace.

What -- when you think about this quarter, the 15.5% number, you referenced positive inflation impact, and maybe that has some impact.

But help us understand what is sustainable in that over-15% level and what may be more transitory or mix related.

Well, for ACS, none of this stuff is transitory.

This is consistent with that concept of evolution in everything that we do that we talked about as we are just going to keep steadily building on what we have done before.

So I fully expect ACS continues to increase their margin rates, just like I expect it in Aero, I expect it in PMT, and TS, and total Company.

We are not very subtle.

In fact, I can't think of any transitory or one-time gains that we generally ever let fall through on anything.

We tend to use those for repositioning.

So it's I'd say very sustainable.

Dave, anything you want --?

Well, I would just say that we had 14.1% margin for ACS for the year, which is a record.

We are going to continue to build there.

It is really -- we hope we are going to get a little more volume leverage.

That would be terrific.

I think we would see really terrific conversion there given everything that Roger and the team are doing on the productivity, on the cost side of the equation.

So you are going to see -- there is going to be sequential differences.

First quarter is going to be different than the fourth quarter.

But when you look at really year-over-year, as Dave said, it is a sustained improvement that we are really targeting and the business is confident that they're going to be able to deliver.

In the formula, Scott, you know the formula that we are using.

Yes.

No, I think what I was specifically referencing is you do talk about inflation, so I am guessing that there is a price-cost spread that is in there that has some sort of an impact that we wouldn't want to model that going forward.

So I am not talking about one-time gains or anything like that, just more of the --

Just, Scott, on the price-to-cost spread, it is actually slightly unfavorable.

But ACS is mitigating that through strong material productivity.

And even building on their performance in the quarter, they also offset some negative mix of roughly 20, 30 basis points in the quarter.

So I think it is productivity across the board both in terms of operational productivity and material productivity offsetting those headwinds.

That's impressive.

Okay, thanks, I'll pass it on.

Thank you.

Nigel Coe, Morgan Stanley.

Thanks, good morning.

Nice quarter.

Obviously you alluded to the fact that you got a bit more contingency in the plan due to maybe where the FX rate is right now and some other factors such as pension.

But obviously keeping a conservative view on the year.

But I am wondering if we are in a situation now where perhaps there's a few more good guys than bad guys as we go through the year.

How does the repo pipeline look at this point?

Is the policy to accelerate repo this year and maybe flow it through next year?

Or do you see the potential for maybe a balance between additional repo and perhaps upside to the plan?

Well, we always want flexibility on repositioning.

We are always looking at projects.

But as you know, we've got over $300 million worth of projects that are already funded that we need to work our way through.

So we like having the flexibility in the event that there is a really good idea that comes forward.

But just executing on what we have already funded is going to be a real boost for us going forward.

I think we provided those numbers for this year, and I don't know about 2014.

Yes, the incremental benefit that we are assuming is roughly $150 million in 2013.

This year.

Yes.

Does that then flow through into '14 as well?

Is there an incremental into '14, too?

There is, Nigel.

Off the top of my head, I don't have that.

I think it is something we can provide certainly in March.

Well, the important thing maybe, Elena, just to add to that, is we funded on a gross basis $120 million of repositioning in 2012.

On top of what we had already --

Already had done.

So -- and by the way, some very attractive --

It's good projects.

-- payback projects.

So what you will see, Nigel -- and we can follow up on that, and clearly we will have more about that when we get together in March, on March 6 -- that you are going to see there will continue to be strong incremental benefit that will flow into 2014.

Fantastic.

Then just digging into PMT margins, just wondered what impact the Thomas Russell acquisition had due to accession accounting in the quarter.

You also mentioned unfavorable price-raws.

You guys have done a great job of mitigating the raw material volatility particularly in the Resins business.

And I am wondering, has there been a change in the dynamic now where price-raws becomes more of an impact going forward?

Well, on Thomas Russell, we had obviously favorability in terms of -- I cited that when I talked about the reported versus the organic sales contribution that Thomas Russell made.

Also, Thomas Russell was actually accretive in the fourth quarter.

We actually had -- it made a positive contribution.

We had talked about that earlier just in terms of the excitement that we have for that transaction both in terms of the tremendous complement that it gives to our current gas technology and gas positioning in UOP, but also what we think we can do to continue to leverage its strength, its marketplace strength, in terms of the financial performance.

So, we saw that in the fourth quarter.

We are going to see a continued benefit, obviously, in 2013.

