漢威聯合 (HON) 2013 Q1 法說會逐字稿

Good day, everyone, ladies and gentlemen, and welcome to Honeywell's first-quarter 2013 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, Leo, and good morning.

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

Today's call and webcast, including in non-GAAP reconciliations, are available at our website, honeywell.com/investor.

Note that elements of today's presentation do 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 do 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 first quarter; share with you our outlook for the second quarter and the remainder of the year; and, finally, we'll leave time for your questions.

So, with that, I'll turn the call over to Dave Cote.

Thanks, Elena.

Good morning, everyone.

A very good start to 2013.

EPS in the quarter was $1.16, and that's normalizing for tax.

That came in $0.01 above the high end of our guidance range, and up 12% driven by the strong margin performance across the businesses.

And we accomplished this in a slow-growth macro environment that was really coupled with some particularly challenging prior-year comps.

And I think it's a nice reinforcement of our conservative sales planning process and the results you can get from that.

Sales of $9.3 billion were in line with guidance.

And like we talked about during Investor Day, it demonstrates the importance of a balanced portfolio.

Now, I say that because while we saw headwinds from lower defense spending, lower European auto production and generally challenging comps, we also saw modest signs of improvement in some several of our key short-cycle ACS businesses; and of course, another terrific quarter from UOP, not just in sales but in what the future is for sales.

Similar to prior quarters, EPS growth was driven by strong margin expansion.

We were up 100 basis points to 16.2%.

And this was driven by cost management or productivity that focused on material costs, and remaining conservative in our [census] planning.

This discipline, along with our considerable amount of seed planting, helped us to deliver these results while maintaining our investments in the future.

Now, as a result of that success, we are raising our full-year pro forma EPS guidance by $0.05 on the low end, making our new range $4.80 to $4.95, up 7% to 11% versus prior year.

This reflects our strong first-quarter performance as well as our confidence in our ability to drive continued margin expansion.

However, also, as we've been saying since October, we want to ensure we are remaining balanced in our planning.

And as a result, we're maintaining a range that incorporates possible risks and opportunities.

We are achieving these results while continuing our investments in the future, or that seed planting that you always hear us talking about.

In the quarter, we proactively funded over $30 million of new restructuring projects, building on a healthy pipeline of projects, as we've talked about in the past.

This is more than we originally expected; which, again, speaks to the strength of our first-quarter results.

We also continue to invest in stuff that's really just terrific when it comes to new products and technologies, and that are winning with our customers.

As an example, Honeywell's SmartPath was selected by the Airport Authority of India, or AAI, to be part of a pilot project for satellite-based precision approach and landings at the Chennai International Airport.

As you know, airport congestion remains a major issue globally, and SmartPath will support this increasing demand by reducing delays, lowering operations costs for airlines, and increasing traffic throughput.

Think of it as like the Honeywell Operating System for an airport -- the same concept.

We also saw a number of new wins from UOP, building on their already record backlog levels, and setting them up for a multiyear cycle of continued outperformance.

For example, UOP announced its 12th Oleflex project win since the beginning of 2011, driven by the renaissance in petrochemical investments spurred by low natural gas prices.

Now, if we take a step back for a moment, we see ourselves in what continues to be a slow-growth macro environment.

We do see some reasons to be optimistic on the horizon.

But we also see plenty of reasons to continue to remain cautious.

For example, US and European sales were as expected in the quarter.

However, China saw a weak start to the year, reflecting a government austerity and a concerted attempt to contain growth.

That being said, the majority of our businesses there are quite healthy.

Inventory levels are returning to normal and order rates are improving, particularly in our long cycle businesses, signaling a modest recovery over the remainder of the year.

As we've said before, taking a conservative approach to topline planning helps ensure we deliver the results you've come to expect.

And you can expect we'll be ready to capitalize on the opportunity, if and when things do pick up.

In the meantime we'll keep following the playbook you've come to expect from us -- seed planting for future growth, including investing in our businesses; launching a bunch of new products; global expansion; and driving productivity through our key enablers so we can deliver this year, next year, and beyond that.

So, with that, I'll turn it over to Dave.

Thank you and good morning, everyone.

Thanks for your participation.

Let's go to slide 4, entitled 1Q 2013 results.

I'll just take you through the summary highlights.

Again, sales of $9.3 billion were approximately flat year-over-year on a reported basis, and in line with our prior guidance, down about 1% on an organic basis; so adjusting for acquisitions and adjusting for currency.

Now, as expected, challenging comps in Aerospace and also in Transportation Systems were headwinds in the quarter, although we expect these comps to get easier in the second half of the year.

And we'll talk about that a little bit more.

Segment profit for the quarter was up 7%.

Segment margins expanded, as Dave said, 100 basis points, to 16.2%, representing really exceptional sales conversion in the quarter.

We saw margin expansion in three of the four SBGs -- and we're going to take you through that in just a moment -- but PMT, you'll note in particular, benefited from a strong UOP quarter as we expected.

Below the line, largely -- those numbers, largely as anticipated and consistent with our prior guidance.

And you'll recall the [pinch] in favorability we have this year, which was essentially redeployed in the quarter to fund smart repositioning projects, which will help continue to drive productivity in a slow growth environment.

The first-quarter ineffective tax rate at 23.1% -- against the planned 26.5% for the full year.

