漢威聯合 (HON) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Honeywell's third quarter 2013 earnings conference call.

(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.

Please go ahead.

Good Morning.

Thank you Zack.

Welcome to Honeywell's third quarter 2013 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.

We ask that you keep in mind that today's presentation contains 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 ask that you interpret them in that light.

We 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 third quarter, share with you our outlook for the fourth, and provide an initial framework for 2014, 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.

As I'm sure you've seen by now, we had another good quarter, benefiting from our diverse portfolio, our continued focus on new products and geographic expansion, and our ability to effectively manage in what continues to be an uncertain macro environment.

If you normalize for tax, which is expected to be 26.5% on a full-year basis again this year, we delivered another quarter of double-digit EPS growth, with the results coming in at the high end of our guidance range.

This was driven in large part by strong sales conversion, with segment margins expanding 90 basis points to 16.7%, higher than we anticipated, reflecting favorable mix, a delay in closing Intermec, and our continued focus on productivity.

An important driver of the productivity we've seen this year continues to be the savings we're seeing from previously funded restructuring actions, and Dave will provide a greater update on that shortly.

As you'll see, we're being proactive about keeping that restructuring pipeline full, which we think is critical to supporting our continued margin growth in 2014 and beyond.

However, while managing our cost is important, we're also focused on supporting sales growth, investing in high ROI capacity, new products and technologies in high growth regions.

That said, it won't come as any surprise that this continues to be a challenging macro environment.

EPS and margin expansion were both strong, but that was in spite of lower than expected sales in the quarter, which was driven primarily by Intermec close timing and lower defense and space sales.

Excluding defense and space, sales were up 3% organically in the quarter.

When it comes to defense and space, you're all aware of the ongoing sequestration impacts and the recent government shutdown.

We saw some shipment delays in the quarter, and while we're expecting some level of recovery before the end of the year, we think the prudent approach is to conservatively adjust our aerospace sales outlook.

The aero team is working hard to manage through the current defense challenges, and we continue to expect a more muted decline in 2014.

On the M&A front, the good news is Intermec is now officially closed.

Even though it took a little longer than we would have liked, but now the real work can begin.

We're really excited about the business, which roughly doubles the size of our scanning and mobility portfolio and the opportunity to merge Intermec's expertise and innovative products and solutions into our already great position in the highly attractive automatic identification and data collection space.

In addition to strengthening our core business, Intermec will open up new opportunities with their global presence and channel strength, in addition to adjacencies in voice and RFID.

This quarter is also a good reminder of the importance of a balanced portfolio, which helped offset some of the defense headwinds I've just mentioned.

Some of our key short cycle businesses, specifically energy, safety, and security, as well as turbo, had very strong quarters.

While our long cycle businesses maintained healthy backlogs, currently over $15.5 billion.

Geographically, which is also an important part of the balance, we continue to see good growth in the US and residential and turbo markets.

We're encouraged by the pickup in short cycle order rates in Europe overall and continued growth in China following a slow start to the year.

With just over two months left in the year, we're confident in our ability to deliver at the high end of the guidance we set for 2013 last December.

As a reminder, we've stuck by our earnings outlook all year, steadily raising the low end of our EPS guidance in prior quarters to reflect our year-to-date performance, and we're doing it again.

As a result of the continued strong execution we saw in the third quarter, we are raising the low end of our guidance by $0.05, giving us a new EPS guidance range of $4.90 to $4.95, or up 9% to 11% for the year.

Turning to 2014, I've said this before, but there's nothing out there to suggest anything but continued conservative planning is best.

Despite what's expected to be a continued slow growth environment, we're confident organic growth will accelerate for Honeywell in 2014.

We're in the process of completing our annual operating plans; and overall, the foundation is in place for another great year.

Looking across the portfolio, we see positive order and win rates providing sales tailwinds going into next year.

The repositioning benefits I mentioned earlier will provide further leverage for growth, and we expect to continue to benefit from the momentum and investments in our process initiatives and high growth region expansion.

We're going to remain flexible, and believe that our seed planting for the future, great positions in good industries, and strength of execution will set us up for another year of outperformance next year, despite the uncertain and slow global growth environment.

So with that, I'll turn it over to Dave to walk you through more color commentary.

Dave?

Thanks, Dave, and good morning, everyone.

And appreciate your participation this morning.

Let's start out on slide number 4. I'm going to walk you through the summary of financial results for the third quarter.

Sales of $9.6 billion, up approximately 3% on a reported basis, 1% on an organic basis; and as Dave said and shown on the slide, up 3% organic, if you exclude the impact of D&S in the quarter.

The sales were below the low end of our original guidance of $9.8 billion, primarily due to several factors.

I'll take you through those.

First, as we mentioned, we're excited obviously to have closed the Intermec transaction, but it did take longer.

And as a result, the sales were lower than guidance by almost $120 million.

So clearly, this is the biggest contributor to the change or the V compared to our guidance for the quarter.

Defense and space sales were down more than expected, primarily due to supply chain constraints and also some shipment delays, which we expect to recover over the next few quarters.

That's about $100 million, and I'm going to take you through that detail as well.

And finally, PMT sales were somewhat lower in the quarter due to formula pricing in resins and chemicals, and we'll touch base on that when we go through PMT in a moment.

Now despite the lower than expected sales, segment profit growth and margin expansion were obviously very strong.

Segment profit increased 9%, with segment margins expanding approximately 90 basis points to a new high of 16.7%.

And importantly, we had profit growth and margin expansion in all four businesses.

So really a balanced contribution across the group.