But it was margin rate (multiple speakers)

It was margin rate (multiple speakers)

Margin rate dilutive.

About 40 basis points in the quarter.

Okay, yes, yes.

And the price-raws?

On the price-raws, well, R&C has been dealing with the decreasing spread throughout the year.

I don't see that spread getting worse during the course of this year, but that is something that they just work on managing going forward.

Like you said, it has become significantly less of an issue for us, just in terms of how we manage the entire business.

So I don't see it creating any issues for us this year.

Okay, that's great.

Thank you very much.

Steven Winoker, Sanford Bernstein & Company.

Thanks and good morning.

So just first question, is the Defense and Space view of sequestration changing or changed at all since the Fall based on the activities over the last month?

No, I would say that we are staying in the same place we have always been, and that's playing conservatively there, because you just don't know what those guys are going to do down there.

Okay.

Then you commented on the energy orders pushout in BS&D.

Can you give us a little more color on what you are seeing there in North America and what your sense is for that changing?

Yes.

I think that whole market has slowed down just because state and municipal budgets are all struggling to get money right now to even investigate or look at anything.

Even though these end up being cost-free projects, it still just causes everything to slow down.

That is the phenomenon that we are dealing with, and it is across the industry.

Okay.

Transport for next year, given your comments on Friction historically, I think hoping for breakeven by 2014 and all that, are you still hanging in there for that business unit over the next six months?

As in what sense?

As in thinking about their ability to drive to the margin targets, given what is going on in Friction as well as volumes in Europe.

Oh, yes.

Yes, we think they have a doable plan.

We are going to continue to fund the transformation that we have talked about.

That is not the most pleasant of situations to deal with, but we are going to stick with it.

Okay.

Maybe just one last, you mentioned -- the words you mentioned about six times was -- and in the presentation, 2014 and beyond; and that we are going to hear about 2014 and beyond in March.

Can you just give us a little clarity?

Are you suggesting that you might be thinking about more specific targets this year as opposed to next?

Or are you just sort of speaking generally?

Very generally.

Okay.

Okay.

The great unveiling will be in 2014 at the next five-year plan.

Okay, all right.

Great.

Well, we will keep asking.

Thank you.

Now, that I am relatively sure.

Thanks.

Jeff Sprague, Vertical Research Partners.

Thank you.

Good morning, folks.

Can you just post us up where we actually finished on pension from a funded status, both in percentages and dollars?

And should we expect that you are done funding for really the foreseeable future?

Yes, we finished at about 85%, maybe a little less than that in terms of funded status for the year.

I think that is about --

$3.5 billion.

$3.5 billion in terms of underfunded balance.

And I would say in terms of the second part of your question, in terms of are we done, I think that is very much TBD.

As we have talked about before and as you are very familiar, this is a very discount rate sensitive phenomenon.

The math is really driven significantly by discount rate.

We talked about this a little bit in December.

If you just go back to the numbers in terms of discount rate that we had in 2009, 2010, in the 5% to 5.25% range, you are basically at a fully funded status.

So I think it is prudent for us to have done what we have done, which is to done the prefunding over the course of the '10, '11, and '12 to be in the position that we are now.

We have seen obviously continued historic lower rates.

We have had headwinds in terms of a number of our major markets.

So I think now is an excellent time for us to shift that focus, do what we are doing for 2013 in terms of capital and cash free deployment.

But we are going to have to say it is a wait-and-see attitude where hopefully what we're going to see is some improvement in terms of rates, and that is going to really address most of this issue.

Meanwhile, on the accounting side, we are going to benefit here in 2013, as we said, from a little bit of pension income.

We expect that will probably continue into 2014 at about that same level given where rates are today.

Again, that is also interest rate or discount rate sensitive.

So, I think for now we feel very comfortable with what we are doing, the strategy that we have employed.

And it will have to be wait-and-see going forward to make any kind of further statement in terms of beyond '13 or '14 in terms of funding.

Great, thanks.

Just add to that, we wanted to stay in this sweet spot where at some point rates do go up, the markets will do better, and you don't want to be in a position where all of a sudden you end up with a significant overfunded plan.

By the same token, you don't want to be in a position where you don't have critical mass in the pension so that when things do get better, rates go up whatever, you still stay underfunded.

So we have been trying to manage that sweet spot, and we think we are there.

With just a little bit of help from rates and from market return, then there should be no need to put money in the pension fund for a while.