The lower tax rate was driven by the passage of the US tax extenders earlier this year.

And that came just late enough to not be a 2012 benefit, and early enough to be a first-quarter 2013 benefit.

So that's going to correct, and will be offset later in the year.

And we are still planning the 26.5% for the full year.

So, EPS of $1.21 reported was up 16%.

However, normalizing at the 26.5% ETR, EPS would have been up -- it would have been $1.16, up 12%, and above the high end of guidance, driven by stronger segment margin expansion in the quarter.

And, finally, free cash flow for the quarter of $327 million was up 9% versus prior year, and right on track to our full year guidance.

Let's go through each of the businesses in turn; start with slide number 5, with Aerospace.

Sales for a road down 1% in the first quarter, again, as expected.

US defense and space program ramp-downs, as well as tough prior-year comps in the commercial business, both contributed to a challenging topline sales quarter for Aerospace.

Commercial OE sales were up 1%, driven by 9% growth in Air Transport and Regional, as a result of continued strong OE build rates.

BGA OE, on the other hand, was down primarily driven by backlog burn down in the first quarter 2012.

Commercial aftermarket sales were down 3% versus prior year -- and a little color on that to help you understand what we're seeing today.

It makes a lot of sense to look back at where we were this time last year.

You'll recall, in the first quarter of 2012, Honeywell commercial aftermarket sales were actually up 16%; which, at the time, was our eighth straight quarter also of double-digit spares increases.

Of course, we benefited from strong win rates in airline selectables; new aircraft spares provisioning; favorable platform mix; as well as higher-than-normal engine maintenance events, and also some discretionary RMU sales.

The key point is, obviously, lapping a very strong period last year.

Fast forward to today, and as we foreshadowed a year ago, the aftermarket growth has continued to moderate.

And as expected this quarter, we experienced a decline in spares volumes mostly as a result of the strong performance we had last year, but also as a result of airline buyer behavior.

However, the flight hours continue to be positive, and we feel confident we will see aftermarket growth in the remainder of this year.

Defense and Space sales were down 1%.

The US sales were unfavorably impacted by the anticipated program ramp-downs.

And these were partially offset by good growth in the international market.

Looking at segment profit for Aerospace, you can see margins of 80 basis points to a robust 18.9% in the quarter, largely driven by commercial excellence; and also continued productivity, net of inflation, including the absence of the prior-year unfavorable impact, you'll recall, of the Hawker bankruptcy, partially offset by lower commercial aftermarket volume.

So, those are the highlights for Aerospace.

Let's go to slide at 6, Automation and Control Solutions.

So, ACS, sales were roughly flat for the quarter on both a reported an organic basis.

Regionally, Europe was a little better than we expected back in January, while the US and Asia were a little bit worse.

Let's just take a little bit closer look at the ACS businesses.

For ESS -- Energy, Safety, and Security -- sales were up 2%, driven by good growth in ECC as a result of a more normal winter heating season, and also continued strong residential market conditions and new product introductions in security products.

Process Solutions sales were down 2%, driven by challenging comps.

It's really as a result of several large projects which have been steadily ramping down over the course of the prior year, and into the first quarter of this year.

Now, the good news here for Process Solutions is the project pipeline remains very strong.

The backlog is converting at a higher margin.

And this is partially as a result of being more selective in what we bid, as well as the organizational improvements we've made in the last year.

In fact, HPS margins were up strongly in the quarter, so a positive margin story for HPS, and the contribution to ACS as a whole.

For BSD -- Building Solutions and Distributions -- sales were down 2%, driven by several large project completions in 2012, coupled with the remaining week US energy retrofit market, partially offset by continued growth in our Americas distribution business.

Now, segment margin for ACS expanded 80 basis points to 13.8% in the quarter.

The performance was driven again by commercial excellence; by operational improvements; and also by continued cost management; and, of course, the benefit of previously completed restructuring actions, which of course are continuing to flow through and pay dividends.

Let's go down to slide 7, PMT, and just the highlights for Performance Materials and Technologies.

Now, UOP sales were up 34% reported, 10% organic in the quarter, primarily driven by increased petrochemical catalyst shipments, and also equipment sales growth.

UOP also continued to build backlog, now approximately $2.9 billion, reflecting an organic increase on both a year-over-year as well as on a sequential basis.

On the other hand, Advanced Materials was pretty soft in the quarter, largely as expected.

Sales were down 9% versus prior year, driven by lower volumes in Advanced Materials as a result of planned plant outages in both resins and chemicals, as well as in flooring products.

And those outages had roughly a 6% negative impact on sales in the quarter.

We would not expect these to have a significant impact on sales, importantly, for the remainder of the year.

Additionally, while we continue to see price-raws pressure in resins and chemicals, the end markets there remained relatively stable.

And we exited the quarter with a robust order book, supporting continued future growth outlook.

The segment margin for PMT was 21.8%, representing an increase of 200 basis points versus last year.

Again, the strength of UOP sales, in addition to favorable price, net of inflation, partially offset by lower volume in Advanced Materials as a result of the plant outages that I referenced, and also the continued investments that we make for growth in PMT.

Let's go now to slide 8, Transportation Systems -- TS.

The sales decline was 4% in the quarter year-over-year, an improvement over the fourth-quarter performance.