It's also important to point out that with the delay in the Intermec close, it also reduced the estimated segment margin dilution that we had expected in the quarter from M&A.

So we had about $20 million of favorability as a result of the timing on the Intermec close, and that's also reflected in the ACS margin rate for the quarter.

Below the line items were mostly as anticipated.

However, we funded almost $40 million of new repositioning actions, including Intermec related projects, with a net accrual of $22 million for the quarter.

Reported EPS was $1.24.

It represents a 3% increase year-over-year.

However, on a reported basis, taxes were roughly an $0.08 headwind in the quarter.

And additionally, as you recall, our guidance contemplated a 26.5% rate, consistent with our expected full-year rate.

So if you normalize for that, EPS would have been $1.25, up 10% and at the top end of the previous guidance range.

And finally, free cash flow on a year-to-date basis prior to any NARCO Trust payments and cash pension contributions were up year-over-year.

So in total, another strong quarter, giving us confidence going into the last three months of the year.

Let's now take a look, go through a little more of the detail for each of the businesses, starting with aerospace on Slide 5. It was a challenging quarter for aerospace, down 2% in revenues, below our guidance for the quarter, as we mentioned, but all of that due to the D&S shortfall.

However, segment profit for aero was up 3%, with strong margin expansion of 110 basis points.

Let's go through just some of the highlights.

Commercial aero, sales were up 3%, in line with our expectations, supported by double-digit sales increases of large commercial jets, and continued healthy demand for mid to large business aircraft.

Commercial after-market sales were up 5% in the quarter, driven by improving flight hour trends in ATR, and robust RMU, the repairs, mods, and upgrades, sales in BGA; partially offset by lower spares demand, in part due to the surplus inventory market, lower spares volumes in China, and lower engine events and utilization rates in business aviation.

Now defense and space, sales were down 11% in the quarter, well below our expectations.

You'll recall our original guidance was a decline of approximately 6%.

That expected decline occurred really driven by after-market demand deferral, as well as program completions and program wind downs.

What the additional variance in the quarter can be attributed really primarily to supply chain constraints, which resulted in customer shipment delays.

And I'd like to just take you through that in a little more detail on the following slide.

So if you go to slide 6, starting with 2013 on the top half of the page, you can see the quarterly defense progression of sales on the right, including the deeper sales declines in the second and third quarters.

Again, we expected sales would be down for defense in the quarter mid single digits, driven by program ramp downs and lower defense spending.

So half the decline was expected, but the other half was unexpected.

Parts availability and supply chain constraints were primarily responsible for the lower than expected sales, with a number of shipments being pushed out of the quarter.

Going forward, we don't anticipate these issues repeating; and as a result, it's our expectation that execution will improve and we'll recover these sales over the next three to nine months or so.

So when you layer on an increasing challenges of the recent government shut down and the ongoing sequester, we now expect sales for D&S in 2013 to be down approximately 6% for the year.

We've seen the biggest impact from the ongoing sequester and budget cuts reflected in lower government services business, our government services business, which importantly is the lower margin business within the segment.

Looking forward, the good news is D&S backlog is down just 4%.

It's holding up relatively well compared to the sales decline, partially due to increased international wins.

And under the current set of budget assumptions, we expect our initial framework for 2014 to remain intact, with sales down for D&S low single digit 2014.

So with that background on aero, let's go to Slide 7, automation and control solutions, ACS.

Sales were up 4% in the quarter.

Strong growth in the products businesses, a modest contribution to sales from Intermec, which closed two weeks before the end of the quarter.

And as a result, sales in the quarter from M&A were less than initially expected; but again, margins were better as a result of lower than expected dilution.

Let's just go through a couple of the details for ACS.

First, on a regional organic basis, sales in the Americas were up 4%, driven by strength in residential end markets, and improving trends in commercial retrofits; partially offset by weaker industrial products and weak commercial install in energy products in the US.

Europe was approximately flat, with growth in ESS driven partially, off partially then offset by lower sales in building solutions.

And China sales for ACS were up 8%, with good growth in both ESS and in process solutions.

Now looking at each of the businesses of ACS.

ESS, our energy, safety and security, sales were up 5% organically, with good performance in security, ECC, and life safety as a result of the US residential strength I mentioned earlier, the benefit of new product introductions, and also geographic expansion.

Process solution sales were flat in the quarter, with continued good services growth, partially offset by larger project completions and consistent with the slow orders environment we've seen over the last year and a half, with some customer delays and some lower capital spending.

However the good news is, we saw a nice uptick in project orders in the quarter, coupled with an impressive pipeline of additional projects.

And we're seeing the benefits of efficiency and productivity gains in HPS, reflected in higher margin rates.

Finally, for BSD, for building solutions and distribution, sales were up 1% organic, driven by higher sales in our Americas security distribution business and building services, partially offset by continued challenges in the US energy retrofit market.

Moving to segment margins, ACS was up 90 basis points to 15.3% in the quarter, representing terrific sales conversion, much of it reflected in higher gross margins.

Commercial excellence, operational improvements, and strong productivity net of inflation and investments for growth all contributed to the performance.

So now let's go to PMT, performance materials on slide 8. You can see for PMT in the quarter sales were $1.6 billion, up 10%, down slightly though on an organic basis, and below the guidance we set in July; again, driven mostly by formula pricing in resins and chemicals.

However, PMT executed very well, reflected in strong segment profit growth of 11% in the quarter.

For UOP, sales were up 30%, although roughly flat organically, driven by the addition of Thomas Russell, increased licensing in gas processing sales, reflecting continued strong refining, petrochemical and gas end markets.