One other quick thing, Dave, if I can add, which is effective also with the beginning of this year.

We have lowered our rate of return assumption from 8% --

8% to 7% (multiple speakers).

-- to 7.75%, which we also think is smart and again is consistent with our conservative approach on this issue.

So that is another element of it, Jeff.

Yes, just backing into some rough numbers though, it looks like if you earn your ROA, you actually earn enough to pay your annual benefits payable and you hold this thing stable, as long as discount rates don't go lower.

Right.

I think that's --

Pretty much, yes.

Yes.

Just on the deal front, do you still see Intermec closing in the May time frame?

And given that Thomas Russell is off to a strong start, have you raised your sights a little bit there on accretion for 2013?

I would say with Intermec, we'll see; but that is kind of the way we are thinking about it now, is sometime during the second quarter.

With Thomas Russell, yes, we are really pretty excited about what that can do for us in terms of what we can get on the orders side.

So I think we can grow that pretty well.

Then just one other quick one, just thinking about this contingency that has been created early in the year.

Should we think of any upside from dollar/euro falling through at the average Honeywell margin rate?

Or is there some other complexity there to think about?

Yes, Jeff, the sensitivity is really for every penny it is roughly $50 million in sales and about $7 million of operating income, is our back-of-the-envelope math that (inaudible).

Terrific, thank you.

Get a flu shot, Dave Cote.

I'll pass the baton.

Sorry.

Howard Rubel, Jefferies.

Thank you very much.

Two questions, Dave, Dave, and Elena.

First, you have done some very interesting drop-in and complementary acquisitions of late, and you have talked about Thomas Russell a little bit.

Could you just elaborate a little bit and give us a little sense of how some of the other acquisitions have done lately in terms of complementing what you have done?

EMS stands out as another example.

I would say, well, it is not just the recent past.

If you take a look at the whole 10 years, the acquisition process that we have really works.

I am hard pressed to think of one that has been bad that was of any consequence.

We had some smaller ones that didn't work out as well as we had hoped, but nothing that has been a big miss.

EMS to your point stands out because there we ended up getting a $2.8 billion order that we hadn't even counted on as part of the valuation.

Thomas Russell has been excellent right from the start, and we think the opportunity there is going to be even bigger.

We are excited about what we think Intermec can do to broaden our portfolio.

So I'm -- we have built a great safety products presence.

So I think this is one of those capabilities that we really have as a Company.

It is not something we do as a one-off every four or five years, dust off the book, and figure out what you have to do.

It is more in the psyche of the Company; it is just how we do things.

So they have all worked out pretty well.

I can't think of one that isn't something to brag about.

I agree.

I just thought maybe there was something to add in terms of how it is 1 plus 1 -- I don't want to use the trite expression 1 plus 1 is getting 3. But there is an element of what you have found is that as you have done some of these, there's other market opportunities that have been uncovered; and that is what the focus of the question was.

Oh, well, that part is true.

It is one of the nice things about broadening our portfolio, is that we end up seeing more new areas to be able to go into.

EMS is a good example.

That has really broadened the -- opened the aperture for Aerospace as they think about what they do in that segment.

Then the follow-up, just to go on Aerospace, you've had a number of notable wins, some are announced and some are not.

How are you thinking, Mr. Anderson, about the incremental BGA investments this year?

Howard, are you talking specifically about some of the RD&E investment?

Yes.

Well, as we have said, we are looking for Aero to be basically flat on an RD&E as a percent of sales.

We talked about that when we gave our December guidance.

It is a good question, because I think one of the challenges we have overall at Aerospace is it is an opportunity-rich environment.

And despite us being selective -- and that is something that we have been very, I think, clear in terms of our direction with Aero -- it is something I think that has really served us very well and is going to continue to serve us very well in the future.

The fact of the matter is, it is a robust pipeline.

We will continue to manage that.

And we just -- I think that is one of the things that we have just gotten better at in terms of execution.

It also underscores, as Dave talked about, just our operating disciplines in just getting better in terms of managing innovation, program management, and delivery.

You are just going to see that translate, we think, into just even a stronger Aerospace in the future, a stronger Aerospace group for Honeywell in the future, Howard.

And also, it is consistent with what we continue to say in terms of the upside that will translate into margin expansion and improvement for the group.

So, the BGA opportunities are big.

As you said, there's opportunities there that haven't been announced, publicly announced or stated.

But we think that pipeline is very rich and we will continue to manage it effectively.

Thanks a lot.