We continue to see European light vehicle production declines of approximately 10%, as auto sales remained depressed across most of Europe; including, now, France, Germany and Spain.

TS, however, has had the benefit of new launches, partially offsetting these declines, and with higher Turbo gas penetration in both North America as well as in China.

And while we expect the difficult environment in Europe to persist, the comps, of course, are going to get easier in the second half of the year.

Segment margins for TS were down 50 basis points, driven by the lower sales and also the investments we're making to improve friction materials, partially offset by productivity actions.

Overall, TS continues to execute well in the difficult macro environment it's in, illustrated by maintaining margins at a solid level despite Western EU light vehicle sales at 17-year lows -- driven, really, this productivity, by continued efficiency improvements, and also flexibility.

Let's now, with that review of the businesses for the first quarter, go to slide 9 and give you the brief highlights for our outlook for the second quarter.

Again, for the second quarter, we're expecting modest sales growth, roughly flat to up 2%, in the $9.5 billion to $9.7 billion range.

EPS is expected to be in the range of $1.18 to $1.23, up 4% to 9% when normalizing for the tax rate in both years.

Let's take a look, then, at each of the businesses; just the highlights of the revenue outlook for each of the businesses in the second quarter.

Aerospace, we're expecting sales to be roughly flat, with modest growth in commercial, partially offset by a mid-single-digit decline in Defense and Space.

Now, we continue to monitor aftermarket activity in relation to global flying hours and airline inventory levels.

And we'll see spares comps improve as we move through the remainder of the year.

For ACS in the second quarter, we think that's going to play out much like the first, with sales flat to up 2%, driven by a modest organic improvement in ESS and the timing of Intermec, which is expected to close by the end of June.

This is partially offset by continued slowness in both HPS and BSD.

We anticipate continued strong conversion in ACS, with margins up year-over-year despite the potentially diluted impact of Intermec in the quarter.

And as a reminder, ACS margins for the year are estimated to be approximately 14.5%, including 40 basis points of Intermec-related dilution, reflecting the acceleration we've seen in margin expansion here the last couple of years.

PMT, for the second quarter, we're expecting sales to be up 12% to 15%, which would equate to mid-single-digit growth organically.

UOP is expected to have another strong sales quarter driven by the Thomas Russell acquisition, and also higher equipment sales.

Again, as a reminder, UOP saw very strong licensing revenues in the second quarter of 2012, which are not expected to repeat at those levels this year.

And, as a result, we expect PMT margins in the second quarter to be lower, both sequentially as well as year-over-year.

Finally, in Transportation Systems, we're expecting sales to be flat to down slightly.

EU light vehicle production is expected to be down approximately mid-single-digit, with Turbo volumes approximately flat sequentially.

There's a possibility we could see low-single-digit volume growth, which would be terrific.

And this is reflected at the high end of the revenue range for TS for the second quarter.

So, as you can see, very good performance despite a slow growth macro environment; supported, as Dave said, by a strong focus on driving productivity; and of course the balanced portfolio which gives us confidence in this outlook.

Now, before going to the full year, I just want to take a few minutes to say a few words and give you an update on NARCO.

So, on slide number 10, as we discussed in our December outlook call -- and this is really the highlights of what we discussed.

But just to really make sure that we're reminding you of this -- the long-awaited NARCO Trust formation is happening.

And, specifically, the NARCO bankruptcy plan is expected to be effective around April 30.

And, thus, we think it's likely the Trust will be established in the second quarter, which means we'll start seeing some Trust formation cash outflows this quarter.

A couple things we'd like to take a moment to point out -- first, we continue to estimate the 2013 cash outflows to be in the range of $200 million to $300 million pre-tax, or $120 million to $170 million, which is shown on the slide, after tax.

The outflows in 2014 are also expected to be roughly in that range -- $175 million to $225 million, net of tax and net of insurance recoveries.

And as you can see, 2013, as well as 2014, on the left-hand side of the chart -- slide 10 -- reflect the high water mark for cash outflows; as a significant portion of the early outflows are carryover of pre-existing claims yet to be paid.

Now, beyond 2013 and 2014, we expect the cash outflows to reduce and stabilize, subject to the annual payment caps on new claims of $140 million, pre-tax; or approximately $16 million, again, net of taxes and insurance receipts.

Now at this point, we feel we are adequately reserved, with over $1 billion remaining for NARCO specifically.

So, no P&L impact envisioned for some time; it's going to take several years of experience operating the Trust to discern certain trends in claims activity, and then reevaluate reserve levels.

So, key takeaway number one is, no change to the cash or earnings guidance for 2013 for this year.

Key takeaway number two is, this level of funding is very manageable.

It will not impact our ability to assertively and positively redeploy cash to build value in other areas.

We've been smart in how we've negotiated the Trust terms, specifically with Honeywell's level of engagement in Trust operating procedures and audit rights over the claims; payment processes; in addition to the ongoing cap on new claims.

And you saw that, in terms of that post-2014 presentation -- all of which serve to differentiate the NARCO Trust from any other.

And, of course, we'll continue to update you on this as events unfold.

So let's now turn to slide 11 and take a minute on the full 2013 guidance summary.

As you can see, some small puts and takes based on what we discussed today, but very much in line with your expectations.

Sales are expected to be up 3% to 4%; 1% to 2% on an organic basis.