We did have, as expected, lower catalyst and service sales in the quarter; again, in line with our expectations, since we're lapping strong petrochem catalyst shipments last year.

And while services were lower, Petrobras FEED primarily, we saw stronger licensing at UOP in the quarter.

UOP backlog also continues to be robust, up 18% organically, with strong customer adoption of their new technologies, as well as the benefit of investments that we're making in new capacity.

Advanced material sales were down 1% versus the prior year, reflects continued challenging global market conditions for the advanced materials segment.

However operationally, the plants of advanced materials performed well.

Resins and chemicals drove higher production volumes, following planned outages earlier in the year.

And floorings resumed production at the Metropolis site in July, following an approximately 12-month shutdown for structural upgrades.

Segment margins were up 10 basis points, primarily driven by the favorable impact of higher licensing and productivity in UOP, partially offset by inflation; and again, continued investments for growth.

In the fourth quarter, we'll have lapped the Thomas Russell acquisition.

So we expect margins to be up year-over-year, but lower sequentially, and in line with the normal seasonal pattern for PMT.

Now turning to transportation systems on Slide 9. TS saw continued improvement.

Sales were up 5% organically in the quarter, driven by strong new launches, higher US and China turbo gas penetration, which more than offset slightly lower European light production and lower off-highway sales in the US.

We continue to expect slightly better sales performance in the fourth quarter against the backdrop of improving auto production, with turbo unit shipments slightly higher than in the third quarter.

Segment margins for TS were up almost 200 basis points to 14%, with strong turbo material and operational productivity gains in volume leverage, partially offset by unfavorable pricing.

And as expected, we saw a meaningful tailwind from the friction plant closure completed in June.

So now, speaking of restructuring, I'd like to take a moment to update you on the progress that we've made in 2013.

Let's go to slide number 10.

Starting on the left side of the chart, again entitled Restructuring Update, this is similar to the chart we showed you last quarter.

You can see we've updated our restructuring balances to reflect third quarter activity.

We've now successfully executed on roughly $130 million of outstanding projects, and we've funded approximately $140 million of new projects, adding to the total projects in process for the year.

Now, as a reminder, the businesses, as you know, are constantly refining a pipeline of restructuring ideas.

They can vary greatly in terms of scope, complexity and return.

And while project approval represents a major milestone, the bottom line, of course, is the need to deliver the savings.

We've put a lot of emphasis on execution, which really leads us then to the right-hand side of the page.

If you take a longer-term view of our restructuring track record, you can see the correlation to the sustainable improvement in our margin rates that we've delivered each year.

And by maintaining a steady pipeline of projects, you see a steady improvement in those cumulative savings.

So as Dave said, this is a key element of our playbook.

And so as restructuring helps fund the operational improvements, we garner from our key process initiatives and also our integration plans.

And importantly, it's enabled us to consistently deliver on high expectations in this slow macro growth environment.

So now let's just take a moment to align you on our second half framework, and just give you an update on how that's playing out.

On slide 11, you recall this framework that we used last quarter.

We highlighted some of the key factors today that would cause us to come in or above the midpoint of our guidance ranges.

So what we've done here is track where each of those elements is performing, and we've shown that in red.

And coupled with our third quarter performance, the framework aligns well to the, sort of the right of the midpoint of the guidance that we've provided.

And while some of these items, like the euro, are fairly straightforward, let's take a moment to just explain a couple of them, or talk about a couple of them in a little more detail.

The commercial after-market for aerospace is tracking in line with utilization rates overall.

With tougher ATR spares comps in the fourth quarter, partially offset by continued strong RMUs.

Now, we've added defense and space here, given the third quarter issues that we've discussed, and the revised outlook that we've given you for D&S for the full year.

ESS exited the third quarter with strong year-over-year growth.

And we're assuming continued good performance, albeit with some pockets of tougher comps in the fourth quarter, including ECC and the scanning and mobility businesses organically, just given the strength of those businesses in the fourth quarter of 2012.

For PMT, we've seen some further pricing pressures in advanced materials, but we think those will be partially offset by improved production volumes in resins and chemicals, as well as fluorines.

And finally, EU light vehicle production was down slightly in the third, and our expectations are for it to be roughly flat in the fourth quarter.

So overall, the market here is trending towards the high end of our expectations.

So taking these elements to account, we're confident in our raised full-year EPS outlook of $4.90 to $4.95, and we think we're pretty balanced in that outlook.

Let's go to slide 12 and just talk about the fourth quarter in a little more detail.

We're expecting sales to be in the range of $10.1 billion to $10.3 billion, up 3% to 5% on an organic basis.

Now recognizing this reflects a step-up in our organic growth compared to what we've seen so far year-to-date, it's important to note that we're really not counting on much from a macro perspective.

But clearly, we'll have easier comps in aero, PMT, as well as in TS.

So let's look at each of the businesses, just a couple of the highlights in terms of the revenue outlook for each of the businesses.

Sales are expected for aero to be up 2% to 3%, with more muted declines in defense and space, more than offset by commercial OE and after-market growth.

We also expect margin rates in line with aero's third quarter levels.

ACS sales are expected to be up 6% to 8%, largely driven by the Intermec acquisition, and mid single-digit organic growth in ESS.

We're planning for sales in HPS and BSD to be approximately flat for reasons we've already discussed.

And with a full quarter of Intermec, we anticipate approximately 100 basis points of dilution to ACS's segment margin rate in the quarter.