Steve Tusa, JPMorgan.

Hey, good morning.

You guys gave a backlog number last year.

I think this year you gave just the long-cycle backlog.

Last year I think it was $16.2 billion, of which 74% was going to be shipped in 2012.

This year, think it is $15.8 billion.

If you could just give me either the total backlog and then, more importantly, what you expect that -- of that long-cycle backlog, how much of that is going to be shipped this year in '13?

Steve, the comparable number that you are looking for is $16.8 billion in terms of the comparable number.

The $15.8 billion that we quoted is really the long-cycle backlog that would ship within 24 months.

So there is --

Okay.

Okay?

Got you, okay.

That's very helpful.

On the PMT margins, I think you said going forward, 18% to 18.5%.

You guys did 18.7% this year but you guided up zero to 20%.

So maybe you could just clarify those comments.

Well, I think when I was talking about that, Steve, I was talking about longer-term sustainable targets directionally.

One of the things that we have been asked a lot is -- can PMT sustain this kind of performance, this kind of performance track record?

So, what I was really referencing was the fact that we have the confidence.

Another way of saying it is we have the confidence in PMT's ability to do that.

So the collection of the technologies that we possess, the market positions, the richness of the NPI, the new product in backlog, in terms of from a research standpoint, as well as what we just see in terms of the continued global macro trends and market opportunities.

You take an example of that now, the addition of Thomas Russell, and our key position in natural gas liquids, that is -- and your -- we have acquired a company there that has basically got a US footprint with significant growth continued in the US, but also now international expansion opportunities.

That is the type of thing I am saying in terms of the sustainability is really what you should look to as opposed to a specific number.

Great.

Then one last question, just on the incremental pension tailwind.

How do we read you guys as having this like hedge out there, as opposed to you guys have been pretty smart in the past about taking some of this upside and offsetting it with restructuring?

Do we read this as there is nothing you really worry about today, so you let the more -- the likelihood is that just kind of flows through?

Or that you are out of opportunities for restructuring?

Just a little curious as to why you are not right away calling that out and saying at some point we're going to offset that with restructuring.

Here is the way I would look at it is -- over the last two, three weeks, let's say, some of the economic news looks like it has gotten better.

But this is not the first time.

We see two or three weeks that look good, followed by stuff that really doesn't look good at all.

And government is still not showing a capacity for dealing with its debt problems.

We are all concerned that at some point this thing turns again and turns in the other direction.

We just think the smart thing to do now is to stay conservative and stay prepared.

There is -- I see very little downside to being prepared for the downside.

That is the way we are just looking at it.

We are saying, okay, better to have this in our pocket and be prepared to deal with that downside.

If it doesn't happen, well, there is restructuring opportunity; there is let it fall through opportunity; there may be other investments that we will do.

But right now, just because the news looks a little better the last couple of weeks, we just don't think this is a good time to declare economic victory.

Yes.

Okay.

Thanks a lot.

All right, we have time for one more question.

John Inch, Deutsche Bank.

Thank you.

Good morning, everyone.

Dave Anderson, you had talked about in your December preview caprolactam headwinds.

And between the capro and the benzene price declines, just remind me; is there a formula that you or that we can look at that says for every percentage change this is the impact on PMT?

And then just the corollary is, what do you think of PMT margins sequentially as the year progresses based on, I think, your previous comments regarding spreads?

I think, Dave Cote, you said you expected spreads to remain not worse or whether in terms of the impact.

Well, again, call it the benzene add or the formula that exists in terms of market pricing, gives us a directional indicator; it doesn't give us a precise.

You can't plug that in and determine what the outcome is in terms of the margin or the profitability for R&C or for PMT, because we serve so many different markets; and as you would expect, John, it gets kind of complicated.

But it is a macro indicator of the health of that overall business space.

And it is an overall indicator for us in terms of, from a planning standpoint, directionally, in terms of the profit performance that we expect out of that business.

And also an indicator of volumes because, as you would suspect, when you get weaker demand, some of that translates into weaker commodity pricing.

So that is one of the challenges that we have going forward.

On the other hand, with PMT we expect to see continued good margin performance over the course of the year.

We are going to see a very good first-quarter 2013.

The reason is, and we have been signaling that, is we are going to have very strong catalyst deliveries in UOP.

That looks like it is absolutely on track.

So we are going to have exceptional performance there over the course of the year.

But we expect another good year in terms of overall PMT margins.