We're still assuming a euro rate of 1.25 at the midpoint, which we believe remains, a prudent assumption in light of the volatility we've all been experiencing.

Now, the revenue forecast for the full year is down slightly from our previous expectations; really has to do with the assumption regarding the timing of the Intermec close.

Previously we were assuming June 1; now, are assuming June 30.

We've incorporated the full impact, obviously, of sequestration; and then, obviously, just the continued outlook for slower growth in the macro economy.

We've increased segment margins, importantly, for the full year, 10 basis points on both the low and the high end.

These increases reflect our strong first-quarter performance and our continued confidence in driving margin expansion through our enablers and our ongoing proactive funding of repositioning.

The full-year tax rate is still expected to be 26.5%, which is consistent with prior-year.

So, as we mentioned earlier, we would expect the first-quarter tax favorability to be offset in the second half of the year.

So, taking into account these items, we are raising our full-year EPS guidance at the low end by $0.05, resulting in a new range of $4.80 to $4.95, up 7% to 11% versus 2012.

And as you can see, we're still expecting around $3.7 billion of free cash flow, so no change there.

And as Dave said earlier, we believe a very balanced outlook for the year, but taking into account the good start that we saw in the first quarter.

So with that, let's go to slide 12, just a brief wrap-up, before we turn it over to Elena and to you for Q&A.

The first quarter obviously reflected another strong quarter for Honeywell.

And like most top-performing companies, we continue to set high expectations and we continue to deliver.

We remain confident in our 2013 outlook.

We continue to plan for growth in a low growth environment, with mixed orders trends by business and region, which is to say we're not counting on a big second-half recovery to deliver strong results.

We're focused on executing our prudent playbook; driving sustainable operating leverage; progress on key productivity initiatives; in addition to continuing to fund smart, new restructuring projects that will yield incremental savings in 2013 and 2014.

And.

finally, we've planted a lot of seeds for the future, with a strong portfolio aligned to favorable macro trends.

These are all intact -- industrial reinvestment, infrastructure expansion and renewal, continued urbanization combined with a growing global middle class -- these trends are going to continue to build.

And we're going to continue to leverage those.

We've got the right people.

We're developing the right products for the right markets at the right value to capitalize on these trends.

So we look forward to global growth returning to more normal levels, but we're not beholden to it.

We're going to keep doing what we always do -- executing on our business strategies, continuing to evolve as a Company and, as Dave said, seed planting for a strong future.

So, with that, Elena, let's go to you and to the group for Q&A.

Leo, (technical difficulty) first question.

(Operator Instructions).

Scott Davis, Barclays.

Good morning, guys, Elena.

Good numbers, obviously; and thanks for not disappointing like some of the other large-cap names have here.

It makes our lives a little easier.

Scott, I just wanted to note that we broke your paradigm about lackluster results today.

Well, you did, but I've still got another 24 that aren't so great, either.

(Laughter) As you might imagine, I read that last night and said, oh, I can't wait to bring that one up tomorrow.

That's all right.

I do read your stuff.

That's good; somebody does.

So, look, the only thing I'm going to pick on, then, is just this flattish free cash flow, year-over-year.

And obviously you're going to spend some capital.

But it begs a question of, given just how weak the overall macro is coming in in the quarter and your outlook, which I don't think indicates much of a recovery from here -- why do you think you need to make substantial capital investments from here?

Well, if we take a look at where the increase is coming from on the CapEx side, it's really for orders that we already have in PMT.

And this is growth that's going to happen.

We've got the new molecules; we've landed the new orders in UOP; and we've got to be able to ship the stuff.

And it's as simple as that.

And that's where the increase is primarily coming from.

This is a good thing, not a bad thing.

Sure.

But isn't there a potential to have a decrease in some of the other areas, just given that you probably don't need to spend much capital at all for flattish type growth?

I'd say it's flattish for this year.

That's the way we're going to think about it.

But when we're making these kind of investments, we need to be looking further out than that.

And I'd say we're pretty rigorous about how do we think about CapEx and where do we put the money.

And any of the spending we're doing I'd say is more than judicious when it comes to the returns that we're going to get from it.

As I said, the big increase is really coming out of PMT where we already have the orders in hand, and we have to be able to support it.

Yes, no, I totally understand that part of it.

Okay.

And then just as a follow-up, when you think about the amount of cash you have in Europe and other areas around the world, is there any flexibility in how you fund the NARCO Trust?

I also assume that some of this CapEx you're spending is going to be overseas money as well, although PMT has a fair amount of that as US.

Anything that gives you some flexibility on utilizing overseas cash, instead of having to use your US base?

Scott, this is Dave.

We'll just continue to be smart in terms of our tax and treasury planning, in terms of managing our cash balances.

Again, the guidance that we gave you at the beginning of the year, all of our communications in terms of both cash and coverage ratios and everything else, assumes this outflow.

So we'll just continue to be smart on that, and continue to be very smart in terms of, as I said, our tax and treasury planning.

Yes, it doesn't totally answer -- I guess my question is, can you use some of that European cash to fund NARCO, or does this have to be US dollars?

Specifically, they don't need to be US dollars.

Okay.

I figured as much.

I just wanted to make sure.

Okay, thanks and congrats, guys.

I'll let you move on.

Peter Arment, Sterne, Agee.

Yes, good morning, Dave; Dave; Elena.

A question on aerospace aftermarket, just in general.