So their margins are expected to be down slightly on a year-over-year basis.

PMT is expected to be up 8% to 10% on the top line.

We're expecting mid single-digit organic growth in UOP.

We'll also lap, as we said, the Thomas Russell acquisition at the end of October.

On the advanced materials side, we're expecting a return to organic growth, driven primarily by increased production rates in R&C, and also in fluorines on a year-over-year basis.

And for TS, terrific organic growth, with sales expected to be up 7% to 10% driven by new launches, continued turbo gas penetration, and flat or slightly better EU light vehicle production rates on a year-over-year basis.

Now, we're also expecting for TS that margins are going to be similar to third quarter levels, with the benefits of the ongoing operational improvement of friction materials that we referenced earlier.

EPS for the quarter, for the fourth quarter, we expect to be in the range of $1.17 to $1.22, assuming an approximate 32% tax rate in the quarter, or a 3% headwind from tax on a year-over-year basis.

When you normalize for tax, using our full-year expected rate of 26.5%, earnings are expected to be up 9% to 14% in the fourth quarter consistent with our year-to-date trend.

Let's now move to slide 13 and just spend a minute before we shift focus to next year to make sure we're working off the same baseline for 2013.

Again, starting on the left, slide number 13, you can see roughly where we think we're going to end up for sales at both the Honeywell level, as well as each of our businesses.

And again, excluding the impact of D&S, we've seen solid organic sales growth from each of our businesses this year.

In the middle, we have segment margins, which we're expecting to be up roughly 60 basis points on a reported basis, or roughly 80 basis points if you exclude M&A, to approximately 16.2% for the year.

And as a reminder, this is above the low end of our 2014 long-term targets; and in fact, getting there a year early.

Finally, on the right side of slide number 13, we have the updated EPS guidance of $4.90 to $4.95, and we've shown it in two ways.

First, on a reported basis, but also on a tax-adjusted basis, where we've normalized the quarters to 26.5%.

Which as a reminder, was our 2012 full-year rate, as well as our expected full-year rate here in 2013.

So as you can see, earnings in either case, $4.90 to $4.95 and reflect an impressive 9% to 11% year-over-year increase.

It's also important to note that with the improvement in discount rates and higher returns on pension plan assets, we currently expect our funded status for our US plans to be near 100%, assuming rates hold at our current levels through year end.

So another bit of good news.

So while there's still a lot of work to do, obviously, to ensure we deliver 2013, our 2014 planning is coming together.

We wanted to take a few minutes today just to walk you through the framework that we've been thinking about, with known headwinds and tailwinds and a discussion of the macro environment on both slides 14 and 15.

So if we start with slide 14, this is our high level planning framework, with known headwinds on the left and tailwinds on the right.

Now, I'm not going to go through each of these individually.

I'll actually think most of this is probably well understood and expected.

But I do think it's important to highlight what we feel is a balanced framework, both on a macro basis, as well as operationally.

So, for example, just to demonstrate that balance.

While we're expecting a continued sluggish global economy, we're also going to benefit from a very strong pipeline of new product introductions.

In our long-cycle businesses, while sequestration will be a drag on D&S next year, UOP backlog provides a strong tailwind for growth.

From a corporate perspective, we expect higher pension income in 2014, driven by the higher asset returns that we've had this year, as well as the rise in discount rates.

That's going to provide capacity for further restructuring.

And then the potential in the center of the page, as you can see, the potential for one-time gains could also provide further capacity for repositioning actions.

So again, that's the benefit we think of a balanced portfolio and a balanced framework.

It allows us to continue to outperform, even in a challenging macro environment, make the right decisions for each of our businesses over the long-term to maximize the value they provide for shareholders.

So now, let's take a look at our summary views to 2014 for each of the four businesses on slide 15.

You can see we've laid out some of our key assumptions.

In aero, on the commercial side, we're expecting after-market to be up in line with flight hours, while OE growth is expected to slow modestly on top of a very robust 2013 base.

As we mentioned in our defense update, we're expecting US DOD budgets to be a down again next year.

But, importantly we're benefiting from growth in the international markets where budgets are growing.

For ACS, we're expecting the short cycle improvement we've seen here in the second half of 2013 to continue, led by new product introductions, continued residential strength, and also a modest pickup in non-residential segments.

We're also expecting improvements in the global industrial markets, as inventories are low in the short cycle businesses, and customers are beginning to invest on the process automation side supported by the orders and quote activity that we're seeing this year.

In PMT, our strong backlog position at both UOP and advanced materials support a favorable outlook.

We'll be monitoring, obviously, the global markets in advanced materials, but we'll benefit from higher production volumes in both R&C, as well as in flooring products.

And finally, for transportation in 2014, which has weathered obviously the macro challenges in Europe and other regions, TS is poised for growth; assuming slightly better European light vehicle production, the acceleration of turbo penetration globally, and of course new launches which will continue to drive growth with volume leverage and operational efficiencies, delivering also strong sales conversion.

So standing back, again, for our view of 2014, it clearly suggests we'll see an acceleration of top line growth in 2014, setting us up for another good year.

And as Dave mentioned, we're currently going through our annual planning process.

We look forward to providing you more details regarding our outlook for 2014 during our December outlook call.

So finally, before we go to Q&A, Elena, let me just summarize what we've talked about on slide 16.

With the third quarter behind us, we've demonstrated once again that even in the face of macro uncertainty and challenging external factors, we can deliver on commitments.

The balanced nature of the portfolio, the cultural transformation reflected in our execution, the relentless drive to be better in everything we do has become the hallmark of Honeywell, and further evidence that our playbook is working.