But like --

And a little less variability compared to what we saw at the end of 2012, looking forward to 2013.

Because, John, to your point, we're going to have lapped the year-over-year impact of the R&C caprolactam-to-benzene add or spread.

Yes.

Or stated differently, the second, third, and fourth quarters, those are going to be more consistent --

More consistent.

-- more to one another in terms of the sequential margin rates that we will see out of PMT.

There is a seasonal element to the fourth-quarter margin in PMT, which on average can be roughly 150 basis points of a decline, driven by really Fluorine Products, specifically.

But other than that, as Dave mentioned, we expect there to be much more consistency in terms of the margin rate performance in 2013.

Actually, that is quite helpful.

I wasn't sure how you would have the confidence if there was no predictive readthrough.

But that answers that very well.

787, I realize Aerospace is very diversified.

It's about flight hours.

But you guys have a pretty good content on that program.

Is there any discernible impact in the guide, even if it is just minor?

Or is it just not really that relevant?

It is not going to have much of an impact.

There are obviously some sales from it in the year.

But even if they stopped producing, which I find hard to believe, that is manageable for us.

Then just last, Dave Cote, ACS has been and is expected to continue to be an important source of productivity.

How are you thinking about productivity opportunities in emerging markets?

The reason I am asking that point is there are lots of reports of increasing automation proliferation because of rising wage costs in China and other places.

You guys as a company, although you have closed the gap, were behind, I would say a few years ago in emerging markets.

You've closed the gap.

Is this still a period of time for Honeywell to be investing?

Or are there opportunities to also perhaps drive productivity because of these -- just because market conditions are changing in the China and Indias of the world?

Well, I guess a couple of comments there.

The first one is, the opportunity for us to be able to expand outside the US is still significant.

While we have grown our percent of sales outside the US from 41% to 54%, 75% of the world's GDP is outside the US.

So still a lot of room for us to grow.

When it comes to productivity, we look at productivity in everything everywhere and in every country.

And we break it out into the two pieces that we have talked about before, is material and organization effectiveness, or OEF.

We look at every business that way, thinking about what is the smartest way to make both of those happen.

And that doesn't really change, I would say, as a result of wage rates going up in China or going up in India.

Yes, it is something that you manage; but it is not so overwhelming that it requires a drastic change in the Company or exit stage right or enter stage left.

Nothing like that.

So, very manageable, and we will continue to do that within that kind of framework, looking at material and looking at labor, and just keeping it as simple as that.

So basically on a net basis, you are still in a build phase, very much so it sounds like for the next few years, in emerging markets versus more of a cost phase, if you want to look at it on that basis.

Well, we always look at, you know, is growth and cost at the same time.

I have never been a believer that you just do one or the other.

So, that is why we have got it teed up in the five initiatives the way we do.

So, we're constantly looking at both.

None of this stuff has been a real surprise.

We still see a lot of opportunity to grow, and we still see a lot of opportunity to take out cost and just driving those big enablers of ours -- Velocity Product Development, the Honeywell Operating System, and Functional Transformation.

There is a lot of margin rate improvement and customer benefit from doing all three of those just a lot better than we do today.

Got it.

Thank you.

All right, Dave, I would like to hand it over to you for a final comment.

Okay, so while the economic times still remain difficult, we are going to continue to focus on what we can control to deliver outperformance regardless of the economic conditions.

At the end of the day, you have to play with the economic cards that we are dealt.

Until governments truly deal with their debt issues that is just the way it is.

We could wish it was different, but the best thing we can do is just play conservatively, assume that these great things aren't going to happen, and stay very flexible in what we do in terms of our ability to respond.

So, we are going to continue to evolve the Company in everything we do.

You know that word evolution is one that I use a lot, because I think it is important for organizations, for people, for companies, for processes, because we went to stay flexible to be able to respond to changing conditions, and we want to be able to improve on all dimensions.

A couple weeks ago, we had our annual meeting of our top 300 global leaders.

It is just fun to be able to tell you about the excitement that you can feel from the top 300 people in the world for Honeywell when it comes to what they know we can accomplish as a Company and where we are going.

The feeling was palpable.

It was the sort of thing that really pumps you up.

So as a Honeywell team, we look forward to demonstrating that continued outperformance that results from all that excitement for all the great groundwork, all the great seed planting that our guys have been doing for a lot of years.

Thanks for listening.

Thank you.

This does conclude today's teleconference.

Please disconnect your lines at this time and have a wonderful day.