I know you're not planning for a stronger second-half pickup in the global economy.

But you are expecting an improvement on the commercial aftermarket.

As we transition, is it just easier comps?

Or what gives you the confidence when you're talking about what you're seeing for airline inventory levels?

Well, first of all, I should say were not counting on much, Peter.

We've tried to do that as a Company, and we've lowered our sales sights even further in just about every business, saying we've got to make sure that we plan conservatively.

So we're really not counting on much.

Yes, and just maybe piggyback on Dave's comment, Peter, just to add a little to it -- we're looking at now, up low- to mid-single digits in the commercial aftermarket for 2013.

We think that's a reasonable range, given the first-quarter performance, and also just looking at the pattern of global flying hours and our pattern of sales for last year.

So the comps, as we said earlier, and as you know, become much easier in the second half.

So I think that is a good way to think and to plan going forward.

Some of the specifics on that -- we're going to continue to see very good R&O on both BGA as well as on the ATR side of it.

And that's really two-thirds of --

Yes, that's really (multiple speakers).

-- aftermarket.

That's a very good point, Elena.

That's two thirds of the makeup of the revenues of the Aerospace aftermarket.

So we're continuing to see that being relatively good.

And also, our anticipation for the spares side of BGA is pretty good.

Yes, RMUs are continuing to be very strong.

And RMUs are continuing to be very strong.

So, I think there's a lot of reasons why we think this low- to mid-single digits.

But that is tempered from where we started the year.

Okay, that's helpful.

And just maybe, just speaking in general about the regions, is it similar regionally around the globe?

It sounds like just in general from your report, that Europe feels a little less bad and Asia is a little softer.

Is that consistent, also, like what you are seeing?

Yes.

Yes.

Okay.

I'll jump back in queue.

Thanks for the good numbers.

Thanks.

Steve Tusa, JPMorgan.

Good morning.

I think Scott took care of all the brown-nosing for today's call, so I'll skip that part.

We can't get enough.

So, on the short cycle trends, it's a little bit all over the map here.

Danaher talked about the US being a little bit weaker; GE was down 17% in Europe, and it fell off a cliff in March.

Maybe if you could talk about your kind of year, your highest-frequency economic indicators -- the businesses that you watch for that.

And maybe you could talk about those trends, anything interesting that happened in March and into early April here.

Sure.

I would say, when it came to March, things actually started to look a little topper than they had before.

Interestingly, in the first couple weeks of April, things look a little bit better than they did before.

But there's nothing here -- and there is a business week to watch, called Basic Switches, that we pay attention to when it comes to something that portends the future.

But at the end of the day, I wouldn't say there's anything that caused any of us to say, okay, the trend has begun in one direction or the other.

There's just this order equivocation, if you will, where you just say, okay, I still don't know enough one direction or the other, to make a permanent or, let's say, more long-lasting call.

And that's why we're going to stay conservative.

I'd like to think that this is a trend.

But after a couple of weeks of things getting slightly better, I'm certainly not ready to declare.

Can you just remind us, also, on these moves in commodity prices with oil going down and natural gas coming back up -- how that impacts PMT, and how you see that?

Is there any impact to the net out?

And also Advanced Materials, as well, the price cost dynamic there.

Any risks?

Yes, I don't see any risks from -- first of all, gas pricing going up is a good phenomenon for PMT.

Because now you have more people willing to look for the stuff and pump it.

When it's only $2.50, $3.00, there is fields that just don't make sense.

And when you get up to $4.50, well, there's a lot of stuff that makes more sense than it did before.

And we'll encourage that dynamic.

I like it.

If we take a look at oil, whether it's $80 or $100, it's worth looking for more.

So I don't see either of those trends being any, or -- movement around those kinds of numbers to be a problem for us.

Right.

So the pipeline -- the quotation and opportunity pipeline of UOP is still robust, no matter what's going on here?

No, it looks very good.

And I'd say all the seed planting that we did there since we acquired it, and all that additional Horizon 3 spending, and becoming more global in our outreach, is all stuff that continues to play out very well for us.

As well as the strength of their position in the petrochemical industry, which is reflected, Dave, in how they really outperformed peers in the first quarter.

Sorry.

One last quick one.

A lot of these chemical companies have been getting hit recently.

And what is the risk that some of these projects get pushed even further?

Are you seeing any of that?

I can't say we're feeling anything like that.

The stuff that we're looking at doing is -- and where we're investing -- really has nothing to do with commodities, trends, or anything like that.

It's more -- the world needs energy.

The world is going to continue to need energy.

The world needs the new HFOs that we have invented.

And that's where the investments are going and that's where the backlog is built.

And I have a tough time seeing that really changing.

It's always possible, but with any kind of minimal global economic growth, those trends continue.

Great.

Thanks for all the detail.

I appreciate it.

Jeff Sprague, Vertical Research.

Thank you.

Good morning, folks.

Just a few things.

Can you just elaborate a little bit more on what you're seeing in Europe overall?

Your comments there sound a little bit better -- actually, a lot better than most people that we are hearing.

Can you put your finger on some particular share gain or something going on with end market -- your particular end markets?

Well, I'd say if we take a look at the overall macros, we are not saying things are better there.

Based on how things are going, we would still forecast and plan for 0% GDP growth over the next three years.