As we turn our attention to 2014, we've recognized there's much uncertainty in the end markets, probably as much as there was a year ago.

However, we are seeing signs of short cycle improvement, and in some cases acceleration, where our long cycle businesses continue to build backlog.

So regardless of the variability in the global macros, you can expect us to keep doing what we always do.

We're going to keep investing in our future, focused on both sales growth and margin expansion, delivering high ROI CapEx investments, bolt-on acquisitions, funding a healthy restructuring pipeline, and introducing new products and innovations to the marketplace.

These things take time, but you've seen it for a while and they're clearly evidenced in the performance that we're delivering.

So with one more quarter in the books, let's go to Q&A.

Thanks, Dave.

Zack, we would now like to open up the call for our first question.

(Operator Instructions)

Scott Davis with Barclays.

Hi.

Good morning, guys, and Elena.

Hi, Scott.

These slides are great, slide 11 in particular.

I wish all our companies did that.

So it's very helpful, so not a lot of questions on the businesses.

But one thing that isn't clear is that your cash balance is building.

I think you're going to be -- you're up to around $5.5 billion of cash on the balance sheet.

And, you didn't really want to buy stock at $65, and now you're at $85.

So, what can you do to ensure that we're not having this conversation in a year and you're $7.5 billion of cash on the balance sheet, Dave?

Not to put any pressure on you, but --.

Well, it's the first time I've ever gotten this question, Scott.

So, I guess I have to think about it a little bit.

The answer is still the same, is there's a lot of opportunities out there, being opportunistic with the cash in order to be able to really advance the future of Honeywell is always top of mind for us.

And I can promise you, I'm not going to blow it, whatever it is.

And it's nice to have it there as a potential enhancer.

And we're going to continue to be opportunistic on our share repurchase.

You've seen us repurchase a bunch of shares this year.

The M&A we've done, I feel really good about.

And we're just going to keep doing that, along with making sure that we pay a strong, competitive dividend.

Dave, anything you want to add?

I would just maybe a couple of numbers, Dave, to just add to what you said.

We've bought 10 million shares year-to-date.

I would say we're probably on track for $1 billion of share buyback for the full year.

I think that's a reasonable number to anticipate.

So it's fairly significant activity.

And we'll continue to stay balanced in how we look at that, Scott.

Okay.

Fair enough.

We'll move on to the next question.

Well, Scott, I would also say it's nice to have a fully funded pension plan.

Yes.

Well, you've got a lot of good things going on.

But anyways, Dave Anderson, you mentioned in your closing comments the signs of short cycle improvement.

And --.

Yes.

Can you give us a little granularity on that, maybe by geography, or really what you're -- more specifically what you're seeing?

Sure.

So, maybe just talk a little bit about so, Scott, both sales and orders.

For ESS, we saw pretty good growth in both US and Europe and in China in the quarter.

But we saw particularly good growth in their order patterns.

So the short cycle pattern, we had 1% organic order growth in ACS.

Now I'm talking about total ACS.

1% growth in the first quarter organic, 3% in the second quarter, 5% in the third quarter.

So it really -- we are seeing that pattern.

And we've talked about this some, that if you dig underneath the covers, it's really coming about in our life safety business, in ECC, in the security business, and to some degree scanning and mobility.

All that's a little bit lumpy because of some of the very, very large orders they've received in large shipments.

So that's a very positive.

You know the TS numbers.

Those look very good overall.

So we see an accelerating pattern there.

And again, turbo penetration, global light vehicle production, as well as, obviously, the benefit of launches.

So we're going to see that trend continue.

We see that as a very nice lift-off, if you will, for 2014.

And that's behind the confidence in the statement that Dave and I both made with respect to an accelerating growth outlook for 2014.

So we're really -- we're very, very pleased at the underlying fundamentals, somewhat masked obviously when you look at the total HON revenues in the third quarter.

We talked about the guidance, et cetera, but it's really Intermec is the primary thing there, and the second thing is D&S.

But boy, when you look at the underlying fundamentals, it's quite encouraging.

Okay.

Just a clarification, slide 12, where you said up 3% to 5% organic for 4Q, is that including defense or excluding defense?

That includes.

Okay, great.

I'll pass it on.

Thanks, guys.

Nigel Coe with Morgan Stanley.

Thanks.

Good morning, guys.

Hi, Nigel.

And I agree with Scott.

Great detail on the slides.

Just wanted to, just to clarify, advanced materials, Dave.

You called that out as accelerating production volumes in both fluorines and also IMC.

And yet on the 2014 framework you called that out as a headwind.

So I just wanted to be sure and dig into what you see for 2014 within advanced materials.

Well, I think what we've mentioned there in terms of the framework really was the markets, the advanced materials markets.

We think those are going to continue to be somewhat challenged for us.

Particularly, we're talking there largely about the fluorines markets, as well as the resins and chemicals markets, Nigel.

On the other hand, we see the benefit we think of improved production volumes in 2014, helping to offset that.

So what we're really flagged here is we think that the macro environment for that business is going to continue to be challenging.

Understood.

Understood.

So you expect to perhaps gain share within that framework?

Well, I think we continue to perform pretty well, we think, in terms of getting our share of demand.

We have, as you know, a pipeline of very exciting new products.

The timing of those, in terms of actual introduction is still TBD in terms of probably not a significant benefit, in terms of 2014.

But, you're certainly going to see the benefit of that in 2015 as we transition, particularly in fluorines, to the new molecule products.

Okay, great.