That's just the way we're going to continue to think about it and plan for it.

Because there's nothing to indicate that they are ever going to have a bang-up quarter or year, so we're going to keep thinking about it that way.

Part of what I think we are seeing is, last year, we took -- orders trends were really pretty negative in Europe.

We were down pretty much double-digit all year long.

That's just one of those things that we to manage.

We got our crossed cost structure in line, which helped.

But then on the orders side, there's a bit of a rebound that you get from -- if nothing else, just being down so much and managing your way through that.

So I'm not ready to declare victory on anything.

And I would say, in terms of products, ACS did much better in Europe overall.

But, again, I think some of that being driven by just being down so much last year, and you get some of the -- I wouldn't call it a dead cat bounce; I think it's better than that.

But at the end of the day, it's not an indicator that Europe is turning around, in my view.

I think, Jeff, just to add quickly to what Dave said, is it continues to be an inconsistent orders pattern.

Overall, a slight negative organically that we have in terms of growth in the first quarter.

And in Europe, it's really, again, attribute just to the balance of the portfolio (multiple speakers.

Both long and short cycles.

Long and short cycle -- we see that balance working.

And so it's not -- the theme, if anything, we're really striking here again today is we're not counting on any kind of improvement.

And, in fact, what we are really counting on is just a continued opportunity to improve our cost structure, our productivity; thus some of the repositioning that we funded here in the first quarter.

Yes, actually on that point, the restructuring size isn't huge, but very attractive payback.

Kind of surprises me a little bit, given how far along ostensibly you guys are on restructuring.

How are you finding such big payback projects?

And is there more of that that may happen over the course of 2013?

Well, I'd go back to these process initiatives that we always talk about -- the Velocity Product Development; the Honeywell Operating System; Functional Transformation.

The evolution of that is going to continue for a long time to come.

And as long as we continue to progress on that path, I'd like to think there are always going to be high-return projects that are going to come available to us.

And I don't see that opportunity declining in the future.

There's going to be good payback projects for us for a long time to come.

Right.

And then just maybe one final one, and I'll pass it on.

The flipside of Scott's concern about the weak economy and spend in CapEx -- maybe there's some vulnerable deal targets out there; people getting a little bit jumpier about their station in life.

Are you seeing any pickup in your M&A pipeline -- just the funnel itself, or the likelihood that things, maybe, happen more actively over the course of the next 6 to 12 months?

Well, it's always tough to predict, Jeff.

So, as we said before, we always maintain just a very big, active pipeline.

We conduct reviews with the businesses about every six weeks, where we go through what are the possibilities, and how are things looking, and what could be new or different.

I can't say that we've noticed any big change in any of that.

But, again, we're not looking for any big changes.

We try to really make this a very methodical, uncyclical process.

Okay.

All right.

Thank you very much.

Steve Winoker, Sanford C. Bernstein.

Thanks and good morning.

I got to tell you, after Steve's reaction to Scott's comment, I'm just going to say I'm in the camp of nice quarter.

And there should be a few apples on your desk in Morristown.

(Laughter) I look forward to it.

Now, just a couple of things.

First, the other side of a prior question on input costs, or on the commodities, what was the specific input cost impact on Advanced Materials this quarter -- the benefit from that?

And was it broader, also, across the portfolio?

Steve, if you don't mind, the net price-raws spread for Advanced Materials is actually slightly favorable.

However, where you are really seeing the impact on raws is within resins and chemicals, with increased prices on benzene and propylene specifically.

But the remainder of Advanced Materials was a slightly favorable benefit in the quarter.

Okay, all right.

And you would expect that to continue?

Who knows?

Who can predict commodities cost?

But I would say, overall -- I'll bolster Elena's point -- that tends to be more of a capro question than anything else.

The rest of the business doesn't really get affected much by that.

Okay, all right.

But it's in your plan.

You're planning for that continuity.

We always plan conservatively, I can promise you that, whether it's sales, cost-price spreads, we try to be conservative -- because you just never know.

Right, okay.

And just a higher level, again -- so here we have another quarter with limited overall volume growth; margins are progressing forward; you're getting at that with the prior question as well.

But as we start, again, thinking about longer-term, and assuming that you do not get -- if your top line continues to be weak and, in fact, we don't get the pickup and all of that, and you think about how much margin room, how long you can sustain the cost and efficiency improvements -- at least just thinking about the next few quarters, how are you currently thinking about that?

I'm sorry, Steve.

How are we thinking about what, exactly?

How much margin expansion you can get in the absence of any volume growth.

Well, as you know, we're believers that margin expansion is kind of a fundamental, based on your how good your processes are, and your process improvements.

And this is where I'm going to come back again to the Honeywell Operating System; Velocity Product Development; Functional Transformation, and our overall margin rate versus some of our peers.

And when you look at it that way, you say, okay, there's still a lot of upside here.

I'd prefer not to do it this way for the next five years.

I mean, I'd like to think that there is some economic growth, sales growth, in there at some point.

But at the end of the day, we've still got a lot of room to progress, just becoming more efficient every year.

Okay, but at least not going negative, right?

You can at least maintain it.

(Multiple speakers) Well, I don't see it going negative.

Steve, you can see that in our forward guidance.

You can see it in our 2013 numbers, what we have, as we've communicated at Investor Day, for 2014.