And coming back to slide 14, it certainly appears that you've got more tailwinds than headwinds into next year.

And the short cycle acceleration of ACS is really encouraging.

Do you think 2014 -- obviously you're going to give us more detail in December, but do you think 2014 is going to be in line with trends, let's say a 3% to 5% organic growth type range?

I'd say it's tough to put numbers on it yet.

We're just going through the AOP planning.

But I don't think those are crazy numbers to think about.

Okay, great.

And just finally, the UOP backlog continues to grow, $2.9 billion versus $2.7 billion.

Just curious, where are you seeing the project activity within UOP?

And just a nerdy question on currency, is there any benefit from the weaker dollar within that backlog number?

Well, I think that, I think the benefit on the -- and we can come to the currency point in just a moment.

But the backlog is really pretty broad-based in terms of where we see it building.

We have yet to --

Around the world.

Around the world.

We really have not seen --.

There is a lot, as we've talked about, Nigel, and this is true for both process solutions, as well as UOP.

But UOP would be earlier in the, if you will, the bid and proposal cycle.

We haven't seen a significant expansion yet related to US gas.

But the proposed projects and the permitting is in process.

So, the pipeline is very, very attractive there.

But overall, if you look at what we're seeing today in UOP, and now beginning to see in process solutions, I referenced the strength of the order rates in process solutions on the project side during the quarter, is really pretty broad-based.

Dave, anything you would add to that regionally?

Yes, I'd say to Dave's point on the global expansion effort, we see it around the world.

And with oil at $100 and the disparity in gas prices between the US and the rest of the world, I think you're going to continue to see a lot of activity around the world, especially as developed regions tend not to invest and emerging markets or high growth regions will.

So that dynamic looks pretty good for us everywhere.

In terms of currency impact in the backlog, no, nothing that --

No, nothing stands out.

Okay.

Thanks, guys.

Steve Tusa with JPMorgan.

Hey, good morning.

Hey, Steve.

So just looking at PMT here, we're going to kind of finish the last -- after a dramatic run from a low single-digit margin to now high teens, it's we're now going to finish out three years here stuck in the 18% to 19% range.

It's obviously good.

It's been growing.

I wouldn't -- stuck maybe is a little bit too aggressive of a term.

But --

Funny you knew where we were going.

When -- what's the timing -- I know you've got a lot of investment going on there.

There are some acquisitions that have diluted a bit.

What is the timing of this thing, I think Andreas had used the term hockey stick at some point to the next -- when is the next wave here of margin expansion?

Are we going to have to wait a couple years, or is that something that could come sooner than that?

Well, we'll go through that a lot more at our March Investor Day.

But I would say for a high end specialty company business like PMT, the prospect of being at a 19% margin and that being the ceiling is not something I'd accept.

So I feel pretty good about their ability to expand.

And consistent with what we've said in the past, we've got a couple of key plants coming online towards the end of 2014, the beginning of 2015.

And that will have an impact, because those are -- those plants are already full.

We have to build them, and the returns on those are going to be really good.

Right.

So I guess just doing the math on that, I guess that that kind of accretion from that can be pretty quickly after those things come online, or is there -- I'm not a chemicals analyst.

So are there, is there like startup issues that means the benefits lag significantly from when those things come online?

Well, we'll go through all of that on Investor Day.

But I certainly wouldn't anticipate startup issues.

We're doing everything we can to make sure that doesn't happen.

Right, right.

Okay.

And then I guess just on the, Dave Anderson, on the pension tailwind for next year, can you maybe just give a little bit more color around the magnitude there?

And then, you bumped up the restructuring for next year, I guess, from $90 million to $125 million.

Is there a -- is there any visibility on what's next?

Because some of this restructuring, I guess, has a little longer tail to it.

Does that mean the benefits for 2015 are now trending up a little bit?

Yes.

Well, I think so.

I hope so.

That's certainly what we've would intend to do, Steve, is both through the redeployment of some tailwind that we'll have as a result of favorability, as I mentioned on pension, as well as hopefully other gains, just continue this track record.

And I think it's impressive, and we like that chart showing that relationship between segment margin and what we've built in terms of pension benefits, or repositioning benefit.

With respect to pension, I think we're probably somewhere in the neighborhood of about $50 million in terms of year-over-year, I think is a good number right now, for preliminary planning purposes.

That is, if you just took current discount rates, current rates of return, and obviously, Steve, these numbers move around.

But we think that's reflective of the kind of capacity that we think we're going to be able to have as a result of that.

Right.

So you've got $50 million there.

You've got $125 million in restructuring.

So you're -- there aren't too many - are there any major headwinds from a non-fundamental perspective lining up?

It doesn't seem like there is.

From a what?

From a what, Steve?

Headwinds, because these are tailwinds for next year.

50 --

We don't see, for example that I don't there are any other below the line headwinds currently that we would say.

And again, we keep saying this, but in December as you know, we provide a fairly thorough fulsome review of our expectations and assumptions for the next year.

So we'll take you through that.

But as of right now, there's nothing that we see.

Right, so that's almost $0.20 of tailwinds with limited headwinds just right off the bat.

Yeah, you can think of it that way.

Hey, Steve, can I give you just a comment back on the PMT margins just real quick?

Sure.

2003 PMT segment margins, 4.3%.

2006, 12.3%.

2010, 15.8%.

And midpoint of guidance for this year at 18.6%.

I'm sorry, Dave.

What was that again?

So anyway, that's just connecting the dots over that time period.

Yes, I have the model in front of me.

I can look at that.

I'm not going to say congratulations.

I just wanted to make sure we were on the same page.

We are.

Thanks.

The congratulations were implied, Steve.

All right.

I'm going to go throw up now.

Thank you.

Howard Rubel with Jefferies.

Thank you very much.

I can't top that.

But I'm going to go to the balance sheet and be boring for a second.

If you do net cash, Mr. Anderson, I believe you've actually used a couple hundred million dollars through the first three quarters of the year, and you can see the growth in commercial paper is up a bit.

Now, I'm sure some of this is due to timing.

But some of it's also due to elimination of a lot of liabilities.

So, if you step back for a moment, as you work down all these off balance sheet obligations and you've got asbestos well under control, how do you think about sort of what your risk profile is from a financial point of view?

Well, I think the backdrop, it always has to be done, I think, Howard, against the backdrop of the global economy and the US economy and just the state, if you will, of financial markets, which are obviously today, still, Dave, I think you happen to be in an uncertain period.

Yes.

And I think--

Assuming -- is your question the economic outlook, or is it a solvency, liquidity-type question?

No, it's more what you want to think about in terms of your leverage going forward.

Because in some ways, the obligations that have impeded your cash flow are being worked down.

Yes.

And do you think -- so we could think about a more normal leverage, level of leverage because these off-balance sheet things like pension, for example, are really things of -- are very well managed today.

And you can put a little more leverage to work?

Or do you want to stay conservative as you're talking about with the risks in the financial markets?

Well, it's a good news story because what's happening is -- well, first of all, again, if I could just finish there quickly, the backdrop is one of macro.

And we all know what that's like.

We've lived through that.

We've lived through the --.

We're living through it.

And are living through it.

So I think that's number one.

So I think prudence is just is number one.

I think you just have to be very, very cautious in that respect.

Number two, your point is very well taken.

Which is the strength of the Company and the continued strong performance in execution is reflected in an improved outlook, in terms of our credit worthiness.

Basically what we're doing is we're growing back into our A, A2 rating, okay, as a result of that.

And it's both, again, operational performance, as well as the smart, we think, proactive funding that we've done on the pension -- enabling that, as well as managing other liabilities.

So Howard, what it gives us over the next two to three years is additional flexibility.

And I think Dave is very clear in this, in terms of the actual deployment of that capacity and the cash is very much TBD.

It gives us a lot of opportunity.

And if you look at our track record, it's one of being, we think, very smart and very disciplined in how we deploy capital --.

And balance.

And balance.

And we're just going to continue to do that.

But clearly, we have more goodness coming through now, which represents more upside for shareholders as a result.

Yes.

And then just to take that balance point, and Dave talked about it early in his comments, how are you thinking about pushing the various business units, in terms of giving them capital for either new projects or for incremental product development?

Have you changed the hurdles, Dave, in any way with this uncertain environment?

No, I'd say, well, first of all, our hurdles have always been high.

Just because somebody can do a calculation that says WACC is 9.3% now versus 10.1% a year ago, that's really not relevant when you're investing in 20% IRR projects.

And when we take a look at our internal investments, whether it's R&D or CapEx, we're -- we continue to stay disciplined in how we invest.

And we continue to invest more, because as the Company does better, well, there's just a lot more opportunities.

The culture is getting better and better at being able to forward-thinking and where those opportunities might be.

It's better when it comes to actually executing on those and making sure they happen.

So, no.

We've never shorted the businesses.

It's been part of our philosophy from the beginning, about having a full pipeline of great ideas, that diversity of opportunity and we're sticking to our knitting on that one.

Thank you, gentlemen.

Thank you, Howard.

Stephen Winoker with Sanford & Bernstein.

Thanks, and good morning.

Hey.

Hey so I wouldn't ask this question if you guys hadn't joined the elite ranks of operational companies over time, but it goes back now to the supply chain comments you made for defense and space.

Of course, bad things happen.

You've often talked about that.

But I'd like to get a better understanding of how you still managed to get surprised by your supply chain in the quarter relative to tasks and contingencies and what really happened, and how do you know that that won't happen again, or at least from a visibility standpoint?

How have you improved the processes?

What's really happened there?

I assume there's a left-handed compliment in there, Steve.

The first part.

The operating performance.

Yes.

Yes, as you continue to push the envelope on getting better and better when it comes to improving a supply chain, meaning less inventory overall while improving delivery.

It's kind of that old Japanese analogy that as you lower the water level, which we have in WIP inventory in aerospace, well there are rocks that get exposed.

And sometimes the rock surprises you a bit.

And in this case, we did get surprised.

And it's one of those where I would say I wish we'd done a better job with it.

And I know Tim would say that.

That we should have seen it coming, but we didn't.

So this is all fixable.

The process is fixable.

The sales are recoverable, and it will happen.

And it's just another rock that we have to fix.

And it will happen.

Okay.

And then on the comps for the fourth quarter, you talked about them getting easier.

That's true, except for I guess ACS, which was 4%, plus 4% last year, anyway, organic.

So a little more color excluding Intermec obviously for what is giving you confidence on a harder comps still showing the kind of growth you're talking about?

Well, it helps that -- as you know, we track the short cycle orders weekly down to a very low business level to get a sense for what's going on.

And we could see the orders.

It's what I mentioned earlier, and you may have the data.

Again, but it's what I mentioned earlier, Steve, in terms of the progression of what we've seen in the organic short cycle orders rates of ACS and particularly ESS.

So that's really what gives us the indication of the stronger revenue, organic revenue growth outlook.

Right.

And Europe, Europe specifically within all of that?