And again, as Dave said, it's against the backdrop of modest to no revenue growth, depending upon the business.

You are going to see some lumpiness quarter to quarter.

For example, we've had just very, very terrific, as expected, UOP margin contribution in PMT this quarter.

PMT, as I indicated in my comments earlier, is going to benefit from, again, revenue growth from UOP in the second quarter.

But it's not going to have the same favorable mix that it had in the second quarter of 2012, where we had very strong licensing revenues -- and, obviously, very high -- and conversion.

We also had Intermec that's going to happen, that's going to dilute the margins.

So there's things that influence it, but the overall, general trend will continue to be positive.

Great.

And finally, a little bit more color about how Defense and Space is currently thinking about sequestration playing out, and the impact on their model versus where they have been over the last nine months.

The smart call is just to assume that it continues.

And that's the way we're going to keep thinking about it.

This is not a time to be bullish.

We're better off staying conservative.

And if they change the spend profile in defense, great.

If they don't, we're fully prepared.

And we added additional sequestration impact in our full-year revenue forecast.

That's one of the key reasons, as we said, on a full-year basis, we were bringing our total revenues down a little bit, partly as a result of now reflecting that full sequestration.

Thank you.

Howard Rubel, Jefferies.

Thank you very much.

A couple of quick items, Dave.

First, when you talked about HPS large projects ramp-down, could you characterize the geography, and what you are doing to see maybe -- talk about a stabilization of the business, or how the patterns flow as you look out over the next 12 to 18 months?

Well, Howard, I would say one of the things that we're doing in Process Solutions that's important is the guys are doing a very good job of going after the installs that we want.

So think of it as the same sort of thing that we talked about in Aerospace as being selective about the platforms that you decide to go for.

Our Process Solutions guys have been doing the same thing.

And, as a result of that, we're seeing much better margin rates in the backlog than what we saw before.

As we look around the world, I'd say it's pretty well mixed in terms of where you see the big projects.

But, in general, it's got more of a focus on high-growth regions, if you will, than what you are going to see in developed markets.

And then, just as a follow-up on new products, could you -- you talked about a lot of things playing out about the way you want.

Are there one or two things you'd like to call out, where, as you've developed new products across the portfolio, where things are playing out maybe a little bit better, and they can accelerate as you look forward?

Well, I can tell you some of the stuff that I'm pretty pumped up about.

We just went to the ISC West show for security.

And we unveiled three or four really pretty cool new products for both -- on the video side and the overall integrated systems side.

And if any of you were in Times Square yesterday, and happened to look up at the Reuters board, you would have seen in earned media -- in other words, we didn't pay a thing for it, consistent with our tightwad spending -- but you saw our new thermostat; our new Wi-Fi thermostat put up there by PR newswire as being the greatest thing since sliced bread.

They might not have put it that way, but that was certainly the message.

So, yes, I'm pretty excited about all that stuff.

ACS has some really great new products already out there.

And, as you might imagine, a lot more good stuff to come.

Thank you very much.

John Inch, Deutsche Bank.

Thank you.

Good morning, everyone.

Just on the point of sequestration, do we think, assuming that nothing changes now, that this down 5% is about the new norm for that business -- which obviously can be managed -- but is that the run rate?

Or is there something about the second quarter that makes that a little bit worse?

I think it's just a really timing, in large part, John, of some project phaseouts, wind-downs.

We had a little bit more favorability in D&S in the first quarter.

And will have a little less favorability, a little more decline, in the second quarter.

So it's really just timing there.

And then the other thing, as we indicated, is the continued progress and performance that that business' leadership is making in offsetting US DoD budget declines, just in terms of pursuing opportunities elsewhere.

So, that's coming through the numbers as well.

But basically I would say (multiple speakers).

Yes, particularly internationally.

Exactly.

But for the full year, I'd say it's a modest tweak down from roughly 3% previously guided down for D&S, to now more like 4% down.

And does that imply that the US piece of the Defense and Space is down more, but you're making it up internationally?

Is that part of the mix?

Yes.

Okay.

All right, so that makes sense.

What about Turbo?

This is prospectively the worst European auto build quarter.

What do you think the runway is for Turbo -- and particularly on a growth rate basis, given the easier compares -- as you exit the year?

Because you've got all these new platform wins.

That business should be ramping up, I would think, pretty nicely, heading into the second half, no?

I would say there is that opportunity.

But I'm certainly not going to predict what the Euro auto industry build is going to be.

We're going to stay conservative, even with what we get from EDI and Global Insight forecasts.

And I certainly hope what you're saying is correct.

And we do believe that there is that strong possibility.

But we're going to continue to be careful.

Well, let me ask it this way -- there's new platform wins in Turbo.

Based on what you've been able to achieve over the past couple of years, does that materially impact growth rate this year?

Sure.

Or is it more of a tailwind into next year?

Both.

We certainly see the impact this year, and we saw it even this quarter, where the Euro auto industry was down about 10% and we were down about 4%, largely because of the impact of new launches.

That's why, with any kind of market stabilization, never mind growth, we end up in a really great place.

I would add that the new launches in the second half are also expected to accelerate over the levels that we saw in the first quarter and what we'll see in the second quarter.

As we indicated, I think we actually have a shot -- knock on wood here -- of actually having a volume increase in Turbo in the second quarter, at the high end of our range.