Euope's been looking a lot better.

Yes.

Europe has been a lot better.

We mentioned that on the call last time, also that we'd started to see that, and it continued in the quarter.

Yes.

And if -- sorry.

No I was just going to say on the orders rate particularly.

And for Europe, just building on that, the TS decline in the fourth quarter of last year was 8% organic.

So there's a big pickup in TS relative to Europe.

There's a big pickup in UOP year-over-year.

UOP in the fourth quarter of last year, sales were down 4% organic, anticipating that to return to mid to high single digits in the fourth quarter.

And then of course, we've talked about defense and space declines moderating, being another piece of it from the long-cycle perspective.

Sure.

That's very helpful.

And then just last question on friction and the plant closure and the turnaround, how far along would you say are you in the broader turnaround and how you think about that part of the portfolio?

Any changes as it starts to put up better performance?

Well, the turnaround has been substantial, because just the closing of that plant in France was a really nice headache to be done with.

So there's a natural pickup from that.

The investment in the new facilities is going great, and we expect it to be a tailwind for us next year.

Great.

Thanks a lot.

Jeff Sprague with Vertical Research.

Thank you.

Good morning, everyone.

Hey, Jeff.

Hey.

Just a quick little cleanup question or two here.

I think we've maybe discussed this once or twice on previous calls, but I'm still a little perplexed by the weakness you're seeing in energy retrofit.

The lighting companies are seeing strong activity.

The HVAC companies seem to be seeing decent activity.

Is there something going on with your mix of customers or something that would kind of explain that apparent disconnect?

Well, what we're -- the US has tended to slow down just because of, well, everything you've been reading about and concerns about budgets everywhere.

If we take a look, though, at building solutions performance versus all our big peers in the same business, we've actually outperformed there.

So all in all, it's a good story relative to competition, but we sure wouldn't mind if the sales were stronger.

All right.

And Dave Anderson pointed out the ACS order acceleration a one, three, five, kind of a Q1, Q2, Q3.

But was September okay?

How did September act, and is there any early read on October?

Any noise in DC?

Actually September for us was very good.

So we actually exceeded that 5% in the September month.

It was a very, very strong finish that we saw.

Great.

thank you very much.

Zack, we have time for just one more question.

John Inch with Deutsche Bank.

Thank you.

Bringing up the rear here.

You don't have to laugh.

It's saving the best for last, John.

Thank you, thank you.

That deserves a compliment to you.

That will come last, too.

Okay, Dave Anderson, were there accrual adjustments in any manner that benefited margins?

Obviously, we're very robust.

I'm just trying to think about this technically.

Nothing significant.

But we took restructuring charges.

Yes, the repositioning charges, which are below the line.

But in terms of the segment margin numbers, John, nothing significant on a year-over-year basis.

So, there was nothing really that would have driven the comparables on a year-over-year basis, third quarter of 2012 to third quarter of 2013.

And then China and emerging markets, Dave Cote, you called out sort of continuing China's strength.

Some companies in other industries have really seen a slowing in emerging markets, broadly defined in the quarter.

Did you -- could you give us a little bit more color on what your experience was?

And it sounds like that didn't happen.

I'm just curious if you saw any evidence of this that would corroborate that.

No, I'd say we're doing fine in what we refer to as high growth regions.

And I think that's a trend that's going to continue in the world and for us.

And I'd say it's our ability to just increase our reach in every one of these countries, whether it's products or sales and distribution, just doing all those basics that cause you to establish a foundation in a country.

So yes, we're doing fine there.

We'll continue to look for that as opportunity for us, only 55% of our sales are outside the US today and there's 75% of world GDP outside the US.

So, there's plenty of room left for us to grow there.

And no September fade that you saw, right?

I'm sorry?

Well, you didn't see any kind of fading in September with respect to your overseas end markets or sales trends?

No, no.

Just then lastly, you've put your planning framework, the uncertainty surrounding non-residential recovery.

You guys do have a fair amount of exposure to those markets.

And if anything, it sort of seems like recovery has been pushed out.

But I'm curious, because you operate in some interesting segments.

What are you seeing with respect to non-residential activity today in North America as it pertains to Honeywell?

And is there any evidence of some green shoots that could be sort of manifesting themselves next year?

Well, the way I describe it is if we go all the way back to the recession and we talked about V-in, V-out, slow-in, slow-out, and non-resi was one of those slow-ins.

So it's been a slow-out.

And I think we mentioned on the call last time we'd seen an increase in quote activity.

I can't say we've really seen a big spike in orders as a result of that yet.

But I think that is one that's going to come.

It's just difficult to predict what the timing of it will be.

So I think all in all, it's just not certain yet when that's going to show up.

We'll know a lot more in two or three months, of course.

Sure.

Well, thank you.

And congratulations, Dave Cote, on your margin performance.

Thank you, John.

Quite impressive.

Thanks.

Well, that obviously concludes the call for today.

I wanted to thank you for your participation, and also just turn the call back over to Dave Cote for your final remarks.

Thanks.

You've come to expect from us consistency in our outperformance and we're pleased, of course, to be able to do that again this quarter.

The execution of our consistent strategy and that constant seed planting that we always talk about, having a great portfolio to grow with, continuously improving our internal processes, and just further development of our performance culture, these are things that are going to continue to serve us well as we look to also outperform in the future.

And I can promise you we're going to continue to invest around the world in seed planting to make sure we have that diversity of opportunity, and it's essential to our future success.

So thanks for listening.

Thank you.

This does conclude today's teleconference.

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