And launches, together with some other favorable macros, commercial vehicles (multiple speakers).

Better comps.

Better comps -- all of those -- should support improved performance, John, over the course of 2013.

And some modest, low-single-digit growth in the second half.

Right.

And was this contingent on some sort of a framework of European auto build?

I can't remember if you said that this is based on the European auto build this year doing X?

Yes, we're assuming that light vehicle production is down low- to mid-single-digits for the year in Europe.

Okay.

And then just lastly, Dave Anderson -- I thought we historically have been talking about several hundred million of NARCO Trust funding.

Why is it -- how have you been able to possibly accomplish this at such a lower rate?

Is that because you had pre-funded it before and it really still is that number?

Or maybe a little more color on the NARCO -- and why now?

It seems like you've done a better job of being able to fund this.

What's happened here?

Well, I think what we're seeing now is that we are seeing a calendarization, if you will.

It's the phasing of the anticipated claims payment for those that have not been processed and executed since the beginning of the stay that goes back to 2002.

So I think, number one, we have a better read on what the timing of that could be, John, that claims processing through the Trust.

And I think, number two, what we're showing here is a little more precise numbers given the reinsurance recoveries, and also tax affecting those of cash outflows.

So, it's the combination of those.

And then something that's consistent, obviously, is the future period look in terms of the enforcement of the caps, 2015 and beyond.

But again, including in what we've shared with you today, the after-insurance recovery and after-tax impacts to Honeywell.

So, I think it's really just those -- a combination of those updates and refinements.

I'm sorry, the reason this is costing so much less today is why?

Because of actuarial precision or something?

No, I don't think it's costing less.

I think what we're doing is we have the payments for claims that are, if you will, catch-up -- the historic claims processing spread over two years, 2013 and 2014; as well as 2013 includes Trust formation funding -- Trust formation spending.

That's about $45 million, after tax.

We have those now have calculated we think more accurately, or a little more precisely, is probably the best way of saying it.

Still very much estimates in terms of how this is going to play out.

And we're showing all of those numbers to you on an after-insurance recovery, after-tax basis.

What you may be recalling is some communications that we've made on pre-tax dollars.

And some of those communications probably also did not factor in some of the direct insurance recoveries.

So, what we have done is sharpen the pencil in our communication today to show you, really, the net impact and our best judgment of the timing of those outflows.

Got it.

I understand.

Thank you.

Leo, we have time for just one more question.

Very good.

Deane Dray, Citi Research.

Thank you.

Good morning, everyone.

Yes, I hope you like the amount of cabbage this quarter.

You know what?

I think you've done some good harvesting there.

So, I can also say I was at that ISC West trade show last week in Las Vegas, and did see a number of those new products, especially the integrated security systems that combine security, HVAC controls, and energy savings.

And there were a number of blue ribbons that you all won as best in show, so congratulations on that.

Thanks.

We're pretty -- ACS has a lot of -- just a great new product pipeline on all the stuff they are doing.

So we're pretty excited about where that is going to go.

And the question I had is on, in ACS -- on the process side.

The comments about the backlog converting at higher margins -- I mean, that's all good news.

But hopefully you could break out how much of this is the result of better pricing going into backlog.

Is there a mix benefit?

And how might there be some new products in there as well?

Well, I think you touched on all the items.

I would also -- I guess maybe to bolster the first part of that -- is just better discipline in how we price; how we understand what our cost is going to be, and how do we manage that; and what do we decide to go after.

But, in addition, they've done a great job on new products and moving up the value chain into the simulation and operator training type products that others can't really do.

And that always gives you a better margin overall.

So, Dave, I don't know if there's anything you want to add to that?

No, I think that's exactly right.

So, just lastly on that is -- where are we in that cycle?

The pushback, I hear from some investors is, hey, this is the peak; and you're going to see diminished spending in these areas.

But it just doesn't seem like that would be the case with the amount of retrofits and upgrades.

But can you comment on where we are in that cycle?

Yes, I guess I have a tough time seeing that myself.

Remember, about half their sales go into the petrochemical and oil and gas side.

And we have good insight into that from just what's going on in UOP, and that looks pretty robust.

And for the same reason we said before, the world needs an energy.

And there was a long period of time where there was disinvestment.

We're starting to see that churn within the refining industry, that while it only grows 2%, there's a big shift that's going on, as high-growth regions are building more capability.

And I just have a tough time seeing that being a declining industry.

Great, thank you.

All right.

I'd like to hand it over to Dave Cote for any final comments.

Thanks, Elena.

We are obviously pleased with our performance in the quarter.

And we're able to raise our margin rate substantially, even on low sales growth.

And, for me anyway, it's exciting to think about what we could do if we just got some sales growth.

It's exciting to think about the possibilities.

We will continue, though, to plan on a slow macro environment; really, because there's no percentage in planning otherwise.

And I think it's important to think about that this performance is a result, not just of conservative planning -- which we talk about a lot, and we do every year -- but it's also that relentless seed planting that we do, whether it's products, technologies, process, geographies.

We want to do a great job, not just with this quarter, but this quarter next year, three years from now and 10 years from now.

And that seed planting continues.

And it's just a part of who we are.

And I think it's why you can continue to expect us to outperform in the future.

So, thank you for listening.

And I hope you're as pleased as we are.

Thank you.

Thank you.

This does conclude today's teleconference.

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